The New Normal, Part V?

We have had some trouble lately, from the Middle East to Ukraine; there is concern and alarm about many things around the world, including economies that are not as healthy as they should be. Markets have not moved decisively in either direction over the last few months, but we thought this an opportune moment to communicate a few of our thoughts, and the thoughts of others, like the relatively new Fed Vice Chairman Stan Fischer.

Market reactions to recent events

— Equities dropped, not into correction territory yet, but a bad week at the end of July, jitters since. This despite better than expected earnings, an upside surprise on Q2 GDP growth, and some modestly improving job numbers. Are markets worried about war and its potential economic and financial repercussions? Many think so.

— Bonds rallied yet again, 10-year treasury yield down well below 2.5% again, the classic flight to quality when there is trouble, plus no sign of inflation and not much growth, no wage increases.

— Markets and economies are potentially affected by wars and chaos in other parts of the world and even the threat of them can roil markets. We are seeing some of that now.

— Bottom line – earnings continue to surprise on the upside even as the weak economy continues and trouble brews around the world, markets watch and wait.

market reactions

For those of you new to this series of client letters, we have been discussing the topic of “The New Normal” since it was introduced by PIMCO during the Great Recession and bear market (2007-08 timeframe). We have taken liberties with the concept; rather than buying the core active management/hedge fund “be nimble and flexible” thesis, we have been examining the markets, economies and the world more generally.

The original new normal concept turned out to be correct about the increasing role of government in the economy and much slower growth and recovery than in the past. But it was dead wrong about equity markets offering poor returns; equities have delivered excellent returns since this started. Business has adjusted and is doing reasonably well; the rest of the country and economy have not.

But now what? That is the $64,000 question. Below we have two sections, first looking at the new Fed Vice Chairman’s view of the global economy, and second noting some hugely important developments in military technology, which impact not just battlefield results but global strategies and potentially the economy and markets. Ultimately it is all connected.

Speaking of economics and Israel…

Stanley Fischer
Stanley Fischer

My colleague and friend John Bussel took me on a trip to Israel a few years ago, and we had the pleasure of a small group session with Stan Fischer, then Governor of the Bank of Israel (Central Bank Governor of the Year, Euromoney Magazine). He was born in Rhodesia, an Israeli citizen who then also became a US citizen; London School of Economics, MIT, Oxford, University of Chicago, World Bank, IMF, professor, banker, author of economics textbooks, PhD advisor to Ben Bernanke and Mario Draghi among others, an amazing intellect who is now a highly influential Vice Chair of the US Fed (succeeding Janet Yellen). Hearing him speak was a very special experience, something I will always remember.

In a recent interview, he expressed some pessimistic views of the world economy: Fed’s Fischer calls global recovery disappointing

As we have been discussing for years, the US economy has downshifted and we are stuck with some serious problems. Fischer goes beyond the US and the current situation; he thinks we may well have experienced a “permanent downshift in economic potential.” He is speaking of the world, not just the US. A lot to consider, nothing to take lightly. Worth a good look and some thought. Is this going to be the “New Normal” after all?

And yet, it is important to remember that the events of the economy and the world do not affect the markets in predictable ways. Many will be our troubles, but the long-term returns of a portfolio come from disciplined investing and not from reacting to every event that happens and every new insight that we gain over time. Be of good cheer, despite the vale of tears in which we live.


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The New Normal, Part V?

time to read: 3 min