Tags: Parisis | eurozone | gold | optimism

No Reason for Euphoric Optimism in the Markets

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Tuesday, 11 Sep 2012 12:46 PM Current | Bio | Archive

I can’t share the euphoric optimism that came into the markets after the European Central Bank (ECB) announced last Thursday its so-called unlimited, but strictly conditional, bond-buying program in the secondary markets, and the U.S. employment numbers came in Friday weaker than expected.

It is a fact that practically all of the world’s important economies have no forward momentum whatsoever. They will have no other choice, in the short to medium term, than to muddle through at a pace that’s anybody’s guess, but probably much slower than many investors expect, and, last but not least, with very little monetary or fiscal help.

In the mean time, we will still have very serious risks, including the European crisis that will continue to persist, the looming “fiscal cliff” in the United States and the Chinese economy slowing further to substantially below its known average of the recent decades.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

No, I can’t become optimistic with such a base for growth.

For now, and as the Organization for Economic Cooperation and Development (OECD) stated it in its latest interim economic assessment report, the European recession is slowing the global economy. By the way, the OECD now expects Germany, France and Italy, which are the three largest economies of the eurozone, to shrink at an average annualized rate of 1 percent during the third quarter of 2012 and at 0.7 percent in the fourth quarter. It also expects eurozone unemployment to rise further from current levels.

That said, today, German Finance Minister Wolfgang Schauble said at the start of the 2013 federal budget debates in the German lower house of parliament Bundestag that the House will get a chance to debate “any” direct European Stability Mechanism (ESM), the eurozone's permanent rescue fund, aid given to banks. Believe me, this promises harsh debates that will impact next year's German federal elections.

According to a recent poll published by Der Spiegel, 54 percent of Germans want their Constitutional Court to block the ESM when it meets on Sept. 12, while only 25 percent want it to be approved. I think we can expect anti-euro rescue sentiment to rise further in Germany. Nevertheless, I also think the court will probable approve it tomorrow, albeit with strings attached and in one form or another.

No, the eurozone is not out the woods yet and the euphoric optimistic momentum could well turn out to be unfounded and premature. Only time will tell who’s right, but I think we will not have to wait until the end of the year before the cards will come on the table.

It’s certainly not the ECB bond-buying program, which is still legally questioned if it is within the limits of its mandate or not, that will change the EU culture of running too large of budget deficits. Investors shouldn’t overlook the fact that Spain has now run deficits for 45 of the last 49 years, while Italy, Portugal and France have seen perpetual annual deficits since there is reliable data available dating back to 1960, 1977 and 1978, respectively.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

On a more global scale, investors should also not overlook the fact that the United States has now run deficits for 40 of the last 44 years, and this includes 2012, the United Kingdom 51 out of the last 60 years and Japan has run an annual budget deficit since 1992.

I’m taking the opportunity here to warn investors that we are in literally unknown territory with the level of uncertainty concerning the future at such an extremely high level.

In my opinion, the quickest path to renewed and sustained prosperity everywhere, which equals of course growth, would be to restructure trillions of dollars of EU and global debt that has been artificially accumulated since the spend/credit binge that more or less started after the dollar lost its post-war gold standard.

In a real free market, which is as I understand it “capitalism,” we would have already seen such an outcome. But authorities all over the world have now spent five years ensuring this hasn’t happened. And they will probably continue to do so. We must admit “simultaneous” money printing is here to stay across the globe until it eventually will work and restores stability, which I doubt will happen, or it creates its own problems further down the road, of which I’m practically sure of. I’m convinced inflation will ultimately win out, as we haven’t seen a year of global deflation since 1933. At the same time, debt restructuring and defaults will remain significant risks and can’t be ruled out at all, especially in areas like the eurozone, where money creation is not in domestic (sovereign) hands.

Keeping in mind that everyone has to make their long-term investment decisions for themselves, the strategy I remain in favor of is accumulating core, higher-quality, real assets, which include gold, on dips. I think there isn’t any need for long-term investors to chase the markets, as the regular wobbles of markets, the threats of default and deflation and shorter business cycles will translate into more than sufficient buying opportunities in the years to come. Long-term investors should take these buying opportunity moments seriously, which implies doing their homework, in the coming years, as constant global money printing will finally wreak havoc with cash and what’s considered the safe haven, core bond markets.

For now, keep in mind the ECB’s bond-buying program only targets the symptoms of the eurozone crisis, not its cause, and it will be only sustainable growth that will be able to put an end to the EU crisis that’s going on and on and shows no signs of abating.

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Tuesday, 11 Sep 2012 12:46 PM
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