Best Cash Equivalent Is Short-Term US Treasurys

Tuesday, 04 Jun 2013 09:58 AM

By Hans Parisis

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In the United States on Monday, we got the important and surprisingly "somewhat" sobering Institute for Supply Management (ISM) manufacturing index, which came in at 49 percent, down from 51.7 in April and at its worst level since June 2009. While the reading is below the 50 percent manufacturing economy breakeven line, it is well above the 42.2 percent overall ISM economy breakeven line.

Interestingly, the included employment index remained, albeit barely, in expansion territory at 50.1. The big question foreword will now be if U.S. manufacturing will continue come close to or go above the 50 percent breakeven line from here on.

Markets have clearly demonstrated, one more time, their inclination to over-reacting, positively as well as negatively, to the U.S. sentiment data and the recent underlying economics.

No doubt, markets seem to care more about how the Federal Reserve's reaction could be to the data rather than the actual data.

It will be interesting to see on Friday how the employment situation evolved in May and if, once again, "good" news would be considered as "bad" news for the equity markets, or vice versa. Anyway, these are certainly not boring times for those who try to see through the actual upside-down world.

Also on Monday, we got the JPMorgan Global Manufacturing Purchasing Managers' Index (PMI), a composite index produced by JPMorgan and Markit in association ISM and the International Federation of Purchasing and Supply Management. The PMI came in at 50.6, up from 50.4 in April and above the 50 mark that separates expansion from contraction. This PMI was up for the 7th month in a row. Also, globally we see employment still marginally rising and coming in at 50.4.

The big exception on the global scale remains the horrendous eurozone unemployment numbers, with youth unemployment simply at catastrophic levels and still growing in the so-called peripheral countries, to which now also belongs France, thanks to the "inflexible" euro and ill-inspired and ill-imposed austerity measures out of Brussels.

Yes, France and Germany have now also started to go their separate ways in different directions from here on. No, that doesn't bode well for the eurozone as a whole.

It will be interesting to see how Germany will act once its national elections in September are over.

By the way, the International Monetary Fund (IMF) just revised its gross domestic product forecast for France to a 0.2 percent contraction in 2013, down from a previous forecast of a 0.1 percent contraction. The IMF also has halved its 2013 growth forecast for Germany to 0.3 percent from its previous estimate of 0.6 percent.

In simple words, all that means is slow and possibly negative global manufacturing growth.

Without any doubt, the United States remains the best of the class. Its manufacturing remains in expansion mode, although it has slowed to a seven-month low of 52.3.

The Markit Eurozone Manufacturing PMI came in better than previously expected, but remained nevertheless in worrisome contraction territory at 48.3 with literally all important countries remaining below the 50 demarcation line.

Among emerging markets, the China HSBC PMI index fell to 49.2 and its operating conditions have now deteriorated for the first time since October 2012, while the HSBC Brazil PMI remained in expansion territory, but fell from 50.8 in April to 50.4 in May, its slowest pace of expansion also since October 2012.

Even the HSBC Mexico PMI remained at its weakest expansion rate in 26 months and came in at 51.7. Finally Turkey, which is also an important emerging economy that has its place on many long-term investors watch-lists, saw its HSBC PMI remaining in expansion territory, but easing to 51.1 in May, down from 51.3 in April.

For Turkey, a lot will depend on how the recent protests will take hold or develop from here on. After the recent substantial depreciation of the Turkish lira, there is practically no more space available for the Turkish Central Bank to ease its rates further to stimulate growth. The recent completely unexpected headwinds caused by the protests could still strengthen further and even beyond what's currently priced in.

No, we are certainly not at a "best of times" growth moment in global manufacturing. On the contrary, we see confirmation developing of a slowing global manufacturing trend heading toward "stagnation" in many places at best.

No, a large part of the global economy is certainly not in shockproof territory. Not by a long shot.

As a long-term investor, I think that the known "unknown" of the next "shock" should always be on your watch-list. This is extremely difficult to do, especially at a moment in time when, for example, in equity markets "bad" news has become the "good" news signal and many traders continue, over and over again, to impatiently wait for this news.

Also on Monday, Atlanta Fed President Dennis Lockhart made some interesting comments to The Wall Street Journal saying: "We are approaching a period in which an adjustment to the asset purchase policy can be considered. ... Whether that's June, August, September or later in the year, to me, isn't really the issue, it's the issue for the markets. ... I don't think that as of today we have a set of conditions that absolutely justify an adjustment."

That said, at some time in the foreseeable future it certainly could become a very interesting moment in time, for which long-term value investors would do well to keep patiently waiting for when "bad" news will finally remain "bad" news.

No doubt such a still unknown moment in time is on its irreversible way to take place one day. When that will happen is a question only time can tell. One thing is for sure is when that happens, I certainly wouldn't like to be part of the herd that will have no other choice than holding the toxic "bag."

Wasn't it French philosopher Jean-Jacques Rousseau who said: "Patience is bitter, but its fruit is sweet." No, in my opinion at least, this time won't be different.

All that said, as a long-term investor I'd keep a close eye on the protests in Turkey and watch if that becomes stronger and more widespread. In case that should happen it will be "fasten seatbelts" and the Turkish contagion could easily spread to most of the "emerging economies" complex. Also don't forget Turkey is a member of the North Atlantic Treaty Organization and neighbors Syria.

If, as a long-term investor, I still had a serious chunk of investments in emerging economies, I would strongly consider cashing in my profits and put my cash in a highly liquid reserve in order to have it available (keeping my powder dry) when the correction finally will take hold at various places in the world. Of course, that's my personal opinion.

Now, all this is not going to happen overnight. No, for the widespread and broad-based correction fully to take place it will need several years and could easily stretch till 2016 and probably even beyond.

In today's deflationary environment in the developed economies, one of my favorite cash equivalents is short-term U.S. Treasurys.

Of course, there are other very good cash equivalents in various places in the world, but in my opinion, the best of all, with undisputable historical proven records, are short-term U.S. Treasurys in your personal account.

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