Summer Squall

Sailors know that squalls come up suddenly, seem very violent, and then pass quickly. Stock markets around the world just went through a squall line — sudden, violent, and gone! The trigger was a forced unwinding of a carry trade using cheap funding in Japan. When the Japanese central bank announced that it was beginning to raise rates, the Yen (Japanese currency) began rising. Faced with higher rates and more expensive buy-back of the currency by which they had borrowed, hedge funds and others reversed their trades. Some of the borrowing had been used to buy leading stocks in our market so these had to be sold to pay back the loans. 

The mass selling was not only prompted by the unwinding, but also contained concerns that the U.S. economy was slowing faster than had been anticipated and perhaps would result in a recession. The fear was, and still is, that the Federal Reserve is once again late in responding to the economy. Interest rates should have already begun the process of being lowered. After all, inflation is now close to the Fed’s target of 2 percent. Once the selling rout took hold, selling begot selling and we were all caught up in the fury. 

Now, the squall has passed but by no means have all the economic concerns. Perhaps fears of a precipitous fall in activity are overdone and our economy can muddle through. With the Federal Reserve likely to cut interest rates in September, that should be possible. However, expect more volatility. The Bull warned that this was coming. After all, there is also a national election looming and an unusual amount of international uncertainty as well. This will pass, it just may take more than a few days.  In the meantime, stay steady and pick up a few bargains. 

The Lonely Bull