Tags: Fed | Syria | invest | long-term

Now Is Not the Time to Invest Long Term

Tuesday, 27 Aug 2013 08:38 AM

By Hans Parisis

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If there were a prize for the "non-event" of the year, this year's indisputable winner would be the recent annual Jackson Hole Economic Policy Symposium held in Wyoming by the Federal Reserve Bank of Kansas City.

The topic for this year's symposium was the global dimensions of unconventional monetary policy (UMP) that started in the United States under Fed Chairman Ben Bernanke in late 2008 and was followed in 2009 by the United Kingdom and the eurozone and finally in 2011 by Japan.

This year's gathering, which since 1978 has brought together central bankers, policy experts and academics, has made it crystal clear that nobody really knows or has a plan for what will happen once the actual period of exceptionally loose monetary policies — both conventional and unconventional— comes to an end. The only thing we know is that it will have to go hand in hand with a sustainable recovery in all the involved places. What will finally be the broader impact on inflation is a subject nobody anywhere is willing or able to talk about yet.

The central banks will have the enormously delicate task of managing the risks of their various respective exits over probably too large of periods, which will make efficient coordination extremely difficult.

I don't think it's an overstatement to say the various UMP central banks will be forced to try to navigate safely through some kind of a Scylla and Charybdis situation. (Scylla and Charybdis were mythical sea monsters noted by Homer and that were regarded as a sea hazard located close enough to each other that they posed an inescapable threat to passing sailors.)

It's a fact a good number of investors are still very optimistic. Let's hope they are right, but I have serious doubts, as nobody can overlook the fact that successful exits are not warranted at all and we will only learn step by step how the situation will evolve as time passes. No doubt, we all will need a lot of luck to get safely through the various market/economic/financial hazards caused by the various "un-synchronized" exits from the various UMPs, of which the U.S. exit remains by far the most important of all.

Today, there are no exit policies coordination agreements among all the UMP-involved central banks, and that by itself could represent a serious threat to the global recovery further down the road.

As a long-term investor, one could ask themselves if there is really a good chance we will ultimately see serious exit cooperation to develop in the near to median term once economies return to better growth.

In the meantime, two senior Chinese officials, Vice Finance Minister Zhu Guangyao and central bank Deputy Governor Yi Gang, already said on Monday during briefings ahead of next week's G20 summit in Russia that the United States, as the main currency-issuing country, should take into consideration the spillover effects of any change in its monetary policy, as far as the rhythm of its exit from the ultra-loose monetary policy is concerned.

Yes, there is understandable fear that developing economies won't have sufficient means at their disposal to halt capital flights and undesirable weakening of their currencies when U.S. interest rates continue their upward trend and return to 3 to 4 percent yields we saw in 2010 or even go to the 4 to 5 percent yields we experienced just before the crisis.

We all know low interest rates have driven (too) many investors into an unsustainable hunt for return in stocks, commodities and all kind of investments, particularly in emerging economies. However, the low interest rates, at least in my opinion, were nothing more than a misleading recipe for unrealistic broad-based risk taking.

Of course, there have been, as always, good long-term investments in all categories in various places all over the world, but that's certainly far from the overwhelming majority.

No, long-term investing is not trading and I'd remain extremely cautious when considering investing in emerging economies in the foreseeable future.

For what it's worth, on Monday, CNBC referred to an unnamed source from "Team Obama" that Larry Summers would likely be named as the next Fed chairman within the next few weeks. But he is "still being vetted," so don't be surprised it might take a little longer. Remember, at the beginning this month, Summers said: "Like many conservatives, I didn't like quantitative easing in the first place. But we're stuck with it. And the trick now is to get out of it without inflicting more economic damage. My suggestion is simply this: Go slowly."

I personally have no doubt it is completely reasonable to suppose that the Fed's main aim will be to ensure that the unwinding of the bond market rally (lower prices = higher yields) takes place in as orderly a fashion.

Please keep in mind the Federal Open Market Committee (FOMC) controls fully its own "direct buying," while what's happening with/to emerging markets remains completely outside the committee's domain.

Coming back for a moment to the widespread rising hopes the eurozone has turned the recession corner, investors should be careful what they wish for. In this context, the Spanish Statistics Institute reported Spain's economy shrank 1.6 percent in 2012, compared with -1.4 percent previously stated.

That said, it's also a fact the eurozone peripheral economies (Cyprus, Greece, Ireland, Italy, Portugal and Spain) all have made progress in addressing their respective internal and external imbalances, as well as their weak levels of competitiveness, but nevertheless none of them presents being in sufficient condition for sustainable growth. Yes, they all have still a long way to go and no periphery country is expected to return to pre-crisis gross domestic product levels before 2016 or 2017.

Interesting anecdote: Only 19 percent of Norwegians want to join the European Union, according to a poll published ahead of Norway's general election on Sept. 9.

Finally, now that the U.S. State Department has postponed a meeting scheduled for Wednesday in The Hague between senior diplomats from the United States and Russia because of "ongoing consultations" over the chemical weapons attack in Syria, a military "punitive" strike seems to come nearer. The extent of such an action is still unknown.

Because of all this, "risk-off" seems to be back. How long that will remain the dominant influence on investors' behavior remains a known unknown.

Meanwhile, we'll all have to wait for when and to what extent that finally happens for trying to explore the vast area of geopolitical as well as financial/economical consequences of such a strike.

Because of rising uncertainties, once again, I don't think we are at the best of times to invest long term.

Short-term U.S. Treasury cash equivalents and the U.S. dollar remain on top of my preferences.

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