The Global Economic Doctor

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The Global Economic Doctor– Click link to read the full edition.

 

 

Welcome to the latest edition of The Global Economic Doctor.  This week, Dr. Scott B. MacDonald writes:

Waiting on the Wall of Worry
History is a race between education and catastrophe.
— H.G. Wells

Summary:

The global economic recovery has been fragile and growth-anemic compared to past cycles. In early June, the World Bank released its Global Economic Prospects, which commences with the following: “Growth prospects have weakened throughout the world economy.” Indeed, the World Bank has taken global economic growth down to 2.4% from the 2.9% it had forecast in January. Pain is most acute in emerging markets, which “are facing stronger headwinds, including weaker growth among advanced economies and persistently low commodity prices, as well as lackluster global trade and capital flows.”  While the World Bank report gave voice to the worries of many investors and policymakers, sentiment in the markets has decidedly turned bearish through the past week.  Equity markets continue to bleed capital, while investors continue to move into cash ($1.8 trillion in institutional money market funds as of May 30th) and higher-rated sovereign bonds. A number of central banks have moved their benchmark interest rates below zero, with strong investor appetite for the perceived safety of higher rated sovereign bonds (Germany, Switzerland and Japan) pushing the yield of more than $10 trillion of sovereign debt into negative territory.  One of the more vocal critics of this has been Janus Capital’s Bill Gross, who tweeted, “Global yields lowest in 500 years of recorded history…this is a supernova that will explode one day.”  According to Goldman Sachs, an unexpected 1 percentage point rise in US Treasury yields could cost investors an estimated $1 trillion.  To grossly understate, perhaps negative interest rates are not such a good idea and the next major market move could come when European central banks and Japan opt to end that policy. Do investors face a wall of worry as June progresses, with the upcoming FOMC meeting, the BREXIT vote, and ongoing China jitters? Absolutely!  The famous British writer H.G. Wells, who gave us The War of the Worlds and The Time Machine, is right in saying, “History is a race between education and catastrophe.”  I am hoping education wins out.

 

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