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It's No Wonder Most Long-Term Investors Are Confused and Don't Know What to Do

It's No Wonder Most Long-Term Investors Are Confused and Don't Know What to Do
(Dollar Photo Club)

By    |   Friday, 09 October 2015 08:41 AM

The FOMC September minutes show most policymakers felt interest rates should still rise this year and recent financial market volatility had not “materially altered” the outlook for the U.S. economy.

The FOMC minutes don’t seem to signal an overly “dovish” FOMC.

Fundamentally, nothing has changed, but the still weakening global growth remains of concern.

Turning to oil, the rallies in Brent and WTI certainly don’t reflect fundamentals as the oversupply remains this year and probably in 2016.

The global energy-consultancy group Wood McKenzie demonstrated in a recent study that oil supply remains at a record 2.4 million barrels per day with overwhelming strong oil demand this year.

What will happen to the oil oversupply in 2016 is still a big unknown as nobody knows what amounts Iran will bring onto the market, especially when we take into account there is still a large portion of Iran’s tanker fleet, which is one of the biggest in the world, at present remains filled with 50 million to 60 million barrels of crude and condensate.

Long-term investors who’d like to take on some oil or oil-related investments in their portfolios probably could do better waiting some time more as downside risks remain very high.

Because of the world’s very weak growth prospects, I’d prefer to wait until the bottom of the oil price literally falls out and prices between $20-$30/barrel become possible targets, which isn't written in stone.

Meanwhile, IMF Managing Director Christine Lagarde said the world is stuck in a “new mediocre” growth pattern, despite that central banks of advanced economies have injected about $7 trillion in quantitative easing programs since the financial crisis of 2007-2008.

She also said the U.S. recovery is broadly in line with targets and rate lift-off is close, while the slowdown in China, alongside market volatility have created larger spillover effects than thought.

Central banks have little room for error in a low-growth world in which over-leveraged and commodity dependent emerging market economies together with a slowing China are major risks especially when we take over-leveraged corporate debt into account.

When we look at policy rates of the most important central banks in the world,  you don’t have to be a financier to see there is serious risk when policy rates in the U.S. at 0-0.25 percent; the eurozone at 0.05 percent; the UK at 0.5 percent; Japan at 0.1 percent; Canada at 0.5 percent. Those rates all at or close to historical low levels (with the exception of Brazil).

No wonder most long-term investors are confused at present and don’t know what to do.

Maybe it could be helpful to have some idea where the economies could be headed from here.

Emerging-market economies are in the late stages of their respective credit cycles, which normally means “wait and see what happens next” before engaging in long-term investing.

Countries like the U.S. (and to a lesser extend Japan) seem to be at the beginning of new credit cycles (expansion), which normally signals the right time for investing again. Nevertheless, prices don’t seem to be sufficiently attractive yet.

The eurozone remains in “repair” mode. This market remains reserved for risk-takers who overlook the fundamental weaknesses and political dangers.

China’s most important weaknesses is its “credit gap” that measures its current credit growth compared to its long-term trend. At the end of 2014 its credit gap stood at about 25 percent, which is excessively high. This means it remains a “no go” for now.

With what is known today, one of the best places for investing over the near term remains the U.S.

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With what is known today, one of the best places for investing over the near term remains the U.S.
fed, economy, investors, money
Friday, 09 October 2015 08:41 AM
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