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These Are Increasingly Dangerous Times for Investors

These Are Increasingly Dangerous Times for Investors

(Dollar Photo Club)

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Monday, 19 September 2016 07:35 AM Current | Bio | Archive


While we are only 50 days away from the U.S. Presidential Election Day, there is very little fresh data of much note about which markets could get excited about today.

Nevertheless, it may be worth considering for a moment the signals that came from the U.S. inflation figures we got on Friday.

August Consumer Price Inflation (CPI) increased more than expected with +0.2 percent on the month and up 1.1 percent from a year ago. The core CPI was up 0.3 percent on the month, also more than expected and was up 2.3 percent on the year. Core inflation was at its highest level since 2008 while 5 of the Fed’s 8 inflation measures are now running above 2 percent.

It is clear that the inflation data was driven higher than expected because of local issues.

For U.S. linked investments, this is important because the main driver for the rising inflation numbers is the price of crude oil (we use here the West Texas Intermediate (WTI) benchmark price as reference) that after having continuously been falling since the middle of 2014, when it reached $106.96 per barrel on June 16 of that year, WTI apparently seems now to have touched a bottom in February of this year at $27.30 per barrel and since then, the trend of the price of crude oil (WTI) has changed direction and turned up again.

In simple words, that means that domestic price pressures will no longer be able to hide behind the cheap barrel of oil.

Professor Joseph Stiglitz suggests that there was more slack in the U.S. labor market than is popularly supposed and that was restraining inflation pressures. That does seem make a peculiar interpretation.

Inflation is hardly rampant, that’s a fact, but away from oil, it is certainly not an overstatement to say that U.S. inflation is about normal, suggesting that labor market pressures may also be normal, which is of course not the same as what Professor Stiglitz has said of late.

It could be good for long-term investors to take notice that the Bank for International Settlements (BIS) warned in its September “BIS quarterly review” that stock and bond valuations are high, especially given that their foundations may not be as solid as investor's complacency seems to suggest.

Claudio Borio, Head of the BIS Monetary and Economic Department stated: “There has been a distinctly mixed feel to the recent rally - more stick than carrot, more push than pull, more frustration than joy. This explains the nagging question of whether market prices fully reflect the risks ahead. Doubts about valuations seem to have taken hold in recent days. Only time will tell.”

As I have written before, the next recession will originate in China. It might be helpful for investors to keep in mind that the Bank for International Settlements (BIS) gives in its September quarterly review flags China with red in its “Early warning indicators for stress in domestic banking systems.

Please do not misread me, I’m not saying China is going to have a banking crisis, but the risks for such a globally disastrous event are, and continue rising.

Taking all that into account, long-term investors are living through dangerous times as the investment environment continues, by the day, to become more opaque and very difficult to understand. All of the challenges we face are unique and we don’t have any experience in dealing with them. 

Maybe it could be good to keep in mind: Aquinas called prudence the queen of virtues, saying that she gently guides all the rest… 

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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Investors are living through dangerous times as the investment environment continues, by the day, to become more opaque and very difficult to understand.
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2016-35-19
Monday, 19 September 2016 07:35 AM
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