Tags: investing | euro area | United States | China

Latin America Fails the Test for Long-Term Investing

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Tuesday, 26 Nov 2013 09:53 AM Current | Bio | Archive

The independent Dutch government agency CPB (Central Planning Bureau) Netherlands Bureau for Economic Policy Analysis just released its “CPB World Trade Monitor” that for September showed the volume of world trade increased by 0.8 percent after declining 0.9 percent in August, but with both import and export momentum coming in lower in September than in August.

World industrial production showed 0.9 percent growth during the third quarter, which was the highest reading since April 2012, while momentum picked up in advanced as well as emerging economies, but weakness was observed in the euro area, Latin America, Africa and the Middle East.

Looking at the data at only face value could be confusing because it’s a fact growth in the world remains very weak and is even negative in some key locations like France, which is important as it is the second most important economy of the euro area.

To keep things “understandable” and to put it all in context, world trade as measured in seasonably adjusted units priced in dollars stood at 6.2 in 2010; 12.9 in 2011; negative 1.9 in 2012 and the latest momentum reading for September coming in at only plus 0.1, up from negative 0.2 the month before.

Secondly, world industrial production measured in seasonably adjusted units priced in dollars stood at 1.9 in 2010; 7.9 in 2011; negative 1.5 in 2012 with the latest momentum indicator for September printing a negative 0.7 after a negative 0.5 the month before.

Industrial production in year-on-year percentage changes for the United States stood at 5.7 in 2010; 3.4 in 2011; 3.6 in 2012 with the latest momentum for September coming in at positive 0.6 after a positive 0.3 the month before, which confirms continuous growth momentum in the U.S.

The euro area stood at 7.4 in 2010; 3.3 in 2011; negative 2.3 in 2012 with the latest momentum for September coming in at negative 0.2 after a positive 0.2 the month before.

For long-term investors in emerging economies, Latin America stood at 6.0 in 2010; 3.2 in 2011; 0.3 in 2012 with the latest momentum indicator for September coming in at negative 0.1 after a positive 0.5 the month before. The data for Latin America, which are in sharp contrast with the U.S., don’t provide sufficient assurance for long-term investing in the area for the moment.

The Dutch CPB data, especially for the U.S., are completely in line with last week’s release of the Markit Flash U.S. Manufacturing PMI that showed an eight-month high at 54.3 in November, up from 51.8 the month before, signaling the era of ultra-accommodative U.S. monetary policy is coming irrevocably to its end. On Monday, the Markit Flash U.S. Services PMI showed a sharp rebound in November to 57.1, which was up from a dismal 49.3 in October.

If positive fundamental U.S. data continue to come in, I can’t see how the Fed’s data dependent “taper” decision could continue to be delayed for an extended period of time. I’m convinced a 3.5 percent or even higher yield on the 10-year U.S. Treasury is possible in 2014, under the condition, of course, the U.S. continues to grow at a pace close to or even better than is the case currently.

Parts of the world, especially the euro area, are not out of the woods yet. “Muddling through” doesn’t provide enough assurance for engaging now in long-term investing in places where fundamentals remain weak.

I’d prefer to remain patient and certainly wouldn’t participate in “chasing yields,” notwithstanding this can be extremely difficult in an environment where “extreme” optimism and complacency in the markets are at record high levels.

We are now, once again, experiencing to some degree what we’ve seen in 1929, 1937, 1972, 1987, 2000 and 2007. In these “infamous” years we saw investment decisions that were guided by optimism and complacency, and that all ended very badly and unfortunately ruined huge numbers of private and institutional investors.

I could be too cautious and who knows: this time could be different. But I prefer to remain inflexibly conservative while I certainly try to keep away from all those hype-related traps that are out there (in big numbers!) everywhere.

Standard and Poor's said it sees Japan's credit quality conditions continuing to weaken and it estimates more than a one in three chance of a cut in the sovereign rating within two years.

In China the communist party announced extremely bold economic and social reforms, which probably should turn out to be the most important ones of the last three decades.
The People’s Bank of China published a reform guidebook in which central bank Governor Zhou Xiaochuan outlines the bank’s plans to “increase” the role of real market exchange rates and, by doing so, basically exit from their normal foreign-exchange market intervention practices.

Long-term investors could do very well by taking these decisions seriously as the PBOC’s plans for reform will signal the end of an era and the beginning of profound change for financial markets. The PBOC has also stated it is no longer in China’s interest to increase further its reserves.

The PBOC’s goal for establishing a fully flexible exchange rate cannot be overstated given the integral role that China’s reserve accumulation has played in supporting a stronger euro and also supporting U.S. Treasurys, which has caused higher prices for Treasurys and accordingly lower yields than otherwise normally would have been the case.

Let’s hope that in January policymakers in Washington don’t repeat their recent destructive bickering and instead reach a common sense agreement across party lines and conjure a comprehensive plan to cut the U.S. deficit and avert a potentially punitive rise in U.S. debt servicing costs.

Also, UBS has just lowered its 1-month and 3-month gold price forecasts to $1,180 and $1,100 an ounce, respectively.

When the ongoing bubbles start bursting, the “exits” will be overcrowded or, under a worst-case scenario, even clogged, no doubt about that.

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The independent Dutch government agency CPB (Central Planning Bureau) Netherlands Bureau for Economic Policy Analysis just released its "CPB World Trade Monitor" that for September showed the volume of world trade increased by 0.8 percent.
investing,euro area,United States,China
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2013-53-26
Tuesday, 26 Nov 2013 09:53 AM
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