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The Sandy Spring Way

July Observations

July 8th, 2015 | By Beau Mercer

FredericBurkeWhat do we know? What don’t we know? What should we know by putting ourselves into the future and looking back into the present? What do we know about our surroundings?

The July 4th fireworks, Greece, and China, renew investment excitement! Global stocks were modestly positive during the second quarter, with similar returns from the US, international, and emerging stocks. Year to date international stocks are well ahead of the S&P 500. But we live in an Alice in Wonderland fantasy world populated by a strange media and talking politicians. The new unknown was described by Alice as falling. “Wait for me Mr. White Rabbit, I ‘m coming too! (falling). How curious, I never realized that rabbit holes were so dark…and so long…and so empty. I believe I have been falling for five minutes, and I still can’t see the bottom.” Alice in Wonderland by Lewis Carroll. Maybe Alice will find the bottom after falling into Greece or China. Alice in Greece will find a 1930’s style economic slump, contracting over 25% in five years, unemployment over 25%, and youth unemployment over 50%. Wages and pensions cut by tens of a percentage point. Greeks are on the hook for 323 billion euros, in which 60% is owed to the Eurozone. One could hear Alice saying: “Why, sometimes I’ve believed as many as six impossible things before breakfast”, when told each Greek citizen owes $30,000 as his or her obligation to the Eurozone. Just think-not paying back all that debt, and having the possibility to control your own monetary and fiscal policy. In retrospect, the Greeks have cooked their books in the past, have done little to reform, and now are being asked by a currency union for concurrence with respect to their country’s debt. Alice must scratch her head, observe the Greek bankruptcy, and wonder how the European leaders are going to structure a debt extension. Alice then reflects, “Down, down, down. Would the fall never come to an end!”

Maybe Alice will find that China is a long way from Greece and the high profile debt troubles of the Eurozone. “What a strange world we live in said Alice to the Queen of Hearts.” Exactly one year ago, the China stock market, as measured by the Shanghai Exchange Composite Index, was trading just above 2000. In the past year the Composite rose by more than 150% driven by speculation in its purest sense. And then the bubble burst! The 2015 Chinese market mimicked the late 1990’s US market when investing also took a second seat to speculation. Margin lending doubled in China between January and June. The boom has taken place as the rate of economic growth in China has slowed. Due to intense buying the Composite rose to 5178; and then the invisible hand (40% decline) started searching for the bottom. Following a well-read script in early July, Chinese policy makers muted free market inclinations; and, initiated a reactive and panicked policy trying to keep the Composite aloft to avoid social unrest as tens of millions of ordinary Chinese watched their savings disappear.

“It’s a great huge game of chess that’s being played-all over the world-if this is a world at all.” Alice in Through a Looking Glass. More than six years after the global financial crisis, every nation continues to struggle with its consequences. Despite headwinds, the US economic data has improved since a weak first quarter but at a subdued pace. US job growth was lower this year than last, but still strong enough to bring the unemployment rate down. Energy prices are substantially lower, housing is picking up some steam, and interest rates remain low. The US stock market is range bound and somewhat uninspiring but the best game in town. By comparison, the Barclays U.S. Aggregate Bond Index, which measures a mix of government and corporate bonds, is down 0.1% for the year to date. The stock market Looking Glass is cloudy, planning on a short term correction that will be muted by relatively strong corporate earnings. Enjoy the story!

“The question is, said Alice, “whether you can make words mean so many different things.”


Fred Burke