Tags: Fed | taper | Syria | gold

This Time Isn't That Much Different From 2008

Tuesday, 17 September 2013 01:05 PM Current | Bio | Archive

For the long-term investor, this week could become very interesting indeed.

Wednesday, we finally will know whether the Federal Reserve has decided to start tapering its colossal and unprecedented $3.4 trillion Treasury and Mortgage-Backed Securities (MBS) bond-buying program.

In case the tapering starts tomorrow, this could be an event for the history books that marks the start of the return to monetary normalization. But we only will be able to judge that somewhere within a decade or even longer than that.

Also on Wednesday, we will have a new insight with the Fed's Summary of Economic Projections and how it estimates how economic growth and employment will probably evolve from here on into the near future.

Of course, Fed Chairman Ben Bernanke in his press conference after the meeting could hopefully become extremely interesting and help us better understand how he sees the future of the U.S. economy and U.S. employment. Let's hope he also gives us a hint of what he considers as the main challenge(s) for his successor.

I wonder if he will use the occasion to deliberate for a while on how he sees what could be the effects of the Fed's tapering on emerging economies as a whole, as they have already being hit hard by only the talks of tapering, and also what tapering could mean for the European banks at a moment the European Central Bank (ECB) still stands ready to provide liquidity in a difficult environment. It would also be nice to know how he thinks about the effect tapering could have on the whole spectrum of U.S. banks.

Please don't forget, all banks have more or less substantial amounts of low-yielding bonds sitting on their balance sheets and these bonds' market values will go down when interest rates move up and the losses in value will diminish all these banks' capital bases automatically because of the new capital rules. To put it simply, we could say that banks now are only marginally safer than in 2008, before the crisis.

Yes, I know most of the financial institutions say they are hedged against losses caused by higher interest rates and that is surely right. But that's not the whole story. We should keep in mind that at the end of the day there will be some financial institution or even a few of those big institutions that will be holding that infamous "bag." Yes, a situation something akin to what happened in 2008 to the insurer AIG, which had sold credit protection through its London unit in the form of credit default swaps on collateralized debt obligations, but that in the end declined substantially in value.

Long-term investors should keep in mind that really big risks are still out there. No, in my opinion, this time isn't that much different from 2008.

Finally, and as I've said here before, I wouldn't be that surprised if the Fed delays tapering Wednesday and then reviews it again at the October Federal Open Market Committee meeting.

As long as the recovery doesn't hit a roadblock, the U.S. economy continues to grow, albeit certainly not at so-called escape velocity, and employment continues to grow, albeit not at a sufficient pace to come back in the foreseeable future to the nominal employment numbers we had before the crisis struck, it's a fact tapering will come, no doubt about that.

Coming back for a moment to the very important geopolitical risk that still represents the Syrian "hodge-podge" that in fact followed the U.S.–Russian arrangement on a plan for removing Syria's chemical weapons arsenal and for which, by the way, the proposed timeframe is already way too extended in accordance to the Israeli Intelligence Minister Yuval Steinitz as he commented on Sunday. At that same occasion the Steinitz refused, which is understandable, to "grade" the U.S.–Russian agreement while he also didn't answer the question if Syria had already moved chemical weapons into Lebanon and Iraq.

He nevertheless said, "Israel has good capabilities to track chemical weapons and Israel has drawn a red line over the transfer of chemical weapons to terrorist organizations, including Hezbollah."

I think it's also important to take notice that Steinitz on Sunday also raised the possibility that a rebel group could use chemical weapons and provide Syrian President Bashar al-Assad the excuse to cancel the agreement.

Meanwhile, U.S. Secretary of State John Kerry has assured Israel publicly that the deal with Russia is capable of removing Syria's arsenal. Now Russian Foreign Minister Sergey Lavrov has said the U.N. report on Syria does not answer all the questions on the Aug. 21 chemical weapons attack and he called for an impartial investigation of the Syrian gas attacks.

No, to me the whole situation doesn't look good and I wouldn't bet on a sound and complete diplomatic solution for the Syrian nightmare. Of course, things could change and miracles do happen.

In my opinion, long-term investors should keep this extremely dangerous and complex situation on their radar screens as long as it takes and be prepared to act quickly in case things get out of hand, which could happen at any time without warning.

Finally, in Germany we have on Sunday, Sept. 22 the national elections, where the main question is not who will be the next chancellor, because that will be Angela Merkel, but if the Christian Democratic Union-Free Democratic Party coalition will remain in power. If that is the case I can't see, at least not for now, fundamental changes coming in German politics, especially as far as the eurozone and the euro are concerned.

There is no doubt the outgoing coalition will keep Greece, Portugal and Cyprus above water at least until the next crisis develops.

As far as maintaining the euro in its actual concept, they will only do the absolute minimum to keep it in place, but nothing beyond that. Things would only have a chance for change if the Socialist Democratic Party comes into the government, but we will only know on Sunday evening.

That said, in my opinion, there are still more chances than not that we are bound for a serious broad-based market correction.

On gold, I still expect gold in the $1,000 to $1,200 range or even lower. Once we reach that price zone, I'd start considering buying it.

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For the long-term investor, this week could become very interesting indeed.
Tuesday, 17 September 2013 01:05 PM
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