For over a year, we’ve been discussing Europe, China, and U.S. Politics as the major drivers of the markets. On September 7, 2012, we published a Market Commentary, headlined “Threat of European Banking Crisis Recedes.
” In it, we discuss the Outright Monetary Transactions (OMT) program, introduced by the European Central Bank (ECB). We think this program makes credible the ECB’s promise to do all it can to keep the Eurozone together. And we believe this action mitigates some of the risk of investing in U.S.-based international banks. As for China, we continue to monitor the country as its leaders turn their economic focus from building infrastructure toward ‘building the consumer.’ We don’t think that China has turned the corner.
We think some of the uncertainty surrounding U.S. levels of taxation and regulation will be resolved when we find out which direction the voters choose for the U.S. on November 6. In the meantime, on September 13, in addition to keeping short-term interest rates near zero until mid-2015, the Federal Reserve announced a third round of Quantitative Easing (QE 3). The Fed has stated it will purchase $40 billion worth of mortgage-backed securities every month until unemployment declines to a reasonable level. We don’t think these purchases will help lower unemployment much, and contend that keeping interest rates low is hurting the retirees/savers in this country. Further, past attempts to reflate the housing market and spur the economy through record-low interest rates and quantitative easing have not been very effective. (Mortgage lending in 2011 declined to its lowest level in 16 years, according to a report from federal regulators.) What we do see is that the Fed’s actions are boosting the equity markets. The DJIA (Dow Jones Industrial Average) hit an annual high after the Fed’s announcement. Continue Reading »