In his Inaugural Address this week, President Barack Obama said a lot about what he would like to achieve during his second term. He also made it clear to the conservatives that he would continue to reach out to them, but not exactly in the “middle,” as he put the accent more on “follow me” instead of “let’s confer.” Time will tell if that’s the best way to move forward and if he will have the capacity to deliver his aspirations.
That said, in his speech, among a lot of other things, there were two phrases that caught my attention: “A decade of war is now ending. An economic recovery has begun.”
No, he didn’t say a decade of war had come to an end, just as he didn’t say the recovery had sustainably taken hold. Because I usually see things in the context of a long-term investor, he made me instantly think of that old saying, “It ain't over 'til it's over.” I don’t know if the president had that also in mind when he worked on his speech.
Against the background of a still-disappointing global recovery, where the surge in economic activity that normally occurs in the early stages of recovery has so far failed to materialize, long-term investors could do well remaining realistic. Keep in mind, the United States now has a total unemployment rate (U-6 rate) of 14.6 percent. The U-6 rate stood at 8.8 percent when the Great Recession started in December 2007.
The civilian labor force participation rate now stands at 63.6 percent, a level we have not seen since 1983. To me, a so-called recovery without sound job gains and a rising participation rate remains a dubious recovery.
Uncertainties remain abundant and we are still facing an unstable global economy; eurozone fragility; financial system instability; widening income inequality and persistent structural unemployment.
In short, we are still facing the same global risks as we faced in 2012, with financial risks remaining on top of all uncertainties.
So far, markets remain in a mood that simply suggests these risks are abating. That kind of self-imposed blindness simply negates the dangerous game that now about 38 central banks are playing by printing money on a scale we’ve never seen.
Probably even more important is the fact that the central banks’ printing binge start to coincide with a moment in time when we see the extremely important Bank of Japan indisputably on its way for (further) losing bit by bit its independence. This situation was confirmed in a univocal way by newly elected Prime Minister Shinzo Abe who said, “Throughout the election I have been calling for the necessity of aggressive monetary easing. From now on, each party (the Bank of Japan and the government) will be held responsible.”
It didn’t take long for Jens Weidmann, president of the German Deutsche Bundesbank, to warn of dangers like price stability, which implies “politicization” of central banks, referring to Japan and Hungary.
Sliding from here into what’s known as currency war games of exchange rate manipulations is only a very small step (stumble) away. No doubt if that were to occur, it would stir up another serious financial crisis (confrontation) and certainly wouldn’t help the so-called “ongoing” recovery and the still extremely fragile eurozone. It would especially not be helpful to the German exporters like the German carmakers. In addition, the European Central Bank is rather boxed in by its unique mandate of keeping price stability at all cost.
So, if Japan gets its way of intentionally lowering the exchange rate of its currency (devaluation), which I think it will achieve and is what its politicians really want now and consequently could provoke inflation to about 2 percent over the coming years, then I think for investors who are “fully able” to take on some risk, time is close to becoming right for shorting the yen against the dollar over a time span of more or less two years.
We are now at around 89 yen per dollar, while prices of about 110 yen per dollar, and even more, are possible within a time frame of more or less two-year horizon. If, and that still remains a big if, the desired inflation level would finally arrive in Japan, that by itself could lift its stock markets substantially higher. Of course, I could be as wrong as anyone else.
Nevertheless, I personally would never take on risks without trying to hedge my risk taking. There are several hedging techniques at various degrees of complexity, timing, etc. available on the market place.
In the United States, the latest readings of the Consensus Bullish Sentiment index at 56 percent and the Market Vane Bullish Sentiment index at 66 percent continue to give their respective warning signs that markets remain in a “topping” zone.
In my opinion, I have no doubt we’ll see a correction in the foreseeable future, but I don’t know what the catalyst(s) for it could be. Also, when the correction will take place or how deep and over what time span it could be is still anyone’s guess.
What’s for sure, it’s certainly not a good time to be complacent.
Finally, as Israel votes today for a new parliament, it’s still too early to give my take if the risk of war with Iran is diminishing or not.
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