Tags: investor | economy | rate hike | fed

A True Contrarian Will Buy Stocks 'When There's Blood in the Streets'

A True Contrarian Will Buy Stocks 'When There's Blood in the Streets'

Friday, 11 September 2015 12:20 PM Current | Bio | Archive

The probability of the first Fed rate hike next week is only 28 percent, while the first rate hike happening on December 16 has a probability of 58.9 percent.

Markets haven’t priced in a September Fed rate hike, which of course implies, in case the Fed should impose its first rate hike next week, we could see more volatility and wild swings than we already have.

Watever happens next week, it’s a fact that whenever the Federal Reserve starts its long way to “normalization,” there will be an impact on the economies all over the world. The question remains how big that impact will be over time in all those different places.

One thing is for sure, long-term investing will become much more complicated than what we have gotten used to over the last 30 years.

In this context, the McKinsey Global Institute warns that the three-decade unprecedented run the world’s biggest corporations have experienced in growing profits, market expansions and declining costs may be coming to an end.

The coming global competition for corporate profits projects that the global corporate-profit pool, which currently stands at almost 10 percent of world GDP, could shrink to less than 8 percent by 2025, which means nearly all of the corporate gains that have been achieved over the last three decades, could be undone in a single decade!

No doubt, that will impact share prices everywhere.

When we only look at two of the most important external factors that have driven that profit growth over the past 30 years (which were global labor arbitrage and falling interest rates), we see these factors are reaching their limits.

All this will lead to slower profit growth while more companies will be obliged to fight for a smaller piece of the pie. Incumbent industry leaders won't be able to just defend their market niche.

Long-term investors that want to re-adjust their portfolios to these new realities could do better looking for companies that:
  • invest in intellectual “assets”;
  • are operational in “fast-growing” markets;
  • have the most efficient operations.
Of course, this will not happen overnight, but it’s coming. It will represent a profound and challenging change of what to look for when considering long-term investing.

Therefore, it certainly can’t hurt starting in time doing your homework, which will not be easy, believe me.

In this context, Citi just released a report titled “Is China Leading the World into Recession?” wherein they explain how the world could, which doesn’t mean “it will” slide into a so-called mild recession during the second half of 2016 and that could stretch over 2017 and into 2018. The mild recession could be caused, if it occurs, by further weakening of the Chinese economy and the already weak (if not full-blown recessionary) situations in important Emerging Economies like in Brazil, for just naming one of them.

Many don’t agree with Citi’s opinion, as they consider it as too pessimistic.

To me, the proverbial “canary in the coalmine” remains the indications we continuously get from the inter-linkage of the slowdown in Chinese GDP that has decelerated from about 12 percent growth in 2010 to about 7 percent today, as stated by Chinese authorities.

Meanwhile, Chinese falling imports that are now down by about 70 percent since 2010.

Other contributing factors are the world’s merchandise trade, which was down by 0.5 percent in Q2 this year after declining 1.5 percent in Q1, and the world’s industrial production, which was up 0.1 percent in Q2 after ticking up by 0.3 percent in Q1, which was of course way too low for saving the world from a lurking recession.

These downward trends will have to reverse quickly!

We aren't in the easiest of times for long-term investing.

On the contrary, as a long-term investor, I would start preparing myself for taking all the measures, step by step, I consider necessary and desirable and that are of course doable, for “not losing money” on what I have today. I certainly wouldn’t chase for “return “now.

I still believe we haven’t seen the real bottoms (yes, in plural!) yet in broad-based markets all over the globe.

As an overall long-term investor, I would try to keep in mind Baron Rotschild's advice who said in the 18th century: “The time to buy is when there’s blood in the streets.”

Take care; this is extremely difficult to do as you have to become a real “contrarian” investor at short moments in time.

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There is no doubt we are not in the easiest of times for long-term investing.
investor, economy, rate hike, fed
Friday, 11 September 2015 12:20 PM
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