“I am deeply ashamed to know that I won't be able to pay our staff. They have got mortgages, children. What am I supposed to do?" Jesus Manuel Ampero, Mayor of Cenicientos (Spain)

It has been an unpredictable summer. Investors have been wrong-footed by surprisingly strong growth emanating from Europe (read Germany), whereas the US economy – habitually the locomotive for the global economy – has gone from one disappointment to another.  [1]  Not many would have predicted that back in early summer.

The endless series of bad news has led many commentators to speculate on whether the US is about to catch a bout of the Japanese disease. The most comprehensive analysis on the subject that I have come across has been conducted by the Global Economics and Strategy team at Bank of America Merrill Lynch (they have to get that name sorted out). [2]  

They make the following observations in terms of what can be learned from the Japanese experience:

  1. Economic growth and bond yields will remain low until banks start lending and house prices start rising.
  2. No secular bull market can be expected in equities until bond yields start rising.
  3. Until such time that the secular bull returns, expect plenty of volatility in equities.
  4. In a low growth, low interest rate, environment, investors crave yield, growth and quality.
  5. Growth is likely to outperform value.
  6. The secular bull doesn’t return until the central bank can hike again.

There are indeed many similarities between the situation experienced by Japan and the challenges now facing the US, but there are also significant differences. However, whether you agree or disagree with all these observations, I believe it is worth paying careful attention to Michael Hartnett when he states the following in his conclusion2 (and I paraphrase): From a portfolio allocation point-of-view, the first rate hike will be the pivotal moment – the point in time where investors should shift their focus from bonds to equities.

Too much optimism on Europe

 Now, despite the string of disappointing US macroeconomic data, it appears to me that investors have become too bearish on the US growth outlook and too optimistic on the European. Most of Europe has basked in the German sunshine, with little or no fundamental justification.

One of the most important lessons learned from the Great Depression was that those countries which…

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