Speaking at the 2013 National Association of Business Economics Economic Policy Conference in Washington, D.C., on Monday Paul Volcker, former chairman of the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan who was the architect of ending the high levels of inflation in the United States during the 1970s and early 1980s, warned that the Fed should not postpone for too long reversing its policies of easy money, as the most common mistake is that authorities wait too long and not that they act too early.
Interestingly, he also stated he continues to see uncertainties as far as the eye can see and he reminded the audience that the latest crisis was unexpected to most markets participants. No, it doesn’t seem to me this time is different.
Not surprisingly, at least to me, at the same conference, Janet Yellen, vice chairwoman of the Fed, said the actual Fed’s easy money policies, particularly its bond-buying program under its quantitative easing (QE) program, should remain in place at this stage and emphasized the dangers of tightening credit too soon. Nevertheless, she said the Fed should keep a close eye on the “costs” of its current policies and not allow bubble formation of any kind. Of course, time will tell if she got it right, but keep in mind “The road to hell is paved with good intentions.”
In my opinion, we are well on our way to a global “QE war” with very few exceptions, and not to a global “currency war,” at least not for the moment.
In the meantime, in China the 12th National People’s Congress, which is its annual legislative meeting, got under way and should confirm the official transition of power to the new leadership team under Xi Jinping.
That said, we have already learned the Chinese leadership aims to grow its economy “moderately” at about 7.5 percent, which is the same target as in 2012, but should be seen in the context of their recent growth slowdown that is structural.
Long-term investors should do well to keep a close eye on China as a whole and more specifically on its construction builders, as the authorities intend to curb the overheated property sector and we could, therefore, see nasty tumbles in that sector from here on.
China put into place a capital gains tax that results in boosting mortgage costs for second-time buyers by 10 to 15 percent above the benchmark mortgage rates, while the required deposits for multiple homeowners also have been increased.
In my opinion, there is no discussion the Chinese global growth locomotive is on its way to further slow down, and in accordance with the intentions of the authorities, risks to substantially slow down demand for iron ore, etc., which would cause lower share prices of the miners in Australia, Brazil and India, at least in the short term.
Keep in mind that China must absolutely re-balance and history has taught us we should expect a growth of 4 to 6 percent in the first five years of re-balancing. Long-term investors shouldn’t overlook that detail.
In the United States, the sequestration is now under way, and while it is not irrevocable, long-term investors would do well to pay attention to the current stopgap bill funding of the federal government that expires March 27, which is the date a partial government shutdown could ensue if no political compromise is agreed on.
We’ll see what happens on Thursday when the House is expected to vote on a bill that would extend funding until the end of the 2013 fiscal year on Sept. 30.
In the meantime, the latest U.S. Markit Manufacturing Purchasing Managers’ Index (PMI) was a good one, not a brilliant one, as it came in at 54.3 for February. A number above 50.0 signals improvement on the prior month; below 50.0 indicates a decrease. February’s number was about the strongest manufacturing output in almost a year, and that should allow gross domestic product growth in the first quarter to strengthen somewhat. If that will be enough to bring down unemployment remains an open question.
The Eurozone Markit Composite PMI reminded us of the growing “Atlantic Growth Gap,” as it showed an index reading of 47.9 in February, down from 48.6 in January, thereby confirming the eurozone growth downturn continues on its downward path with deterioration accelerating in Italy and Spain. Only Germany and Ireland remain in positive territory.
Unemployment in the eurozone came in at 11.9 percent in January, which was a new record since the creation of the euro, with the highest rates in Greece (27.0% in November 2012), Spain (26.2%) and Portugal (17.6%.) For comparison, in January 2013, the unemployment rate in the United States was 7.9 percent, while in Japan it was 4.2 percent in December 2012.
I fully agree with Warren Buffett when he says: “Whether socks or stocks, I like buying quality merchandise when it is marked down.”
Stock market indices in the United States are approaching all-time highs and the Dow Jones Industrial Average could be close to set, technically speaking, a triple top.
If I had money to invest, I wouldn’t get in now. On the contrary, if I hadn’t already taken profits off the table, I would certainly consider doing it now.
My standpoint hasn’t changed and I would only come back to the markets when a correction has run its course deep enough and has sufficiently been “marked down.”
That said, I have no doubt whatsoever the United States remains my favorite place to be invested in by far.
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