Tags: Fed | stimulus | investing | growth

Long-term Investors Should Wait for Real Growth

By    |   Tuesday, 18 September 2012 01:11 PM

Against the background of last week’s OECD (the Organization for Economic Co-operation and Development) newest composite leading indicators (CLIs), which showed that the loss of momentum in economic activity will likely persist in the coming quarters in most major OECD and non-OECD economies, we’ve seen open-ended in the U.S. and unlimited in the eurozone, quantitative-easing plans being put in place.

It doesn’t matter who said first “The road to hell is paved with good intentions,” but I'm afraid we are on that same road again.

Long-term investors could do well to take notice the CLI for the U.S. showed signs of moderating growth, but nevertheless remained above trend, while the CLIs for China and Italy continued to point to a slowdown. The CLIs for Germany, France and the eurozone as a whole continued pointing to weak growth.

Maybe it would be good to ask ourselves, as long-term investors and not as traders, where growth will come from, or how will we be able to avoid another downturn, which should be viewed in the near to medium term with a timeline stretching into 2016 and even 2017.

In my opinion, and contrary to what the majority seems to think these days, we are still far away from a sound, solid and sustainable economic and market recovery, while high unemployment is set to remain in place for a long time to come. I hope I’m wrong, but I see us moving closer to a second downturn that could dwarf the one we experienced after Lehman Brothers collapsed in September 2008.

The Fed’s new plan to buy up to $40 billion in mortgage-backed securities a month, the European Central Bank’s bond-buying program, and China’s planned $160 billion in infrastructure spending won’t be able to put us back on a sound path to growth.

What central banks are planning all comes down to printing money, which will create inflation in assets such as stocks and real estate, which many are hoping for. That will occur before a more dangerous form of consumer price inflation takes hold. The process of continuously monetizing debt will ultimately result in higher interest rates and lower bond prices in most of the world’s biggest economies.

In the U.S., the expectation of inflation reappeared in the markets as the difference between yields on U.S. 10-year notes and comparable-maturity TIPS (Treasury Inflation Protected Securities), a gauge of trader expectations for the Consumer Price Index, reached 2.73 percentage points, its widest reading since May 2006. That number is directly related to the Fed’s intention of letting inflation heat up as it tries to boost employment and the economy. In my opinion, that’s not going to work, and the results will be much worse than expected.

Fed Chairman Ben Bernanke should be careful what he wishes for. U.S. bondholders will do exactly what Greek bondholders have been doing — demand more interest. That will destroy any form of recovery.

As I have stated here before, long-term investors, not traders, shouldn’t chase the markets because there will be more than enough buying opportunities around the globe between now and before 2016/2017 is over.

Remember, unemployment and labor force participation numbers will show us the way we’re going.

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In light of all the stimulus from central banks around the world, long-term investors should be patient and wait for real economic growth, not asset inflation goosed by monetary policy.
Tuesday, 18 September 2012 01:11 PM
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