The first half of 2016 was characterized by disappointing economic performance globally, particularly in North America, Europe, and China.

Interest rates continued their decline, as yields on government bonds in Switzerland, the eurozone and Japan dove to deeper depths.

At Quarter-end, Switzerland floated a 50-year bond at a negative yield. To us, that offering might constitute the single most pessimistic long-term investment forecast in at least three centuries. For this bond to be a good investment, commodity prices must remain nearly flat and economic growth must range from negative to nearly nil for a half-century. That has not happened since Adam Smith described what became known as the Industrial Revolution.

What future historians will surely consider the most important development was the Brexit vote in Britain. Global elites overwhelmingly united in telling British voters that leaving the European Union would be very, very unwise, and would hurt the British economy. They only divided as to whether its effect were a recession, followed by years of slow growth, or an unmitigated disaster.

We disagreed with them, as we have so often. We were pleased for the British people with the result, even though there will certainly be near-term costs for Britain. But the Brussels-based European Union has become a gigantic bureaucracy that is uncontrolled by any democratic recourse to voters, and the British economy is definitely suffering from a large immigrant flow of people who come for free health care and social benefits. The flow last year was far above what the Government had promised. Brexit will not drag the world into recession, as some very prominent left-oriented spokespersons and businesspeople have promised.

Islamic terror attacks increased in scope and number, spreading to such previously peaceful areas as Bangladesh and the home of Disney World. From an economic standpoint, they seem to be losing their shock effect, and they no longer pose a threat to GDP calculations, except in the poorer countries. It seems most investors have lost the capacity to be horrified to the extent of factoring terrorist threats into their investment decisions. (The Islamic horror at Nice was the first in more than a year that did not hurt equity prices, and help gold prices.)
In this hemisphere, the US and Canadian economies muddle along, helped by low interest rates. The biggest business news in Canada has been that there is no news of progress on pipelines. Kinder Morgan’s application to twin its existing oil pipeline to the Port of Vancouver received federal approval, but local natives and politicians are blocking it. Should Donald Trump be elected, Keystone would be approved, and Ottawa will not block it. As for moving Alberta oil east, that is subject to objections from politicians in Ontario and Quebec, and investors seem—quite reasonably—to have little faith that the project will become a reality within an investment time horizon. It is unclear what other big revenue and job-creating programs will arise that will shower investors with returns and governments with taxes.

South America is relapsing into its historic pattern of a big boom leading to an even bigger bust, this time most notably in Venezuela and Brazil. Chicago lost out to Brazil in the competition to host the Summer Olympics—a decision that turned out to be a boon to heavily-indebted Chicago and a curse to Brazil.

The best-performing of the leading economies this year has been India, which is doing fewer important things wrong, and may be reforming its massive bureaucratic decision-making process, the legacy of the Nehru era, with its acceptance of “The Hindu Rate of Growth.”

Finally, the China story which has been the driving force in commodity pricing, is becoming less and less exciting. It remains—by far—he largest consumer of iron ore and copper—and it keeps increasing its oil and meat consumption. But it is no longer the Atlas holding up the entire global economy—as it was in the years after the Wall Street Crash. There are worrisome signs that the Xi regime is becoming more insecure as its economy struggles, and it may decided to rally the nation with geopolitical distractions. China’s reaction to the World Court’s ringing rejection of its claims to control over a part of the South Pacific that is larger than the Mediterranean is certainly worrisome. A friend of mine was in the room at the Court when the decision was announced. The room erupted in cheers from the South Pacific representatives and explosions of rage from the Chinese officials. She came away with strong feelings that China would respond with further provocations.


1. Actual Fund performance is reported by the Fund on the BMO Capital Markets Structured Products website: Funds&tab=Past Issues

2. Links to Bloomberg for Indicative performance are also provided on this site.