SFCS Capital's September Market Review

November 1st, 2010
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Contributed by: Claude Bovet, SFCS Capital
On the back of real concern over a US double-dip that has only increased since August, global risk assets (equities, bonds and commodities) exploded higher as Bernanke and the Fed confirmed it would implement another round of quantitative easing, dubbed QE2. In many respects, investor response to the news is somewhat surprising given that QE2 is being implemented as a direct result of the Fed’s concern over the economy, jobs and especially deflation. These three concerns are real and current and not problems expected to arise at some point in the future. But investors have chosen instead to focus on the liquidity that QE2 will create. As a brief explanation, quantitative easing is the process of purchasing financial securities – typically US Treasuries – in order to provide money to the financial system in the hope that it will transition into the economy.

During QE1, this money was substantially withheld by the banks in order to bolster significantly weak and deteriorating balance sheets and thus was not lent to the private sector. That is not to say that the private sector was clamouring for loans; on the contrary, corporations and consumers have been reluctant to borrow, the former from uncertainty about economic activity and the need to invest in capital expenditures and payroll, the latter as job concerns and thus reduced income have hastened an increase in savings. A dead end, it seems, that would require another round of QE, at least that’s the rationale that Bernanke seems to be holding to.

What will be the effect on the economy and financial markets? Many are concerned, and rightly so, about the brazenly speculative animal spirits that have been awakened in expectation of a new wall of money entering the system. SFCS Capital shares this concern. However, our signature Protection Strategies approach that performs strongly during market routs and crises will kick in if investor over-speculation reverts to a more rational mindset.
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