Tags: Investments | Hope | Empty | Promises

Don’t Make Investments Based on Hope and Empty Promises

By    |   Tuesday, 31 July 2012 11:31 AM

Notwithstanding it being summertime in the Northern Hemisphere, these are certainly not relaxing and comforting times for investors.

Speaking last week at the Global Investment Conference in London, Mario Draghi, President of the European Central Bank (ECB), after glorifying the merits of the euro, provoked unfounded optimistic expectations among many investors whereby the ECB could solve the deep-rooted and widely diverging structural problems of the eurozone.

At that occasion, he fell clearly short of explaining in a decent and understandable way what he meant when he said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

I’m sorry, but I can’t believe him until I see actions (facts) that show the ECB is going to resolve the debt crisis and the structural problems of the eurozone. Extra money printing won’t do the trick and neither will buying government bonds of troubled member states, as we have seen in the past.

I don’t expect stunning news that confirms the expectations that markets have demonstrated when the ECB announces its monetary policy decision on Thursday. Of course, we’ll have to wait and see. I could be being too skeptical.

Anyway, the just-released EU inflation flash estimate issued by Eurostat, which is the statistical office of the European Union, came in at 2.4 percent for July, unchanged from June. Keep in mind that the primary task of the ECB is to keep the inflation rate below 2 percent.

The Organization for Economic Co-operation and Development’s latest annual inflation estimate for the OECD area was 2.0 percent in June 2012, down from 2.1 percent the month before. It is important to take notice of the fact that the numbers mask opposing moves in energy and food prices.

Energy price inflation slowed from 2.0 percent in May to 1.4 percent in June, which was its the lowest rate since October 2009, while food prices rose for the first time in five months to 2.8 percent in June, up from 2.6 percent in May.

Yes, climate is already taking its toll on food prices, with drought problems in most of the important food-exporting locations in the world. No, it’s not yet time to push the panic button, but don’t be surprised when things get worse. Cargill now expects food prices to rise in the United States about $75 per person on a year basis. Needless to say, low-income families will be hit hard.

In the mean time, the U.S. Bureau of Economic Analysis’ personal consumption expenditures decreased $1.3 billion, or less than 0.1 percent, in June, while personal income increased $61.8 billion, or 0.5 percent. I don’t know what the Federal Reserve can do to make Americans spend again. In the meantime, markets look like they are waiting for another round of quantitative easing and to see what politicians will or will not do to avoid the “fiscal cliff.”

Besides, the U.S. Treasury just confirmed its previous forecast that it will hit the debt ceiling of $16.394 trillion, which has been effective since Jan. 30, 2012, before the end of the year. Nevertheless and surely interesting, it also noted that it has the tools to postpone the day when it actually runs out of cash to some time in the first half of 2013.

As usual, the decision makers everywhere want us to believe what they say, but to me they are surely not convincing enough to give me and maybe other long-term investors justified comfort on where we are really going.

Putting geopolitical risks (which are still a formidable threat) aside for a moment, the European crisis, with all its confusing and chaotically moving parts, remains on the front burner, while the U.S. “fiscal cliff” threat remains on the back burner, at least for now.

For people who are looking for investing in cheap assets now, I must say the whole spectrum still looks far from cheap enough. I cannot believe in investment decisions that are based, in large part, on hope and empty promises.

I still believe that next year, or the year after, will have plenty of once-in-a-lifetime investment opportunities for those who have real money that is immediately available under literally “all” circumstances.

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Tuesday, 31 July 2012 11:31 AM
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