The Decline of U.S. Financial Dominance
The Effectiveness or Lack Thereof of Federal Reserve’s Monetary Policy
It has been four years since the start of the worst financial crisis in the post war era. It feels like a lifetime to me. Lehman Brothers filed for bankruptcy in September 2008, tipping the world into a systemic financial meltdown which we have been recovering from ever since. It’s helpful to step back every once and while and see how far we have come since the market lows of March 2009, when the S&P closed under 700. It has more than doubled since then, but oh what a ride it has been!
[expand title=”Read More” trigpos=”below” swaptitle=”Hide Text”]One of this week’s guests, Fort Washington Investments Nick Sargen, points out that there have been three distinct market phases since the financial crisis began. First, “the sell off” from September of ‘08 to March of ‘09 when global credit markets froze, economies fell into recession, and the Fed drove interest rates to zero. During the sell-off, the S&P lost 46%, other markets plummeted; U.S. Treasuries and gold were the only major asset classes to gain.
The second phase is what Sargen calls the rally-rebound: monetary and fiscal stimulus continued, banks stabilized, and economies started to recover. From March of ‘09 to March of 2010, the S&P skyrocketed 76%, other stock markets soared as did high yield bonds.
The third phase is what we have been living through since, what Sargen terms “choppy”, the infamous risk on/risk off market buffeted by the onset of the Greek debt crisis, which has spread to other countries and brought the viability of the entire euro-zone into question. Stock markets, especially in the U.S., have actually done better than they feel through this period and bonds, especially high yield ones, have more than held their own.
Where do we go from here? Our two guests have followed every twist and turn of the financial crisis and its aftermath, one as an investment strategist the other as a major player in global finance.
Nick Sargen is a familiar face on WEALTHTRACK. He is Chief Investment Officer of Fort Washington Investment Advisors. Nick is a long time international economist and global money manager who has had top positions at major Wall Street firms including Salomon Brothers and JP Morgan Chase. He also has a Ph.D in economics from Stanford.
Our second guest is a new face on WEALTHTRACK but is well known and highly respected among global policy and financial leaders. He is John Lipsky, Distinguished Visiting Scholar at the Johns Hopkins University School of Advanced International Studies. Late last year, John retired from the International Monetary Fund where he served throughout the financial crisis from 2006-2011. John was the IMF’s First Deputy Managing Director, and became its Acting Director when Dominique Strauss Kahn resigned in 2011. Among the senior positions John held prior to the IMF was Chief Economist and Director of Research at JP Morgan and Chief Economist at Salomon Brothers. He also has a Ph.D in economics from Stanford. Needless to say, Nick and John have known each other and worked on and off together for forty years!
I began the interview by asking John Lipsky about Fed policy and how much impact additional stimulus would have.[/expand]
WEALTHTRACK Episode #911; This program was originally broadcast on September 7, 2012.
Listen to the audio only version here:
Nick Sargen & John Lipsky #911
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Chief Investment Officer
Fort Washington Investment Advisors
Distinguished Scholar, SAIS
Former First Deputy Managing Director, IMF[/wptabcontent]
[wptabcontent]This week we have a rare interview with one of the major players in the rescue of the global financial system. John Lipsky, the former number two leader of the International Monetary Fund throughout the financial crisis is joining us, as is one of his close friends and another Stanford University PhD economist, Nick Sargen, a veteran global strategist.
The timing of their appearances could not be better. Yesterday we learned anew how much macro policy decisions mean to the markets. Investors drove stock prices higher across the globe on the decision by the European Central Bank to, if needed, purchase unlimited amounts of European country bonds with maturities of one to three years. Like the Federal Reserve’s policy to buy U.S. Treasury bonds to keep U.S. interest rates low, the ECB’s new Outright Monetary Transactions Program (OMT) is designed to control interest rates in the euro area, thus boost economic activity and provide financing to troubled countries such as Spain and Italy. As ECB President Mario Draghi put it, the program “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.” Draghi has now put into action what he pledged earlier this summer, that he would do “whatever it takes” to hold the Eurozone together.
The Dow and S&P 500 hit their highest points in more than four years yesterday, but the biggest story was the Nasdaq Composite Index, which climbed to its highest level since November of 2000, in the midst of the technology boom. At 3135.81, the tech oriented index is still 39% lower than its March 2000 peak but no one is complaining, especially shareholders of Apple! Apple shares which makes up about 13% of the Nasdaq hit a new record of $676.27 today. Contrary to many expectations, it’s been a very good year to own stocks. The tech oriented index is up 20%, the Dow is 8.8% higher and the S&P has gained 14% year to date.
Before I tell you a little bit more about this weekend’s guests, I want to tell you about the improvements we are making on the WEALTHTRACK EXTRA feature on our website. It’s where we have previously posted exclusive podcasts and extended interviews with our Great Investors and Financial Thought Leaders. We are expanding our offerings and adding interviews you won’t see anywhere else, including questions exclusively for WEALTHTRACK EXTRA. Some are serious, some are personal, all are compelling! This week, we got a chance to sit down with John Lipsky and ask him about how close we came to financial Armageddon and why he is very concerned about the lack of progress in global financial cooperation.
John is currently Distinguished Visiting Scholar at the Johns Hopkins University School Of Advanced International Studies or SAIS. Late last year, he retired from the International Monetary Fund where he served throughout the financial crisis, from 2006-2011. John was the IMF’s First Deputy Managing Director, and became its acting director when Dominique Strauss Kahn resigned in 2011. Among the senior positions he held prior to the IMF was Chief Economist and Director of Research at JP Morgan and Chief Economist at Salomon Brothers.
Nick Sargen is Chief Investment Officer of Fort Washington Investment Advisors and its parent, the Western & Southern Financial Group, where he oversees $40 billion in assets. Nick is a long time international economist and global money manager who has had top positions at major Wall Street firms including Salomon Brothers and JP Morgan Chase, as well as working at the Federal Reserve and U.S. Treasury.
As always, if you can’t join us at the appointed hour on your local public television station, you can watch the show on our website as a podcast or streaming video. You can also find the One Investment picks of our guests and my Action Points there. For those of you who would like to see our program 48 hours in advance of the broadcast, you can subscribe to our WEALTHTRACK PREMIUM subscription service on the website.
Until then, we hope you have a great weekend. Make the week ahead a profitable and a productive one!
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[wptabcontent]SARGEN: Turned the Corner?
High quality European equities
“I’ll stick my neck out a little bit. It might be an early call, but I do believe it’s … we’ve done our homework, we’ve begun to make some forays into the European markets, mainly in the safer sectors- not financials, maybe telecom space and the like. So I do believe… what I’m basically saying is this could be a mega trend, but I want… I’m going to listen to John Lipsky, if he grows more confident that we’ve turned the corner, I’d be adding to positions in high quality European names at this time.”
– Nick Sargen
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