Tags: euro | Russia | Ukraine | US

Green Shoots of the Global Recovery Are Still Waiting for Flowers

Tuesday, 22 April 2014 01:57 PM Current | Bio | Archive

On Monday, Ukraine was back on the front burner when the U.S. State Department released an 11-page document that included images of Russian soldiers in eastern Ukraine. The documentation also unequivocally showed some of these soldiers had been photographed in their same outfit earlier during the operations in Crimea.

U.S. State Department spokeswoman Jen Psaki said that if Russia "doesn't take steps in the coming days to implement an agreement to ease tensions in the Ukraine, there'll be consequences. . . . Obviously, we would have to make a decision in a matter of days if there are going to be consequences for inaction."

Also on Monday, the Russian Foreign Minister Sergei Lavrov asked Washington to put pressure on Ukrainian authorities to stop hotheads like the ultra-nationalist group "Pravy Sektor" from provoking a bloody conflict and to encourage them to live up to their obligations as agreed on in last week's "Geneva deal."

He went even further and accused the Kiev authorities of breaking last week's Geneva accord on resolving the Ukraine crisis and condemned a fatal shooting near Sloviansk in eastern Ukraine, saying "extremists are calling the tune," and adding it was "absolutely unacceptable" the Ukrainian authorities had failed to end what he called the illegal protests in Kiev.

From his side, President Obama threatened more sanctions on Russia if Moscow doesn't use its force to implement the Geneva accord quickly.

Interestingly, Vice President Biden, who is on a two-day visit to Ukraine, said Tuesday that Ukraine leaders must fight the "endemic cancer of corruption." Yes, the puzzle gets really complicated.

To me, what's going on over there is a perfect example of two hugely important blocs talking "at" each other and not "to" each other. I don't think it's an overstatement to say it becomes clearer by the day the United States and Russia have completely different views and therefore different agendas on Ukraine.

In the meantime, the mutual blaming game is accelerating. Unfortunately, that kind of game could easily spin out of control in the blink of an eye.

Don't forget, Russia has troops on standby near the Ukrainian border, which is in itself a serious situation that continues developing in the wrong direction.

At the same time, Russia has been successful in its goal of destabilizing the whole area.

In my opinion, long-term investors should probably not take that situation lightly.

As an investor one should think how to protect, at least in part, their portfolio in case events should take a turn for the worse. I have no doubt West Texas Intermediate oil prices could go well above the $104 per barrel price. Under "normal" circumstances, which is certainly not the case today, oil prices should somewhere in the $80 per barrel zone.

What is also interesting as of late are the moves in the markets when the Russian stock market index MICEX, which is a capitalization-weighted composite index calculated based on prices of the 50 most-liquid Russian stocks, moves lower, the euro strengthens against the dollar and other currencies.

I leave it up for debate why this "MICEX-euro-dollar" relationship has sprung up, although I consider it only temporary. It's an undeniable fact when we have raising fears of any military action/intervention we have a direct impact on the performance of the euro against the dollar, and when the MICEX goes down the euro goes up and vice versa when things are getting somewhat better.

With Kiev seemingly losing authority in the east of the country, there is certainly a risk of further escalation emerging in the near future. When we add to that dovish-sounding Federal Reserve Chairman Janet Yellen, I wouldn't be surprised to see the euro hitting $1.40, which should be a good level for considering selling some of your euros because of the very simple reason that as of late too many top-level EU personalities — financial, business and political — have started complaining about the strength of the euro and the damages it causes.

Remember, earlier this month in Washington, European Central Bank (ECB) President Mario Draghi told reporters: " The strengthening of the exchange rate requires further monetary stimulus."

Investors should not overlook the fact that the latest inflation number for the euro area as a whole stood at only 0.5 percent, which was its lowest level in more than four years and well below the ECB's official target of approximately 2 percent, while at the same time it's common knowledge that a too-strong currency doesn't allow inflation to expand.

All that said, it's also a fact that the strength of the euro is partly due to capital inflows because of the desperate search for yield, particularly into the euro periphery. It's also a fact that market participants obviously act as if the euro area crisis is definitively over, which is, in my opinion at least, a grave mistake that is going to cost them dearly in the future.

In this context, Axel Weber, former head of the Bundesbank, said at the occasion of the latest International Monetary Fund (IMF) meeting in Washington: "The market is probably too benign on some of the developments in Europe. It's pricing as if the problems were behind us, but what's behind us are the bad headlines and the problems are still there."

Many investors err thinking the euro area is Germany or vice versa. Unfortunately, growth is still practically stagnant in the euro area as a whole, while a host of economic and social problems of the crisis, such as high youth unemployment, remain.

For example, youth unemployment is 7.7 percent in Germany, 20.5 percent in the United Kingdom, 25.5 percent in France, 38.7 percent in Italy and 60.8 percent in Greece.

As long as these situations outside Germany don't change dramatically, investing in most of the countries of the European Union is like skating on thin ice. It's only a question of time until you'll fall through.

Globally speaking, we could say the green shoots of the recovery are still waiting for the flowers, especially in the European Union, which is not on any measure you could think comparable with the United States.

At least for now, emerging markets remain still too state-investment dependent, which restrains me of starting to step back in again.

Taking all this into account, the United States remains the best place to be, although investors will need, from now on, better economic data and earnings to extend the five-year bull market in stocks. That's one of the reasons, but not all (!), I still expect a serious correction and, therefore, I still prefer safe dollar-cash-equivalent vehicles.

Archbishop Fulton J. Sheen said: "Patience is power. Patience is not an absence of action; rather it is 'timing' it waits on the right time to act, for the right principles and in the right way."

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the United States remains the best place to be, although investors will need better economic data and earnings to extend the five-year bull market in stocks.
euro, Russia, Ukraine, US
Tuesday, 22 April 2014 01:57 PM
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