Blog Post

Recency bias is a term behavioral scientists use to describe our tendency to assign greater relevance to more recent events and diminish the relevance of events further past.  In investing we see this often.  In the 1990s people expected double digit returns in stocks and didn’t pay attention to overvaluation which led to a bubble.  In 2009 many were afraid to invest even though the opportunity was a once in a generation bargain.  Early each year I’m questioned about pursuing whatever investments did the best in the previous year.  Return expectations rise when the previous year is good and they fall when the previous year was bad.  The truth is that each year is unique and different investments outperform or underperform.  We try look for signs of what is different going forward.  The four main themes for this year are:


  1. The US Energy Boom is turning bust. The world has a glut of oil.  OPEC is not cutting production to maintain their market share.  Saudi Arabia’s cost of production is about $10 per barrel.  Our cost of producing new oil is likely over $60.  This will create a headwind for the US economy in 2015.
  2. Massive stimulus and rate cuts will accelerate growth in Europe and Asia. Europe’s trillion Euro bond buying program came late but the fact that several countries in Europe have slipped into deflation has finally won over the overly cautious members of the EU.  Now you could say Europe is exporting their deflation by devaluing their currency and making the cost of their exports lower and the cost of imports higher.  Asian countries are cutting their relatively high interest rates due to slowing growth and currency appreciation.
  3. The dollar is absolutely soaring. Since the European Union announced their trillion Euro stimulus, the Euro has dropped dramatically.  The US dollar has soared against not only the Euro but against most major world currencies.  This will be great for consumers as everything we import will be cheaper.  However, this will be very challenging to US companies that export, compete with imports or are multinationals.  The size of foreign earnings will be less simply due to exchange rates.
  4. The Federal Reserve is intent on raising rates this year. They’ve been telegraphing this one pretty strongly lately.  However, this one is probably the least certain.  I’m not saying the FED doesn’t want to normalize rates (at least get the short term rates up to 1%).  I believe due to #1 and #2 above the FED will likely delay any rate increases.  If the collapse in oil drilling, decreased exports and increased imports slows job creation and if the strong dollar continues to cause the price of everything we import to fall then the FED may become more worried about job creation and less worried about inflation.  Realizing that hiking interest rates will only make the strong dollar worse may create the caution that causes this delay.  Just don’t expect the rhetoric to change until they make the decision to delay.


Stocks ended a volatile week on a weak note.  The European Central Bank began their bond purchases.  Treasury bonds were higher due to foreign demand.  Commodities including energy and gold were lower while the dollar rose sharply.  We continue to monitor the situation and adjust as necessary.


In particular this week:


  • China reported that exports rose 48.3% in February while imports fell 20.5% with growth to Europe accounting for much of the rise. The large swing was likely affected by the timing of the Lunar New Year.  The trade surplus was a record $60.6BN.  China grew at 7.4% last year, the slowest in 24 years, but the government has set a growth target of 7% this year.
  • The Commerce Department reported that US retail sales fell a seasonally adjusted 0.6% February after falling 0.8% in January and 0.9% in December. Economists had forecast an increase of 0.2% in February.  Excluding autos, retail sales fell only 0.1%.  It was widely believed that the severe February weather may have caused the decline in autos.
  • The Labor Department reported:
    • Prices for imported goods rose 0.4%. This is the first increase in eight months.  However, import prices were down 9.4% from a year ago.  Petroleum import prices rose 8.1% in February.  Import prices were actually down 0.4% in February excluding petroleum.
    • Initial jobless claims for unemployment fell by 36,000 to a seasonally adjusted 289,000 in the prior week. The four week moving average of claims also declined by 3,750 to 302,250.
    • The producer-price index for final demand declined a seasonally adjusted 0.5% in February. Economists had been forecasting an increase of 0.3%.  This is after declining 0.8% in January, 0.2% in December and 0.3% in November.  Excluding food and energy prices were also down 0.5%.  Most of the decline was attributed to a drop in trade services which can be quite volatile.  Excluding food, energy and trade services, prices were unchanged in February.


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Best Regards,

Loren C. Rex, CFP®, AIF®                                                                                                                 Erik A Smith

President                                                                                                                            Partner & Financial Advisor

Generations Financial Planning & Wealth Management                                 269-441-4143

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Battle Creek, MI  49017

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These are the opinions of Loren Rex and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.


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