| |
|
|
|
Home > Investor Education > Toron Talks > Monthly Commentaries
June, 2008
Equity markets around the world took a thrashing in June as the prospect of further banking sector losses and capital infusions precipitated another round of de-leveraging - banks calling in loans and cutting back on borrowings to maintain their capital ratios. For year-to-date 2008, the TSX with an extreme weighting of more than 50% in commodities, led performance in global equity indices showing a return of +4.1%. By contrast, major US indices declined 12% - 14%, European indices dropped around 20% and indices in the emerging markets of China, India and South East Asia recorded declines ranging from 30% - 60%.
At half a trillion dollars and counting, banking sector losses have been larger and more widespread than first anticipated. However, central banks have demonstrated their commitment to avoiding the collapse of a single financial institution while keeping interest rates low and liquidity accessible so banks can rebuild their balance sheets.
This drawn out process has been exacerbated by an explosion in food and energy prices - key, but volatile components of the Consumer Price Index - that has heightened fears of escalating inflation and higher interest rates, discouraging consumer spending further and promoting downward revisions to corporate earnings estimates.
In today's global marketplace extreme inflationary concerns are unfounded. If the price of a product or service rises too high in one market it will be supplanted by a cheaper alternative from another region. We have seen ample evidence in the cost of labor and capital. Food and energy experience different dynamics due to disruptions in supply caused by inept public policy. It's also worth noting that while prices are high, there are no shortages of either food or energy. Simply put, inflation is a monetary phenomenon - too much money chasing too few goods
In the industrialized countries current inflation is an echo of the credit boom since the supply of money and credit has been declining for some time. Central banks have been slowing the pace of money growth since the end of 2006. The banking crisis has curtailed corporate and commercial lending and the velocity of money has also slowed. Finally, the weak US dollar and current account deficit are losing their inflationary impetus and are close to a turning point, precipitated by a strong improvement in the US non-petroleum trade deficit.
Bleak financial markets indicate that leveraged players are losing their patience waiting for a "quick fix" and are throwing in the towel. The dimensions of the global liquidity crisis and ensuing credit crunch defy a short-term lasting solution. Patience and discipline will reward investors who keep their emotions in check and their powder dry.
Peter Sacks
Managing Partner
|
|
|
|
| |
Monthly Commentaries