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4 Most Dangerous Words in Investing: 'This Time It's Different'

4 Most Dangerous Words in Investing: 'This Time It's Different'

(Dollar Photo Club)

By    |   Wednesday, 05 October 2016 07:29 AM


Chicago Fed President Charles Evans, who is known as a dovish Fed official and a FOMC voter next year, said: “I have a forecast where things continue to improve. I do think there will be a rate increase,” adding that he would be fine for rates to increase by year-end.

He added: “I am less concerned about the timing of the next increase than I am about the path over the next three years.”

Turning to the government Evans said: “What the central bank needs to do is have a view point on whether or not fiscal policy is going to be stimulatory or contractionary on the economy over the next three to five years and then we have to decide if we need to take action to offset its effects on inflation.”


Over in the Euro area, the Dutch ECB council member and president of the Dutch central bank Klaas Knot said: “The low interest rates not only create problems for life insurance companies and pension funds, but it also hurts the interest rate income for banks ... This puts pressure on banks’ profitability.”

Knot added that the ECB will have to weigh the side effect of accommodative policy to the extent to which it is effective in reaching its price-stability goal.


When asked whether the ECB has discussed reducing the pace of its monthly bond buying, ECB media officer Michael Steen said: “The Governing Council has not discussed these topics as Mr. Draghi said at his last press conference and during testimony at the European Parliament.”


Meanwhile, newswire reports are suggesting that the ECB may not continue its quantitative policy in the way markets had expected. Some ECB council members are suggesting that the decision on the faith of quantitative policy will be made in March next year rather than the expectation that there will be a tapering of quantitative policy announced in advance of the ECB Governing Council monetary policy meeting on March 9, 2017.

In the meantime, it’s a fact that financial markets are starting to consider what life might be like without central banks pursuing aggressive quantitative policies.

Maybe it’s good to remember and notwithstanding this is very rarely referred to, the Federal Reserve has been tightening quantitative policy since about the first half of 2015. In fact it's organic tightening whereby the Fed’s balance sheet/GDP ratio is reduced.

For comparison; of the world’s three main central banks’ total assets / GDP ratios, the ECB ranks first, thanks to Mr. Draghi’s mainlining liquidity he has become so addicted to, second comes the Bank of Japan and third is the Federal Reserve.

In the meantime, the gold price has fallen through the key psychological level of $1,300 per ounce.

Ironically, this decline has occurred when Chinese investors are celebrating the Golden Week holidays, which rather limits the potential of appetite from that corner.

Anyway, 1,000 tons of paper gold, or 25 percent of the total annual physical gold 'supply,' which has been on average 4,000 tons per year for the last 10 years, was sold at the London open when China was on holiday!

From its side, Indian demand seems not to be forthcoming at these price levels, at least not so far.

The potential for short-term weakness in the gold price, which is of course not the same as the dramatic drop we have witnessed yesterday, was as of late expected by several professionals.

Please keep in mind that the economic consequences of the gold price drop are not especially significant.

For all, gold is mostly used as a hedge/insurance against inflation, though, it must also be said, gold has limited uses in that regard and gold price moves meet only occasionally real world relevance, which of course doesn’t mean it never does.

Finally, Goldman Sachs wrote in a commodity report, “We see growing vulnerability in the Chinese property market … Policy-driven housing booms tend to be followed by slumps due to the payback effect.” We all know that China faces a huge overbuilding problem and at the same time concerns that many working-class families can no more afford homes because of still ongoing speculation.

 

All investors could do well keeping in mind that when the Chinese housing should burst (I personally have no doubt that it will burst and it’s only a question of time), it will have negative effects everywhere on the globe with risk on the upside.

Never forget, the four most dangerous words in investing are: “This time it’s different.”
 

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

 

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HansParisis
All investors could do well keeping in mind that when the Chinese housing should burst (I personally have no doubt that it will burst and it’s only a question of time), it will have negative effects everywhere on the globe with risk on the upside.
investing, dangerous, words, fed
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2016-29-05
Wednesday, 05 October 2016 07:29 AM
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