March Market Commentary

The U.S. economy continues to strengthen, with 215,000 jobs added in March combined with a slight rise in the unemployment rate to 5%, which is paradoxically good news as it means the people who had given up looking for work are now trying to break into the job market. However, the Fed is still hesitant to raise interest rates. Perhaps this is due to concerns about China, currently the world's largest economy, which has seen a large slowdown in growth that has exposed major structural weaknesses in the nominally communist, state run economy.

Since joining the WTO in 2001, China has become known as the largest manufacturing base in the world, with imports from China accounting for 2.7% of America's GDP in 2015, as opposed to 1% in 2000. Its demand for raw materials and farm products fuelled booms across the developing world, while cheaper goods and a massive new market was made available to the West. However, after a decade of posting at least 10% growth like clockwork every year for the last decade, in 2015 growth slid to 6.8%, and is expected to further decline to 6% by 2017. The slowdown was most dramatically presented in the massive stock crash expierneced by the Shanghai Index in the beginning of the year. Although the Chinese stock market is largely isolated from the real economy due to the massive control the state has over it, the crash was still painful to many middle class families who had invested their savings into the stock market, and the clumsy, heavy-handed attempts by the Communist Party to halt the crash were indicative of a much larger weakness within the current economic system.

China's main source of wealth has remained its manufacturing, even as the economy modernized and a massive new middle class has grown to fuel domestic consumption and branch out into service and tech jobs. However, even as China has accumulated all of the trappings of a free market economy, the state still remains firmly in control. This has created in some ways an existential crisis within the Chinese economy, as it tries to respond to pressures from the free global market while coping with heavy taxes and major restrictions from the Communist party. This was strikingly shown in the real estate bubble of 5 years ago, in which entire "ghost cities" were constructed for factories that were never built. More recently, the government continued to pour money into factories at the expense of other sectors, even as rising labor costs and evaporating demand made Chinese manufacturing less completive. This led factories to simply continue to make products there was no demand for, which created large stockpiles of now useless goods.

This heavy handed control was most obviously seen in China's attempts to control it burgeoning banks and financial markets. China has recently introduced new capital restrictions, which prevent banks from buying U.S. dollars and from any Chinese citizen taking money out of the country. This is coming at a time in which Chinese investors have become noted for buying businesses and real estate all over the world. These restrictions came after Chinese exchange resaves fell by $108 billion, and China has restricted certain foreign banks, including Deutschebank and Standard Chartered from engaging in some forms of foreign exchange transactions. Also, citizens have been restricted to transferring $50,000 in U.S. dollars. These restrictions have also obviously spooked foreign investors who might invest in the Chinese market.

Finally, China is facing a crisis that all totalitarian governments face, that of transparency. With it tight internet controls and complete control over all aspects of its media and fiscal reporting, it is very hard for foreign observers to know what the full extent of the economic slowdown is. China has definitely made solid efforts to produce an honest reporting of its fiscal numbers to the international community by the NBS(National Bureau of Statistics), which the World Bank has deemed "usable and informative." However, the NBS has many obstacles to not only representing, but even acquiring the data it needs. It has to go around corrupt and incompetent local officials and factory owners, and is often forced to send out its own teams of surveyors to find out the facts on the ground. More importantly, it is a direct subsidiary of the overreaching Communist Party, and has no power to report without their authority, let alone advise. This means that in the current crisis, the Chinese people are only able to hope that it's all powerful government knows what it's doing, while the rest of the world is finally given cause to wonder what happens behind the closed doors of Chinese politics.     

  -Jared Maloney , Market Commentator

January Market Commentary

The Dow Jones and S&P indices have fallen 11% so far this year, the worst start to a new year in Wall Street history. The main factors behind this plunge are falling oil prices, which had fallen below $27 a barrel,before rebounding, and fears about China's slowing growth rate.This is compounded by a continuing sluggish European economy and uncertainty about the state of the U.S. economy. However, it is important to remember that the stock market is one of the most volatile and unpredictable of man's creations,and that historically, powering through a bear market usually pays off. 

One of the biggest reasons to stay invested is the simple adage, "Buy low, sell high." Barring a full blown recession, which is unlikely, most downturns are usually an opportunity to selectively buy stocks cheaply. While there are legitimate reasons for the sudden downturn, the market is also in the process of correcting from its previous highs of last year. In recent years, the market has followed the pattern of outpacing the real economy, with stocks surging even as the recovery remained weak. Valuations therefore expanded on relatively modest earnings and sales growth. Now an opposite pattern can be observed, with stocks rapidly falling even as the U.S. economy strengthens, albeit slowly.

 It should also be noted that while this is the worst start to a year in Wall Street history, there has been only one instance, 2008, that this translated into a down year for the economy. Further, if this was the beginning of another recession, it would be the first time in history that it happened so rapidly and with so little warning. At present, there are none of the imbalances that normally precede recessions,such as wage and commodity price inflation or rapidly rising interest rates.      

                                                                                                                                                                                                                  -Jared Maloney


* Graph is created by Patrick O'Shaughnessy

December Market Commentary

Oil Prices continue to drop, showing $35.27 a barrel today, down from $114 a barrel 18 months before. The IEA sees the slowing growth in worldwide demand, as year over year growth declines to 1.2 million barrels a day, down from 2.2 mb/d at the beginning of 2015.

However, despite falling prices and slowing demand growth, oil supply continues to grow. This is mostly due to OPEC attempting to combat the American fracking boom by continuing, and in some cases even increasing, production unabated. This has caused total supply to grow 1.8mb/d versus a year ago, especially due to increased production from Iraq and Kuwait.

This will inevitably lead to a shrinking of oil production in the U.S, as cash operating costs for production are now equal to current prices. Thus, there can be no return on capital investment in new production, and therefore no incentive to invest in most new wells. It is thus expected that U.S. unconventional production will fall by nearly 1 million barrels a day next year, which may eventually result in a market equilibrium. However, there is the added variable of offshore floating supply in large tankers, which is currently sitting on 100 million barrels of oil. When this floating supply is introduced into the market due to future contracts already set in place, this further flood of supply will serve to keep oil prices down well through 2016, thus making price stability in the near future unlikely.

Therefore, absent a geopolitical interruption in supply, there is little reason to look for price stability anytime soon.  -Jared Maloney , Market Commentator


August 31st, 2015

As August comes to a close, the worlds economic forecast appears grim. The Nasdaq saw its biggest plunge since the 2008 crisis this weekend, accompanied and probably precipitated by an even steeper plunge in Chinese stocks. This coupled with an anemic European economy and a debt crisis in Puerto Rico, creates a deceptively dark perception of America's economic future. However, Americas economy continues to show signs of consistent if muted growth, as second quarter GDP growth has been revised to 3.7%.

China's Shanghai Index continues to fall despite massive stimulus efforts enacted by the Chinese government. This is indicative of the continued slowdown of the Chinese economy, whose enormous manufacturing base and insatiable need for natural resources has been powering the global economy for the last decade. This, combined with the recent plunging price of oil has hit commodity heavy emerging markets especially hard. All of this has caused a ripple effect which, combined with slow U.S. growth has led to the current downturn witnessed over the last few days. This is probably not, however, the start of a new recession. American stocks have been widely perceived as being somewhat over valued relative to the real economy, and this is most likely simply a correction to reflect Americas more modest but still strong growth.

Although it is unlikely to have a strong impact on the overall U.S. economy, it is still important to note that Puerto Rico is currently in the midst of an overwhelming debt crisis. Puerto Rico is currently $72 billion in debt; when considering Puerto Rico's relative poverty and population of 3.5 million, this is an astronomical amount. To put this in perspective, New York City, arguably the wealthiest city in the nation with a population of 8.5 million, currently has a debt of $110 billion. This debt is mostly owned by private retail investors who invested in Puerto Rico due to its unique tax status as a territory rather than a state. This, compounded by corruption and mismanagement endemic in the Puerto Rican government, created an enormous unsustainable glut in spending. Puerto Rico currently hangs in limbo, as the U.S. government remains uncertain as to how to handle the crisis. While some sort of debt restructuring is obviously needed, there is intense debate on whether Puerto Rico's territory status should allow it to declare bankruptcy. While Detroit notably declared bankruptcy in 2013, states and seemingly, territories, are unable to do so. This has called into question what rights Puerto Rico possesses as a territory, and has even opened a debate on whether Puerto Rico should be granted statehood or even become independent. Both of these options are unlikely however, as most Puerto Ricans continues to want to remain a part of the U.S., and the unwillingness of the U.S. government to grant Puerto Rico statehood. Suffice to say, across the world from China, to Greece, to Puerto Rico, the over hang of ill conceived spending and debt remains an intractable problem.

-Jared Maloney , Market Commentator 

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July 23rd, 2015

The current stock market plunge in China, coming on the heels of the Greek debt crisis, is still causing substantial unease in global markets. The sudden 30% drop in less than a month has caught both Chinese investors and government officials by surprise, and has led the Chinese government to unleash a flood of stopgap measures, which range from ordering state run institutions to buy shares and banning large share holders from selling stakes, to arresting short sellers and stamping down on "rumor mongering."

China's financial market is a self contained entity which is almost entirely cut off from international investors. China's mainstream economy is largely insulated from this market, and only 7% of Chinese households own stock. Of this 7%, a vast majority do not possess even a high school education, and many borrowed money and bought on margin to purchase their stocks. This lead to a rapidly inflating bubble which burst on July 7th. The market seems to have leveled off as of a few days ago, but due to the massive, heavy handed intervention having been employed by the government, it is hard to know whether the crisis is largely over or this is simply an artificially induced "bump" which will fail to stave off further losses.

At least in the short term, China's stock crisis is not expected to have a significant impact on the global economy. The only countries that might see some fallout are China's closest regional trading partners, such as Australia and Indonesia. However, there are fears that China's economy in general is rapidly slowing down, and that the stock market crash is simply a prelude to a larger collapse. China's slowing economy has been a well known fact for years, recently highlighted by a sharp drop in commodity prices which, in a major industrial economy like China's, indicates a drop in demand. Coupled with an also well established real estate bubble which has seen the creation of famous "ghost cities," in which entire rows of apartment complexes stand empty for years, there is growing concern that China is headed for a recession.

The Greek debt crisis remains in limbo, as Greece repaid a 2 billion euro loan to the IMF, and received 7 billion euro in return. Greece's prime minister Alexis Tsipras, who heads the left wing Syriza party, is attempting to get passed a series of tax hikes, spending cuts and market reforms through the Greek parliament in order to obtain a new bailout from Greece's creditors. Although elected into office largely by denouncing the austerity measures imposed on Greece, Tsipras seems determined to keep Greece in the Euro zone, and is struggling to get his own party to agree to these new measures. -Jared Maloney , Market Commentator

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June 15th, 2015

The current global economic situation looks more volatile than it actually is, with several factors contributing to the perception of instability. The reality, however, is a stable, if somewhat anemic global growth picture. Factors driving this perception include the current crisis in the Middle East, the debt crisis in Europe, and the current level of interest rates in the U.S.

In the Middle East, ISIS remains a powerful force that continues to hold large portions of Iraq and Syria. This has caused Iraq to ramp up the production of oil to 4 million barrels a day to create a short term influx of cash. This has combined with Saudi Arabia also increasing oil production to compete with American fracking, and Libya also beginning to export large amounts of oil despite the absence of a centralized government. All of this contributes to continued low oil prices, which may temporarily curtail the fracking boom in the U.S. Here in the US, the downside of lower oil prices, such as job cuts in the oil sector, has already been felt, while the benefit of lower prices to the consumer has yet to be fully realized.

The E.U. market remains stagnant, with low growth and continuing division among member states. Greece remains at the forefront of the crisis, and looks increasingly likely to pull out of the E.U. all together. The current hard-line leftist Syriza Party delayed a 300 million euro payment to the European Central Bank, and remains defiantly opposed to reducing government spending, particularly on pensions, which are clearly unsustainable in future years. As a result of an inability to find common ground, the I.M.F. has recently left negotiations, making it look even more likely that Greece will default on its loans and leave the euro. However, as most global banks have managed to dispose of their Greek debt over the last 5 years, the impact of Greek default on global markets should be limited to "headline risk”.

Interest rates remain low as U.S. economic growth continues to be weak. A severe winter, port strike in Los Angeles, strong dollar, and low oil prices combined to dampen growth. The I.M.F. recently scaled back the U.S.'s growth forecast to 2.5%, and recommended that the Fed hold off on raising interest rates until 2016. Still, there were some signs of improvement as jobless claims continued to fall, with unemployment reaching 5.4%. It appears that consumers are finally leaving behind the enforced confinement of Old Man Winter, and retail sales have rebounded in May (+1.2), with the months of March and April being revised upward. We expect the trend of moderately higher wage growth established in recent months to continue as the job market slowly tightens. -Jared Maloney , Market Commentator

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