“Growth Resuming, Dangers Remain.”
That’s how the just released IMF staff's analysis qualifies global economical trends and developments in its first part of the 2012 IMF World Economic Outlook (WEO).
In this context, it’s interesting to take notice how a big majority of observers considered last Friday's U.S. jobs report surprisingly disappointing notwithstanding unemployment rate dipped to 8.2 percent while payroll jobs in March advanced a far too modest 120,000 when around twofold was expected, but when also we should absolutely need to see an average number of around 350,000 new jobs for letting the protracted “slump,” we are still in, definitively behind us.
Maybe the IMF WEO 2012 gives long-term investors some good “food for thought” on why the necessary job creation is still faltering, by stating: “Housing busts preceded by larger run-ups in gross household debt are associated with deeper slumps, weaker recoveries, and more pronounced household deleveraging. The decline in economic activity is too large to be simply a reflection of a greater fall in house prices. And it is not driven by the occurrence of banking crises alone. Rather, it is the combination of the house price decline and the prebust leverage that seems to explain the severity of the contraction. These stylized facts are consistent with the predictions of recent theoretical models in which household debt and deleveraging drive deep and prolonged slumps.”
In countries like U.S., the U.K., Spain, and in many other Western countries, which includes Eastern European countries, households racked up a lot of debt before the Great Recession and now this debt hinders the recovery because economies with a lot of indebted households face an overall fall in demand, less demand for products means less employment, unemployment goes up more and incomes of families fall.
These families find it harder to meet their debt payments and that sets off a negative chain reaction with more defaults, banks being more worried about lending, which results in long-term damage to the economy.
Trying to break this vicious cycle will take ‘firstly’ much more time and ‘secondly’ more so-called “puts” than generally expected. In the U.S., when in June, the Fed’s maturity extension program, which is usually referred to as “operation twist” comes to its end it could be substituted by some form of “sterilized” Quantitative Easing (QE).
In Europe, Ewald Nowotny, current president (governor) of the National Bank of Austria and member of the European Central Bank (ECB)’s governing council said when commenting on the prospects for a third LTRO, which refers to ECB’s supplementary longer-term refinancing operations (LTRO) that provide extra and “cheap” liquidity to the financial sector: “I can't rule it out, but I see no need at present.”
So, for now at least, the current monetary policy settings of “print-borrow-consume” in the U.S. as well as Europe seem clearly to remain in place whereby the settings will continue to drive the markets whereby the policy makers, together with others like Japan, will intentionally, at least that’s how I see it, continue to misprice the cost of capital, in an attempt to push the private sector to misallocate capital into asset purchases and consumption at the wrong time and at the wrong (too high!) price.
We all should have learned that such policies irrevocably lead to the formation of “bubbles” that are the direct consequence of central bankers mispricing of capital.
Recent history that goes back over the last 20 years and more specifically the last 10 years has demonstrated that all these bubbles end up bursting at a certain point in time hereby confirming the undeniable economic failures of these policies.
Unfortunately, for the time being, everything still indicates the cult of more debt, more liquidity, and more consumption is till well in place. Very few of the monetary policy makers seem to care or even admit that e.g. in the U.S. today, tens of millions of American citizens, which are either homeless and/or on food stamps are a direct consequence of firstly the Greenspan and then the Bernanke policy “puts.”
The just-released OECD area unemployment rate came in at 8.2 percent in February 2012, which is broadly at the same level it was in January 2011, in fact confirms that the monetary policies in place are unable to solve, at least so far, the unemployment problem.
I’m still convinced that markets and that includes “cash,” which remains my preference for the time being, for all the known and unknown reasons, notwithstanding I don’t feel happy about it, remain way “over-priced” until central banks will be obliged to change their actual policies. When that would be, nobody really knows and it will certainly not occur all at the same time.
What I do know is that until that happens we’ll continue see frictions between the central bank inflationary policies and the natural cycle of deflationary debt deleveraging. That situation may easily continue well into next year and even well into 2014. In my opinion, long-term investors should not consider time as a competitor.
Instead, they should try the preserve what they have today.
I have no doubt whatsoever that downward adjustment of the markets has not run its course, and which should bring us back to rational priced markets and sustainable developing economies. Once we are there, we will have a very important basis and construction block that will put in place the basis for the next major multi-year cycle of global economic development.
Long-term investors should try to remain patient until risk asset valuations have come down to really “once in a lifetime” inexpensive levels.
We are not there yet at this point in time and until then my preference remains U.S. dollar, but not exclusively and “cash” or “cash equivalent(s)” allocations like short term U.S. Treasurys and German bunds.
Of course, safely located “physical” gold, not “paper” gold, will always be on my preference list. Of course, that’s my personal view and I’m not a prophet…
The main “known” risks remain spiking oil prices caused by rising frictions between Israel and Iran and, without any doubt, the eurozone that hits a deeper than generally expected pothole like e.g. a Spanish bailout or a political reversal in France at the presidential elections next month or whatever that could go not as planned or expected in Brussels.
China slowing further down in an orchestrated way should not be too much of a high not-discounted risk as long as it doesn’t accelerate suddenly.
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