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Quite A Week!

Four states and many plane rides were interwoven with lots of phone calls, emails, market notices, and media alerts. This has been quite a week! If you were on Mars and missed the 1,000-point Dow Jones Industrial Average correction, you may find the details on the front page of every newspaper.

We have received the following frequently asked questions.

1.Are you worried about China?

Answer: Yes. China is the world’s second-largest economy. The US is first. China is the world’s largest goods-producing economy, while the US is heavy in services. China’s growth rate is slowing. Its governmental policies are changing. The transmission mechanism that took 15 to 18 million people from rural to urban lifestyles has stopped. China’s population imbalances – the result of the earlier one-child policy and the Chinese preference for male children over female – are now revealing themselves. The high economic growth rates of the past three decades, from 7% to 9%, will not continue. China is huge, and its economic slowdown is globally important.

Do we throw in the towel because of China? No. We expect more incentives and stimulus from China. Over time, we expect the Chinese currency to follow a gradual path toward floating. China wants the yuan to be a world reserve currency, and the country’s economic size supports that desire. However, a long process is required to achieve reserve currency status, and stumbling blocks can be expected along the way. China is not a reason to liquidate all stocks in the United States. It is a reason to be very selective about China exposure.

2.What about Europe and Greece?

Answer: Greece is temporarily resolved. “Extend and pretend” have resulted in a new deal. Now there will be a new government. The issue of default by Greece has been postponed for approximately three years. The issue of Greece as the weakest and most deeply wounded member of the Eurozone is still open.

Will the Greek economy actually hit a bottom, plateau, attract investment, and begin to grow? That query is fair, and its resolution is undetermined. At best, the outlook is problematic. For the next three years, Greece really doesn’t matter except to those 11 million citizens who live there and a small global business interface.

3.What about the rest of Europe, the euro, and the European Central Bank (ECB)?

Answer: The euro is destined to get weaker. In our view, parity with the dollar will happen, and long-range valuation may approach the lowest price in the post-Maastricht era. That was about $0.85. European inflation is very low. European interest rates are based on a policy of negative rates on excess reserves. The 19 countries in the Eurozone are at negative rates. In addition, neighboring countries like Sweden, Denmark, and Switzerland have negative rates. Acceptance and use of negative rates is growing.

The distortion and other impacts generated by negative interest rates set by a major central bank are extraordinary. Negative rates eventually result in higher asset prices in many places in the world, including Europe. Those negative rates are purported to be an attempt to stimulate inflation, although they do not seem to work. At best, extraction from negative interest rates will be extraordinarily difficult. At worst, it will be impossible without major dislocations. That said, Europe and the Eurozone are committed to negative interest rates. In fact...


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