The Markets
“Life is fine! Fine as wine! Life
is fine!”
During the third quarter of 2014,
U.S. investors remained as optimistic as the narrator in Langston Hughes’ poem,
Life Is Fine. All major U.S. indices pushed
higher during the quarter despite mixed economic signals, monetary policy
concerns, and geopolitical tensions.
U.S. Treasury bond markets
continued to confound investors and analysts during the quarter. Rates have
remained low even with the end of quantitative easing in sight and the Federal
Reserve preparing for the next step in unwinding monetary policy which is
raising the Fed Fund’s rate. Although the timing of the rate increase remains
uncertain, in theory, bond rates should be moving higher in anticipation of the
change. A Bloomberg survey found economists
anticipate 10-year Treasury yields will reach 2.78 percent by the end of 2014. They
began the year at 2.98 percent and finished last week at 2.45
percent.
Bond yields have remained low, in
part, because of geopolitical conflicts. Relations between Ukraine, Russia, and
the West deteriorated further when an international commercial airliner
carrying hundreds of passengers was shot down over Ukraine by a surface-to-air
missile. Sanctions imposed by the European Union (EU) and United States have negatively
affected the Russian economy. BBC.com
reported about $75 billion in capital has fled Russia and the country’s economy
appears to be on the brink of recession.
Sanctions also hurt economic
growth in the EU where recovery has been as precarious as a newborn foal trying
to stand. World stock markets were disappointed, late in the quarter, when the
European Central Bank confirmed it was ready to pursue further stimulus but failed
to offer any specifics. Over the quarter, interest rates in Europe drifted
lower. The Wall Street Journal
reported, “Record-low interest rates in Europe have flipped bond investing on
its head. Some bond buyers, typically paid for lending out their money, have
begun paying borrowers to look after their cash.”
Renewable energy issues aggravated
problems in Germany. “On June 16… the wholesale price of electricity fell to
minus €100 per megawatt hour (MWh). That is, generating companies were having
to pay the managers of the grid to take their electricity,” reported The Economist. The problem was less
predictable forms of energy, like solar and wind, create challenges for
utilities accustomed to power plants that run constantly and produce a
predictable amount of energy.
Throughout the quarter,
geopolitical issues increased at a rate that might rival Fibonacci’s hypothetical
rabbit population (okay, maybe not quite that fast):
- The Ebola crisis captured
the attention of governments around the world. Safety trials for
experimental vaccines are underway in the United Kingdom and the United
States, and the first unexpected case arrived on U.S. shores.
· Violence continued to roil
through the Middle East and North Africa. ISIL/ISIS accomplished what many had thought
impossible – uniting most countries in the world against a common enemy.
· In Hong Kong, protests supporting
free elections and opposing the Chinese government’s vetting of political
candidates were marked by an increase in violence.
· Japan suffered its worst volcanic
disaster in 90 years.
The third quarter of 2014 was
many things, but it certainly wasn’t boring.
Is another industrial revolution upon us? Sure, sure, historians still
debate whether the term ‘revolution’ is a misnomer since the first industrial
revolution began in the 1700s and sort of merged into the second industrial
revolution in the mid-1800s. Revolution is apt when a new way of doing things
completely replaces an old way. However, the changes in agricultural
techniques, technology, and industrial organization happened so slowly it was hardly
a revolution in the traditional sense of change occurring rapidly.
The Economist suggests we are in the throes of
another period of sweeping change:
“A third great wave of invention and economic disruption, set off
by advances in computing and information and communication technology in the
late 20th century, promises to deliver a similar mixture of social stress and
economic transformation. It is driven by a handful of technologies – including
machine intelligence, the ubiquitous web and advanced robotics – capable of
delivering many remarkable innovations: unmanned vehicles; pilotless drones;
machines that can instantly translate hundreds of languages; mobile technology
that eliminates the distance between doctor and patient, teacher, and student.”
Industrial revolutions
have been characterized by painful change; although, they created broad
swatches of economic opportunity. While this revolution eventually may bring
incredible improvements and open new economic opportunities across all levels
of global societies, currently, it is “opening up a great divide between a
skilled and wealthy few and the rest of society.”
Weekly
Focus – Think About It
Believe
you can and you're halfway there.”
--Theodore
Roosevelt, 26th President of the United States
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