Tags: gold | Treasurys | QE | Fed

We're Still a Long Way Away From Really Good Long-Term Buying Opportunities

Tuesday, 25 Jun 2013 08:44 AM

By Hans Parisis

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The Basel, Switzerland-based Bank for International Settlements (BIS), which is known as the central bank of the 58 most important central banks in the world, released its 83rd annual report on Sunday.

In it, the BIS sent a warning to all its member central banks of the developed as well as of the emerging economies that central banks cannot continue delivering further extraordinary monetary stimulus without compounding the risks they have already created.

The actual state of affairs is becoming increasingly perilous, as the balance between the benefits and costs of extraordinary monetary stimuli are definitively shifting, and policy frameworks anchored to price stability should remain above all the foundation for growth and long-term macroeconomic stability.

In understandable English, this means the era of massive quantitative easing (QE) is definitively on its way out; however, this easily could take more time than generally is expected.

The big and extremely complicated, hence dangerous, question remains "when" will be the right time for central banks to pull back from their QE expansionary policies without causing sharp/destructive rises in bond yields since economic growth probably will remain dull at best and "sound" job creation will have yet to gain firm traction.

The BIS says that if yields on U.S. Treasurys rise 3 percentage points across the maturity spectrum, that would represent a loss in the value/price of over $1 trillion, which represents a mindboggling more or less 8 percent of U.S. gross domestic product (GDP). Even worse, if bondholders of Treasurys of France, Italy, Japan and the United Kingdom would have to face a 300 basis points rise in yields, the losses would represent a daunting 15 to 35 percent loss of GDP in the respective countries.

I think it's better not to take this lightly and we should remember bond yields can rise very fast, as they did in 1994 when long-term bond yields in a number of advanced economies rose by around 200 basis points. Yes, this is certainly food for thoughts and something to keep on your radar screen.

From here on, it's certainly not an overstatement to say that the risk of rising yields in the bond markets in many places all over the world are on their way back up, no doubt about that.

This doesn't mean we couldn't see in the very near term yields in U.S. Treasurys easing back down somewhat, as we are in oversold territory, which should be prone to a short-term bounce in prices.

Over the medium- to long-term time span, bond prices should finally start a downward path after their 30-year rally, which would mean rising yields are lurking on the horizon. Yes, the United States is in the offing of a very long journey back to "normal" monetary policy settings, at least that's how I see it.

Please keep in mind that, under normal circumstances, this can't happen overnight and all long-term investors will have enough time to readjust his or her long-term portfolios accordingly. Of course, it could be wise not to wait until we'll have to face one of those unexpected/surprising "shocks" that are still out there. That's for sure.

In the mean time, Dallas Federal Reserve President Richard Fisher made some interesting remarks saying that markets should not believe the Fed will end up propping up the economy indefinitely and that the Fed can't be pushed to keep buying Treasurys at the same pace as it's doing at this moment, and, in so doing, keep inflating asset price bubbles. He added that QE is not a one-way street and bubbles have developed in a number of financial markets, specifically mentioning emerging markets and real estate investment trusts.

On the other side of the pond, Jens Weidmann, president of the Bundesbank and European Central Bank policymaker, stated on Sunday in an interview with the German daily Sueddeutsche Zeitung: "Neither states nor the private sector should expect the current phase of low interest rates to continue permanently. ... They must be able to service their debt in a 'normal' interest rate situation too."

On Tuesday, we saw the Italian two-year 2015 zero coupon bond (CTZ) auction of 3.5 billion euros printing an average yield of 2.403 percent vs. yielding 1.113 percent previously, which was a rise of 129 basis points and represents a spike of 113 percent in only one month time (Italian 2-year CTZs are auctioned monthly). This may be a sign of what could be expected concerning rising bond yields as "dictated by the markets" on both sides of the pond in the foreseeable future. By the way, all yields in the eurozone, the Germans' included, are moving up.

All that said, I expect the Fed is finally bound to take a more conservative approach in the years ahead. From my side, I don't expect the Fed to begin tapering right away, but in my opinion, they will surely have started tapering before the next summit of the Group of Eight (G8) nations, which will take place next June 4 and June5 in the southern Black Sea resort of Sochi, Russia, which is hosting the 2014 Winter Olympics in February.

From my side, I remain expecting a correction further to unfold; however, we easily could see a snapback rally in different markets, but that should not take out the highs of May 22 in the Standard & Poor's 500 at 1,687, which is technically very important. Of course, that's how I expect it, but we all know in finance nobody can guarantee anything.

In my opinion we're still far away from really good long-term buying opportunities. I remain "risk-off" and certainly don't play the "buy-the-dips" game. I continue to prefer cash equivalents, such as very short-term U.S. Treasurys and the U.S. dollar.

As I've said here before, I will try to analyze gold again once it comes into the $1,200 to $1,250 per ounce zone. In the meantime, it could easily bounce somewhat and, in fact, could outperform all the other markets that have moved lower recently.

By the way, Goldman Sachs just revised its expectations for gold in 2014 down to $1,050 per ounce from $1,270 per ounce previously.

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