DIY Investor Magazine
/
2015 Issue
6
I have no doubt that investors always think the times
they are living through are astonishing. But just examine
what financial markets are telling us today and you will
agree that these conditions are as unusual as they are
remarkable.
While such markets might make life difficult for
investors, they also present great opportunities and my
approach is to concentrate on diversification, selectivity
and dynamism to get the best results.
The 2008 global financial crisis shocked financial
markets, taking them to the brink of a meltdown. But it
is the market dynamics following the great recession
that have led us to the current situation, packed with
record-breaking extremes.
Following the crisis central banks across the
globe, in the US, UK, Japan and Europe, launched
unprecedented measures of unconventional monetary
policies in the form of quantitative easing (QE). The
task was nothing less than saving the financial system
by relating fragile economies and pulling them out of a
deep recession.
EASING
QE involved buying government bonds and pushing
their yields to record lows. And flushing markets with
liquidity also helped push some equity markets to
new all-time highs. Figure 1 correlates the US 10-year
Treasury yield with the performance of the S&P going
all the way back to 1926.
As policymakers aggressively cut short-term rates,
sometimes into negative territory, the new environment
pushed some real estate markets upwards, reaching
bubble conditions. Whether QE was the cure or another
disease is yet to be seen, but undoubtedly it created
financial extremes.
FIGURE 1: DROPPING US 10-YEAR TREASURY
YIELDS & RISING US EQUITIES
We are experiencing extraordinary times in financial markets says
Yoram Lustig, author of The Investment Assets Handbook
DIVERSIFICATION, SELECTIVITY & DYNAMISM
ARE NEEDED TO TACKLE MARKET CHALLENGES
IN A WORLD OF EXTREMES AND UNCERTAINTY ABOUT
ECONOMIC GROWTH, CHANGING SENTIMENT AND
NEWS CAN CAUSE LARGE SHIFTS IN ASSET PRICES,
INJECTING VOLATILITY INTO THE SYSTEM
Source: Bloomberg, January 1926 to December 2014
CHANGING WORLD
However, it is not solely QE that brought with it the
extraordinary conditions we are facing today. The world
is a dynamic place that keeps on changing. China,
once the global growth engine, began its secular
decline towards what some would call a ‘normal
economic growth rate’.
The oversupply of petroleum, together with falling
demand, as well as some conspiracy theories of Saudi
Arabia against the US fracking industry and US against
Russia and Iran, pushed oil price off a cliff to a 50%
free fall. The dropping oil price has taken inflation down
with it, towards deflationary territory.
The desire to export deflation, reflate economies and
enhance competitiveness of exporters has meant a
series of global currency wars, seeing the US dollar
appreciating and some other currencies collapsing.
After decades of increasing globalisation, the world’s
