The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
Do you feel like we do?
Markets around the world have experienced great turmoil
over the last several weeks as they struggle to figure out what the world will
look like going forward. At least four
major struggles erupted in near simultaneous fashion to confuse and distort the
current economic situation around the world.
The primary issues facing investors today are, in no
- Renewed decline in consumer activity and
revision of prior economic activity in the U.S.
- Continued struggles in Europe, including
increased efforts to prop up struggling bond markets there
- U.S. budget shenanigans driving investors
to consider an actual default by the U.S. government
- S&P's downgrade of the United States
and associated entities
We cannot refer to these as a "perfect storm" because
the market was able to focus on these issues one-by-one, but we are curious
whether they portend a second version of the so-called "New Normal"
on the Sideline
On August 2, the Bureau of Economic
Analysis released its personal income and personal consumption data which
showed a 0.2 percent decline in personal spending during the month of
June. This came shortly after aggressive
revisions to various data left the estimate to first quarter's growth at a
paltry 0.4 percent and a year-to-date average of less than 1 percent.
Economists had been forecasting growth would pick up in
the second half of 2011, but with such an anemic appearance in the first half,
they quickly adjusted estimates downward for the near future. This has been a reliable pattern since
2008: forecast slow, disappointing
figures in the near term, but surely something will happen that allows growth
to pick up in the future!
Descenso, Declino, Recul, Ruckgang!
At the beginning of
the month, traders ramped up their disdain for European debt and yields began
to rise. During the first week of the
month, the European Central Bank (ECB) reinstituted a program to buy Greek,
Irish and Portuguese debt. The markets
saw this as an inadequate and perplexing response to rising Spanish and Italian
bond yields and, over the weekend of August 6th, the ECB changed course. After Spanish 10-year bonds broke through 6
percent solidly the week before, the ECB began purchasing Italian and Spanish
debt on August 8th, effectively enacting a ceiling on the yields of these
As of this writing,
Spanish and Italian bonds are yielding 5 percent, about 120 basis points below
their high recent high. By placing a
ceiling on where their debt will trade, there is a risk the ECB will end up
owning the problem, not only by mandate but also by owning all of the actual
Because funds have
to come from somewhere, this can be viewed as a taxpayer bailout of these
countries paid for especially by the, ahem, "rich" countries.
Budget Showdown or Politics as Usual?
The media truly
enjoyed hyping the recent Congressional debate on the debt ceiling, attempting
to work the word default into every article or comment possible. Comparisons to Europe (who has countries with
real problems paying their debt) luckily fell on deaf ears for the most part,
but there was no escaping the fear overall.
Even after the
resolution on August 2 to this issue, the idea we narrowly avoided a default
was pushed time and again.
Of course, at no
time were we near any actual default with Treasury having many other options to
cut spending before defaulting on what the world thinks of as the one and only
risk-free security. For example, had
they delayed social security payments for a week or two, it's likely enough
representatives would have heard from their constituents to lead to some sort
reached, of course, didn't solve anything except to exchange one consequence
(automatic spending cuts) for another (reaching of the debt ceiling). The debate leading up to the November 24 deadline should be interesting.
Grade AAA. No,
of U.S. long-term debt shocked the market which had an entire weekend to
contemplate before hitting the trading desks a week ago Monday.
Reaction in the
market place was as we expected: Stocks down
huge as a result of the fact the stock market rarely is prepared for actions in
the bond market and bond yields down huge as those same stock investors along
with other risk-market participants flooded to the safe-haven of Treasuries.
Last week, S&P
affirmed France's AAA stance, however French yields remained aloft. S&P must feel pretty silly given so many
investors around the world disagreed so heartily with their conclusion.
Feeling Like We Do
So what does all of
My view since 2008
has been that there will be no consistent recovery until real, unassisted
consumer demand returns. This has not
Furthermore, it is
clear future government assistance, in the form of stimulus packages, cash for
clunkers, or $8,000 credits for first time home buyers, is not on the way. The markets are digesting this fact along
with the Fed's statement they will likely hold rates where they are for the
next two years.
The result is a
lower, flatter yield curve providing cheaper credit and a lower stock market
that must reflect an economy that will no longer benefit from the temporary
demand created by temporary government programs.
governments around the world must repair their balance sheets before resuming a
significant growth rate. Until then it
is important to invest wisely, cautiously and with your stated objectives
always in mind.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.