Last Thursday, Kazakhstan removed the peg that kept its currency, the tenge, trading in a specific range v. the US Dollar. This caused it to drop a whopping 23%. Who cares? Well, maybe we all should… This is emblematic of what is going on in the world economy and what is causing much of the volatility in our stock market.
So, what’s going on? Many emerging market countries, such as Kazakhstan, control the value of their currency by setting a rate, or peg, at which they trade. This is in contrast to the major world currencies that trade freely on markets, such as the US Dollar and the euro. China notoriously pegs its currency to the US Dollar and keeps it artificially low (although it has appreciated some over the last several years). Keeping its currency low makes it easier to export its goods.
Earlier this month, China devalued its currency by 1.9%. This sent a shockwave through the world markets. Not because 1.9% is necessarily a huge amount, but because of what it might mean. China is the second largest economy in the world. And as a manufacturing heavy economy, it imports lots of raw materials, i.e. commodities such as oil, copper and aluminum. The concern is that China made this move because its economy is slowing and they need to boost their exports. This idea is bolstered by the price of oil, which has dipped below $40 per barrel. There is definitely too much supply, but more importantly, a lack of demand.
Many emerging market countries depend heavily on exporting raw materials. And, as their exports have slowed, money has started to flow out of them at dramatic rates. This is causing their currencies to drop and forcing countries with pegs to drop them in order to stay competitive. As these emerging market economies slow, we lose a major engine for worldwide growth. Also, as the currencies drop, the debt of these countries may come under pressure. Much of the debt in these countries is denominated in US Dollars. Therefore, when the local currency drops 10% v. the Dollar, the cost of the debt will increase by 10%. This ultimately could result in default events.
All of this points to a slowdown in worldwide growth. And while the US economy seems to be doing ok, we cannot pull along the rest of the world as we have in the past. Europe is currently using a quantitative easing program to try to avoid going back into a recession. Japan’s stock market has soared, but its economy is stagnant , contracting 0.4% last quarter. And, as mentioned above, China and the other emerging markets are in danger of a drastic slowdown.
Over the past several weeks, we’ve been seeing the impact of this dynamic in our markets. The Dow and the S&P 500 have both reached correction territory (a 10% decline from the high) with volatility spiking. The ten year treasury has dropped to 2.0% as money is flowing out of riskier investments and into the safety of the US Government bond. And, while the US Dollar has appreciated against many emerging market currencies, it has dropped dramatically against the euro. This is a signal that the currency market does not believe that the Fed will raise interest rates in September or possibly at all this year. This reflects the belief that the US economy and the world economy are too weak to absorb any monetary tightening.
All this being said, stock market corrections are a normal and healthy occurrence. Historically, they happen about every 18 months and we haven’t had one since 2011 (we did drop 9.8% last October). And, the world economy is definitely slowing, so it makes sense that our market would take a pause. However, our economy is still showing growth and our corporations are increasing their revenues and income. It is important to remember that investing should be for the long term. And over time, the markets will overcome the short term volatility and create value for shareholders.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Check the background of this investment professional on FINRA’s BrokerCheck.
An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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