Tags: bubbles | prices | investors | economy

Long-Term Investors Face Challenges We Haven't Seen in Decades

Long-Term Investors Face Challenges We Haven't Seen in Decades
(Dollar Photo Club)

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Friday, 02 October 2015 07:13 AM Current | Bio | Archive

Signs continue growing the Fed has made up its mind (so far at least) to start its path to “normalization” in December while the data flow between now and then could probably have less policy influence.

San Francisco Fed President John Williams said in a prepared speech: “… When you have a high-pressure economy, with unsustainably high levels of economic activity for a long period of time, people may make decisions based on excessive optimism, rather than sound economic basics  … I am starting to see signs of imbalances emerge … I expect that we’ll reach our maximum employment mandate in the near future and inflation will gradually move back to our 2 percent goal. In that context, it will make sense to gradually move away from the extraordinary stimulus that got us here.”

Williams commented personally: “It’s OK to have the party, but we just don't want it to go too far.”


It’s interesting to note Williams gave his speech at precisely the moment we learned:

Taking all this into account, prudent long-term investors could ask themselves where is finally that much needed “growth” going to come from?

It’s a fact markets at present don’t reflect the real economic situations everywhere thanks to all these still ongoing quantitative-easing programs (QE).

Maybe it’s not that bad keeping Williams’ words well in mind: “It’s OK to have the party (QE = money for nothing), but we just don't want it to go too far.”

Long-term investors could do well trying to take an as much as possible realistic view on the world’s economic situation.

Here we see:

  • Notwithstanding all the still ongoing QE programs in all the major economies of the world, all these economies continue to struggle for achieving self-sustaining growth “in” aggregate demand. We should take notice the U.S. remains by far the least worrisome location in a bad neighborhood.
  • All these major economies, the U.S. included, will face further down the road, serious “structural” challenges, not at least because of their continuous rising debt levels that are on their way of literally becoming “unpayable.” We have to add to that the challenge of their “aging” populations. Finally, all these economies will face huge costs because their aging and inadequate infrastructures.
  • Finally, there are these growing divergences, yes in plural, among the major economies in the world that all found their origins in the Great Financial Crisis. We have come to an extremely dangerous point that global integration seems more and more a disappearing event, which if that can’t be reversed any time soon, will bear an extremely high cost to global growth.

When we look at all that, we must admit the Fed can’t do much about that.

From a long-term investor’s standpoint we will have to find satisfactory answers to the following questions:
  • Over the next decade, will global growth accelerate or decelerate?
  • Will global growth be above or below its 30-year average?
  • When we look at a worst-case scenario, which implies rolling regional crises while there is weak and volatile growth when near-term demand issues prove to be too challenging and when long-term structural issues remain unresolved while, at the same time, financial flows become more volatile, which will go together with more frequent powerful shocks, would I take as a long-term investor the risk to invest long-term before the storm has died down?
Not easy questions to answer.

Of course, everybody will have to decide for himself or herself.

One thing is for sure: Long-term investors are facing huge challenges we haven’t experienced in many decades.

Sometime in the future, prices will again reflect fundamentals (economic basics), but that will only happen when the decades-long bubbles have burst.

Be patient!

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HansParisis
One thing is for sure; long-term investors are facing huge challenges we haven’t experienced in many decades. Sometime in the future, prices will again reflect fundamentals (economic basics), but that will only happen when the decades-long bubbles have burst. Be patient!
bubbles, prices, investors, economy
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2015-13-02
Friday, 02 October 2015 07:13 AM
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