Tags: employment | invest | Draghi | eurozone

Time Is Your Friend in Investing

Tuesday, 07 May 2013 10:53 AM Current | Bio | Archive

On Friday, we got another pleasant "moment" with better U.S. employment numbers for April, although this certainly doesn't mean we are now headed for a sustained period of strong employment news.

U.S. non-farm payroll employment increased 165,000 in April and the unemployment rate fell to 7.5 percent from 7.6 percent in March, which was better than expected and showed that at least some of the uncertainties that go together with the sequester and rising health care costs, as well as higher taxes, has been shrugged off.

It's still too early to have a good idea of the full impact of sequestration on the coming growth performance. Some economists expect sequestration could shave off 2 percent of gross domestic product in the second quarter.

However, markets showed once again their current inclination for denial of fundamentals, as they went gangbusters and reached new record highs.

When digging deeper in the latest numbers, we see professional and business "services" have added 587,000 jobs so far this year, which resulted in 135.5 million "employed"(seasonally adjusted) and a participation rate of 63.3 percent.

To put this in context, when the Great Recession started in December 2007, we then had 138.0 million employed and a participation rate of 66 percent.

These comparative numbers shouldn't be overlooked, as they certainly give no reason whatsoever for being optimistic on where we are today.

For now at least, after the first four months of this year, we got finally somewhat encouraging hiring numbers, especially in the service sector, but it appears to me the hiring came mainly from a catch-up from the hiring freeze at the start of the sequester, when very few business were hiring people because all the uncertainties that went, and still go, together with the sequester.

Nevertheless, the U.S. employment trends index, which aggregates eight labor-market indicators, signaled further, albeit moderate, job growth in the coming months. So hopes can remain for further improving job numbers, even at a (too) slow pace.

What also becomes clearer is that the Federal Reserve still has no reason yet to start moving away from its quantitative easing policy, which is in fact, fundamentally, not good news at all.

Unfortunately, today's monetary easing policies from all over the world are carrying all investors, yes, without exception, into a "Twilight Zone," where literally nobody has been before, let alone has come back from.

I'm sorry, but I can't imagine how that could end well. The only thing I'm sure of is that fundamentals will, one day, come home to roost, and that won't be pretty, you can be sure of that! Of course, we aren't there yet.

On the other side of the pond, Eurostat, the statistical office of the European Union, announced the retail sales index dropped 2.4 percent year-over-year in the euro area, which puts it now back at levels not seen since 2003.

When we take into consideration the record unemployment rate in the eurozone of 12.1 percent, which is expected to continue rising, it should not come as a surprise that on Monday, European Central Bank (ECB) President Mario Draghi made the following stunning and even historical statement: "The Governing Council (ECB) has decided for the first time to look openly at the possibility of reducing the interest rate on the deposit facility to less than zero. … There are many complications. There are many consequences that we must take into account and study closely. The Governing Council has decided to analyze these consequences in order to be ready to act if needed."

Believe me, this declaration is extremely important to all and especially long-term investors who hold euros in their portfolio.

If the ECB applies negative interest rates on its deposit facility, which would be an absolutely first in the history of the ECB, it would negatively impact the exchange rate of the euro. Nobody has an idea of the size of the impact this would make.

Long-term investors would do well putting such a move on their radar screen, because if it happens, it will happen suddenly, and the downward correction in the euro exchange rate could easily be fast and furious and much bigger than many dare to expect today.

Please keep in mind that Draghi promised to do whatever it takes to save the euro, but he never promised to do whatever it takes to maintain a strong euro.

Also, keep in mind that the so-called "troubled" eurozone economies, the trouble of which now seem to be metastasizing into the core economies, would absolutely welcome and profit from a weaker euro. There is no doubt about that.

In this context, the Markit Eurozone Composite Purchasing Managers' Index is enlightening, as the data show the downturn in the single currency zone has gathered momentum, while Germany has entered back into "contraction."

While China continues showing signs of slowing, my view on the markets hasn't changed a bit and I certainly don't chase yields in a marketplace where the daily sentiment index, as published by "trade-futures," hit on Monday for the second time this year the record 87 mark.

I have learned in my more than 40 years of experience in the universe of investing never to go into competition with time, let alone to chase illusions.

Therefore, I'll remain patient and I'm prepared to take all the time needed until the correction comes. Once that starts, I will take again all the time needed for trying to define how long and how deep the correction could go. Please don't misunderstand me, but we could easily be talking about a couple of years before the correction is over.

Of course, that's my personal opinion and I could be as wrong as anyone else.

One thing is for sure; I always try to oblige myself to see time as my friend when investing is in play.

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On Friday, we got another pleasant "moment" with better U.S. employment numbers for April, although this certainly doesn't mean we are now headed for a sustained period of strong employment news.
Tuesday, 07 May 2013 10:53 AM
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