Sunday, January 18, 2015

Hyman & Kim: U.S. Pulling Global Economies

One comment mentioned of late is the U.S. economy may be decoupling from the rest of the world economies. In Part 2 of Ed Hyman's and John Kim's interview (Part I of Interview) with Consuelo Mack on Wealthtrack, both Hyman and Kim believe it is not possible for the U.S. economy to decouple from the rest of the world at this point in time. The globalization of trade and manufacturing has created an interconnectedness that will be difficult to break. Both Hyman and Kim believe, however, that the economic strength in the U.S. is pulling along other economies around the world.

A large part of the interview is focused on markets outside the U.S. However, one investment area both expressed concern about was the liquidity of the bond market. The Volker Rule and Dodd Frank legislation have created a potential crisis in the bond market. These rules have reduced bond inventory of the Wall Street banks from $250 billion to $50 billion today. At the same time, retail investors have increased their bond exposure from $1.7 trillion to $3.5 trillion. If a crisis were to occur in fixed income, Wall Street does not have the ability to clear this level of trading. On October 15th the treasury bond market had what some traders call a flash crash. Themis Trading noted in an article at that time,
"The bond market appears to have fundamentally changed and no longer seems to have the built-in liquidity shock absorbers provided by traditional dealers. Some will say that Dodd-Frank caused this since dealers can no longer hold as much inventory. Some will say that this is just the natural evolution of electronic trading. But something is wrong when the safest bonds in the world experience such a rapid price move in such a short time period."
The below video also contains a good discussion on asset class allocations that readers/investors may find of interest.

No comments :