Practical analysis for investment professionals
30 July 2014

Turning Points: The Impending Taper, Japan’s Troubled Economy

Posted In: Weekend Reads

We stand just a couple months away from the Fed’s cessation of money printing (it should cease in October 2014). Current expectations are for the Fed to maintain low rates for another year, well into 2015. Analysts continue trying to assess the dependence of markets on the Fed and to discern the direction of the economy. In a fascinating development, emerging markets are now more seriously considering a potential departure from the US dollar as the world’s reserve currency, most notably with the creation of the BRICS bank. Notably, China continues pressing ahead with its plans to maintain high-growth rates despite a litany of problems in its banking system.

Japan’s economy continues to sputter in the months following a retail sales tax hike as of April 2014. Spanish and Italian sovereign bonds are now trading below comparable US treasuries despite the fact that Draghi has not yet monetized a single sovereign bond — demonstrating the power of the spoken word. Housing markets the world over are looking a little frothy, with significant areas of concern in Brazil, Germany, France, the United Kingdom, Canada, and Australia, among others.

Yet again, Argentina is poised to default on its bonds. Perhaps they have learned the wrong lessons about markets.

Here’s a wrap-up of key issues affecting global markets for fundamental investors.

Currencies

Commodities

China’s Direction

Credit Markets

Derivatives

Energy

Euro Crisis

Hedge Fund Money

Interest Rates and Central Banks

Japanese Debt and Inflation

Stock Market

Follow the Bubble

Time Capsule

In light of Argentina’s upcoming default, we thought it might be instructive to look at a postmortem analysis of their last default in 2001. As they say, history doesn’t repeat itself, but it sure does rhyme. A white paper from the City University London analyzes the 2001 Argentine default on its foreign debt and its consequences in terms of the existing literature on sovereign debt default. Its purpose is to evaluate this experience and to see to what extent the Argentine case requires a rethinking of the nature and consequences of defaults. We show that the Argentine case contradicts many of their standard predictions, in particular its posterior lack of access to international credit, restriction to international trade, and negative economic growth. Moreover, it corroborates the historical fact that many defaulters “get away with it.”


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Ron Rimkus, CFA

Ron Rimkus, CFA, was Director of Economics & Alternative Assets at CFA Institute, where he wrote about economics, monetary policy, currencies, global macro, behavioral finance, fixed income and alternative investments, such as gold and bitcoin (among other things). Previously, he served as SVP and Director of Large-cap Equity Products for BB&T Asset Management, where he led a team of research analysts, 300 regional portfolio managers, client service specialists, and marketing staff. He also served as a Senior Vice President and Lead Portfolio Manager of large-cap equity products at Mesirow Financial. Rimkus earned a BA degree in economics from Brown University and his MBA from the Anderson School of Management at UCLA. Topical Expertise: Alternative Investments · Economics

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