The Gold Standard | A review of third quarter

I had to write the piece below for a client. I thought I would put it up in my blog too:

In the third quarter of this year, Global stock market fell hard. Investment returns on the Morgan Stanley Capital International (MSCI) stock indices for major regions of the world tell the story clearly. MSCI World stock index dropped 16.5%, the US index dropped 14.0%, the European Union Index dropped 22.4%, Asia ex-Japan fell 21% and the overall Emerging market index dropped 22.5%.

JP Morgan Global Emerging Markets Total Return Index dropped 1.8% whereas the Global Government Bond Index was up 2.7% during the same period. The US government bond index (maturity greater than one year) was up 6.5% while physical gold was up 8.2% during the period.

The same was true for currencies too. Only the Japanese yen and the Chinese yuan bucked the trend and gained against the US dollar. All other currencies ceded ground to the US dollar. The Australian dollar lost nearly 10% whereas the Brazilian Real, Polish zloty and the South African rand lost more than 16%.

In sum, it was the quarter for safe-haven assets. That is why Treasuries and Gold rallied. Investors fretted over the fate of the Eurozone and the single currency. US economic data were on the disappointing side too. Economic Cycle Research Institute noted that a US recession, in the next 3 to 6 months, was now baked in the cake.

The volatility and the correlated downturn in global risky assets left many hedge funds in bad shape too as they barely hedge these days. They take levered bets on global beta. They suffered.

As October dawned, investors have felt cheerful and have brought risk with little fundamental support to back up their exuberance. The rally in commodities is awkward for all nations as they struggle to rediscover non-inflationary growth. Instead, all that they are getting is inflationary non-growth. Investors, it appears, needs more reminders of this reality to wake them up and smell the coffee.

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.