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In This Issue
Basics of ETP's
History Speaks
Chart of the Month
Asset Class Returns
Market Commentary
Call us at 212-949-0494 or click here to email  your questions, thoughts and comments.


IHA MonthlyTop
June 2013
InnerHarbor Advisors, LLC is a private Financial Planning firm based in New York City founded by Michael J. Keating and John O'Meara. 
Financial Planning Video Highlight
What exactly is an "ETF"... or "ETN" ???
  
History Speaks
Korekiyo Takahashi
  
Korekiyo Takahashi
Modern day Japan, led by Prime Minister Shinzo Abe, is attempting to reinvigorate its economy using a "three arrows" strategy - monetary expansion, government spending and structural reform. To find a historical precedent for such actions you would have to look back to, well, Japan in the early 1930's. Leading into that time, the Japanese economy had declined nearly 10% in both 1929 and 1930 as the Great Depression reduced demand for its export goods (such as silk). In late 1931, however, Korekiyo Takahashi was re-installed as the finance minister. Mr. Takahashi cut interest rates and took Japan off the gold standard. He also increased  government  spending via the central bank finance. This caused the Japanese Yen to lose half its value relative to the dollar. This devaluation helped restore Japan's export markets and corporate profitability soared. The Japanese stock market doubled in 1932. These are the results that the current PM appears to emulate. We doubt Mr. Abe would like to relive the rest of the story: Mr. Takahashi was gunned down in 1936 in a coup attempt by military officers who viewed him as a tool of Japanese industrialists.
Chart of the Month
Desperately Seeking Wage Inflation
From The Economist's View website, a chart showing the 6.5% decline in inflation adjusted wages in Japan since the mid 1990's. This is the trend Shinzo Abe is trying to reverse with his "three arrows" strategy.
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Asset Class Returns
Through May 31st, 2013

Returns assume dividend reinvestment and do not include any types of management fees, transaction costs or expenses. 

     

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 Commentary

June Commentary

 

In last month's commentary we recommended our readers watch Japanese markets- a most useful economic guide as they are on the forward edge of the global monetary and fiscal expansion- and what an incredible ride it's been! The Japanese stock market rose over 13% in the first couple weeks of May but has lost nearly 20% since then.

 

This is partly the because of the high volatility and the rapid run-up the Japanese market has experienced these last six months - you can expect to give something back after an 80% appreciation in such a short period of time. But it also reflects worries about Prime Minister Abe's commitment to structural reform in the Japanese economy, one of his "three arrows" for recovery. Finally, and perhaps most worrisome, it reflects fear of an interest rate spike in Japanese government bonds (JGB). In the last month, the 10 year JGB had seen rates rise from around 0.5% to over 0.9%.

10 Year JGB Yield

This is the conundrum that central bankers and governments around the world will have to face - how to increase economic activity and inflation expectations while keeping interest rates relatively contained. Quick increases in interest rates will impose significant losses on holders of income producing assets. We have seen a similar response in the US as interest rates have crept up in the last few months.This has caused noticeable losses in some income producing asset classes such as REIT's and high-yield bonds. 

Blue- REIT's             Green- High-Yield Bonds            Red - Stocks

While these interest rate increases may seem relatively inconsequential to some (especially if they do not own interest rate sensitive investments), these movements in financial market do translate into the real economy. 30 year mortgage rates are approaching 4% for the first time in a year and mortgage refinancing applications are at their lowest level in two years. These have real-world effects on employment and household balance sheets. As such, they will play a key role in determining how willing central bankers will be to continue supplying the easy money that has been juicing stock markets over the last few months.

 

Please 'reply' to this email with thoughts and ideas. Feedback is appreciated.

Thank you for reading.

 

 

 

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InnerHarbor Advisors, LLC
420 Lexington Ave, NYC 10170
212-949-0494
Managing Partners:
John O'Meara, CFP, M.S.             j.omeara@inneradv.com 
Michael J. Keating, CFP    m.keating@inneradv.com

 
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