Investor Risk Perceptions Shifting
A major shift in perception is spreading throughout the global investing community — from institutions to individuals. Increasingly, investors are carefully weighing which countries’ bonds, stocks, and currencies are more risky or less risky? The shift has gathered momentum since the end of June when the Fed stopped buying U.S. bonds under its second quantitative easing program, known as QE2 for short.
To better understand what’s going on, let’s step back to 2008, the year of historic financial and market blowups. At that time, markets in emerging countries fell the most precipitously despite the fact that their economic fundamentals were superior to those of the larger, more developed countries. Worldwide investors perceived the traditional markets in Europe and the U.S., with longer histories of stability, as much safer than emerging markets.
No longer! That perception of stability has been eroding for years and now has pretty much been shaken to the core.
Globally, many observers — Guild Investment Management among them — have long pointed out the unwise fiscal behavior taking place in Europe and the U.S. Finally, the investing community at large has grasped the degree of mismanagement at the highest levels in the developed world. Country-specific fundamentals seem to be reasserting themselves. Confidence, hard to win, can be easily lost, and is much harder to win back.
Recently, market volatility has driven some money out of equities and currencies into bonds as a short term alternative. Longer term, we believe that a portion of the money will move into foreign currencies of faster-growing, medium-sized countries and into gold. Equity investors are starting to shun the U.S. and Europe, just as they have been shunning Japan for years. Over the long run, desertion from the dollar and euro will substantially elevate some currencies of smaller, faster-growing countries.
We have identified three levels of risk in the current market:
• Least risky
Emerging countries that are lenders to the developed world.
• Moderately risky
The once venerable U.S. is trading like a country in decline.
• Most risky
Western European nations that do not have the flexibility to lower the value of their currency by printing money (members of the Eurozone).
Eurozone = High Risk Zone
Several European countries recently banned short-selling of financial stocks. The U.S. did the same thing in the summer of calamitous 2008. Financial stocks collapsed even further shortly afterward.
Expect to see a poorly re-engineered rerun with new actors but the same plot and the same ugly final act. In the original, American taxpayers paid for the profligacy of bankers and politicians. Now European taxpayers will foot the bill.
The next few weeks will tell the tale. So far we see some small movements from Italy to balance its budget in 2013. We’ll see if the Italians are using the correct growth rates and the parliament agrees to what the ministers propose.
As the heads of the French and German government consult one another, they both realize that their constituents want neither a pan European debt market nor a larger European Financial Stability Fund (EFSF). This week the official debates about the EFSF get underway in the Netherlands and Dutch support for expanding the EFSF is far from guaranteed.
In our opinion, if European parliaments intend to pass an EFSF expansion that has a chance to be successful in saving sovereign debt markets and their banking systems, they should try to pass a fund that is in the 1.3 trillion Euro range rather than the proposed 440 billion fund.
Enter the Cash-Rich Chinese Bargain Hunters
You may be wondering what is happening in China during all the fiscal drama in the West. To be sure, the Chinese have their own internal challenges, but we believe the situation is containable at the present time.
The Chinese economy suffers from high inflation and a still undervalued Yuan even though the government has been letting its currency rise in recent months. Fixed investment is too high a percentage of the GDP. To address this problem Beijing is encouraging prosperous citizens and companies to begin a long-term program of investing abroad. The Chinese are smart investors and they know a bargain when they see one, so we expect this activity to manifest in a number of ways:
a wave of Chinese money headed for the U.S. and European real estate markets. Indeed, Chinese real estate investors are already on a spending spree in New York
a continued flow of money into world commodities markets.
exploitation of the current market decline by purchasing U.S. stocks.
far less investment in the U.S. bond market. The Chinese will be net sellers of U.S. dollar denominated treasuries as they diversify their huge foreign exchange portfolio.
Singapore Dollar SGD-USD X-Rate (1 Year)
Swiss franc CHF-USD X-Rate (1 Year)
Canadian Dollar CAD-USD X-Rate (1 Year)
Hoenig Retiring from the Fed
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, is retiring soon as he reaches the mandatory retirement age. For more than a decade, Mr. Hoenig repeatedly called for the breakup of the large banks that were “too big to succeed.” Had his voice been heeded, the crisis of 2008 would have been much less devastating to the U.S. and world economies. As he told Gretchen Morgenson of the New York Times recently, “extremely powerful financial institutions, both financially and politically, undermine the long-term strength of our system and make us look like a financial oligarchy.”
Excessive risk was taken on by American banks in the years leading up to 2008. Clearly the influence of the financial industry and the lack of wisdom by many in the U.S. Congress — for instance, those who voted to extend loans through Fannie Mae and Freddie Mac to borrowers with low odds of repaying them — are big reasons why this happened. Taxpayers have been paying the bills ever since for the over-speculation, and that’s a travesty.
Mr. Hoenig’s voice will be missed.
Job Growth That is Hurting The U.S. Economy
An article by John Merlene in this past Tuesday’s Investor’s Business Daily discusses the rapid growth in employment among federal government regulatory agencies in recent years.
The article says that while the U.S. private sector employment shrank 5.6%, federal regulatory agencies have seen their combined budgets grow a healthy 16%, and their employment rolls are up 13%.
What are all these new employees doing? The article says they have been churning out new rules. The Federal Register, a proxy of regulatory activity, saw its page number grow by 18% in 2010 alone. According to the article, 379 new rules were imposed last month alone…and another 4,200 are in the pipeline.
This is weighing heavily on the U.S. economy, and hurting its competitiveness. Business owners see an increasing regulatory burden as a deterrent to starting new businesses, expanding, and hiring employees.
The reality is that business owners and entrepreneurs have better chance to create long-term employment opportunities than does the government. However, apparently some in government have a different viewpoint. The article ends with a quote from an Environmental Protection Agency (EPA) document this past February stating that “in periods of high unemployment, an increase in labor demand due to regulation may have a stimulative effect that results in a net increase in overall employment.”
A net increase in overall employment? Really?
Our Current Positions and Recommendations
Guild Investment Management, Inc., is holding a large allocation of cash. We have avoided the suffering of the past two weeks and will have ample funds available as stocks, currencies, commodities, gold, and other attractive options fall into good buy ranges.
Long-term holders of gold concerned about political upheaval should continue to hold their core positions. Those who prefer to trade gold should take partial profits on spikes, but remember to also buy the dips.
Use any strength in the dollar to purchase currencies of better-managed countries.
Keep a close eye on world markets. Much uncertainty and volatility exist. We expect a huge quantitative easing and bond-buying program to be instituted in the next few months by Europe, Japan, and the U.S. jointly. China may also join in. This development will signal to us a big move up in gold, stocks, oil, commodities and other investment areas that benefit from inflation.
To request information about Guild Investment Management services and offerings please call (310) 826-8600 or email email@example.com.
|Investment||Recommended||Closed||in U.S. Dollars|
|Commodity Market Recommendations|
|30 YR Long Term|
|U.S. Treasury Bond||8/27/2010||10/20/2010||0.0%|