Tags: geopolitical | risk | investors | iran

Geopolitical Risk Will Only Get Worse for Investors

Geopolitical Risk Will Only Get Worse for Investors

By    |   Monday, 06 January 2020 09:06 AM

For investors, the bad news of the day, economically speaking of course, was that the Iranian Maj. Gen. Qassem Soleimani, who was named the architect of Iran’s shadow wars and military expansion in the Middle East that brought the Islamic Republic to the brink of conflict with the U.S., had been killed in a U.S. airstrike when traveling in a convoy to Baghdad.

One thing is for sure, geopolitical risk is back with a vengeance, which should favor safe-haven investment instruments like, for example, gold as well as the U.S. dollar and the “price” of crude oil.

The U.S. Department of Defense said that Gen. Soleimani was targeted after intelligence learned that Iran was actively developing plans to attack U.S. servicemen and diplomats in the region.

In recent years, Gen. Soleimani rebuffed attempts by Iran’s President Hassan Rouhani’s government to push for a more diplomatic approach in Syria and Iraq, saying that diplomacy can’t do the work of “martyrs of defense,” the Wall Street Journal reported.

In the meantime, on Friday the Federal Reserve of New York added $51.15 billion via repurchase agreements or repos that are conducted only with primary dealers and whereby the Fed seeks to control short-term rates for setting a baseline for overall borrowing costs, which at the moment are aimed at the federal-funds rates that are currently set at the 1.50 percent-to-1.75 percent range and that seems to work rather well so far.

On Friday, the repo rate was agreed on at 1.55 percent, which means the Fed did win its “End-year’s repo battle” and that the difficult/dangerous September situation, when the repo rate spiked to 10 percent at one moment, didn’t reoccur.

Also on Friday, the Fed reported that its balance sheet was slightly up to $4.165 trillion on January 1, 2020, from $4.056 trillion on January 7, 2019.

On Friday we got also the important December 2019 U.S. Manufacturing ISM Report on Business that showed a PMI at 47.2 percent, which was a decrease of 0.9 percentage point from the November reading of 48.1 percent (below 50 percent means contraction) and that was the lowest number since June 2009 (!). Of the 18 manufacturing industries, only 3 reported growth in December: Food, Beverage & Tobacco.

The past relationship between the PMI and the overall U.S. economy indicates that the PMI for December at 47.2 percent corresponds with a 1.3 percent increase in real gross domestic product (real GDP) on an annualized basis.

It’s certainly not an overstatement to say that the U.S. industrial production is at the moment in recession.

Forward-looking indicators such as:

  • ISM's New Orders Index registered 46.8 percent in December, a decrease of 0.4 percentage point when compared to the 47.2 percent reported for November. This indicates that new orders contracted for the fifth straight month and at a faster rate.
  • ISM's New Export Orders Index registered 47.3 percent in December, a decrease of 0.6 percentage point compared to the November reading of 47.9 percent. This indicates that new export orders contracted for the fifth time in six months.
  • ISM's Production Index registered 43.2 percent in December, which is 5.9 percentage points lower than the 49.1 percent reported for November, and that was the fifth consecutive month of contraction. The index had its lowest reading since April 2009 (!).
  • ISM's Employment Index registered 45.1 percent in December, a decrease of 1.5 percentage points compared to the November reading of 46.6 percent. This is the fifth month of employment contraction, and at a faster rate in December.

Part of the weakness in the ISM figures could be related to the announced production shutdown of Boeing’s 737 MAX aircraft, which could, for example, explain some of the weakness in New Orders.

Nevertheless, investors should better take care not remaining too complacent as it is more than probable that we haven’t seen “the worst” effects yet.

Without any doubt, the December 2019 Manufacturing ISM Report on Business is not a good one, and when we add to that, among a lot of other things of course, the rising geopolitical tensions, as an investor, I would prefer to cash in at least some of my profits, especially in equities.

Maybe taking note of the fact that over the past few months, Warren Buffett’s Berkshire Hathaway cash pile grew to a record of $128 billion… could give some ideas, CNBC reported.

For investors, certainly food for thought!

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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It’s certainly not an overstatement to say that the U.S. industrial production is at the moment in recession.
geopolitical, risk, investors, iran
Monday, 06 January 2020 09:06 AM
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