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Don't Count on Past History When You're in Uncharted Territory

Don't Count on Past History When You're in Uncharted Territory
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Friday, 10 June 2016 10:12 AM Current | Bio | Archive


When Bill Gross tweets, the market listens.

 



Gross is fund manager at Janus Capital, but who is best known as co-founder of Pacific Investment Management Company, commonly called Pimco, an American multinational investment management firm that had $1.52 trillion in assets under management as of June 2015.

It's not a bad idea for long-term investors to also take notice of what he is saying.

To put Mr. Gross' message somewhat in context, and according to Bank of America Merrill Lynch, the average yield of the global government bond market now stands at a record low of 0.67 percent while.


Besides that, and according to Fitch Ratings, the total value of negative yielding sovereign debt now stands at $10.4 trillion or $10,400 billion, which is simply mind boggling and at the same time irresponsible if we still believe we continue to live in a capitalistic system.

Adding to all that, Goldman Sachs estimates that a sudden 1 percentage point rise in U.S. Treasurys, which is on the cards let’s not forget that, that small rise alone has the real potential of causing a catastrophic loss of about $1 trillion in the markets.

Such a loss would substantially exceed the losses that were caused by the price collapse of the mortgage-backed bonds that represented a very important part of the “Subprime mortgage crisis,” which caused the U.S. recession of December 2007 – June 2009, and that caused globally the great Financial Crisis from which the world hasn’t completely recovered yet. 

The world will need boatloads (yes, in plural) of luck and central banks’ policy convergence and not divergence as actually is the case, to come out of this extremely dangerous situation with only limited and therefore bearable damage, which in my opinion, will be practically impossible.

I’m afraid, it’s all a question of when, which is extremely difficult to define accurately, but, unfortunately, it is not a question of if.

Long-term investors could do well trying to re-position their portfolios or at least part of it, so that losses should be limited the day the unavoidable shock to the financial markets will occur and, as long as it takes, put aside chasing returns. Believe me, that will be extremely difficult to achieve, but I think, it’s certainly worth a try.

In context of all the above, Mervyn King who was Governor of the Bank of England from 2003 to 2013 describes today’s investment environment as a world of radical uncertainty. 

Therefore, long-term investors should better approach any investment very pragmatically for the very simple reason that when you don’t know what the future holds, as is the case today, it is practically impossible to calculate or seriously estimate (not wishful thinking!) an investment plan that should secure you, at least for a good part, a satisfying and achievable return.

The situation wherein we are today also doesn’t permit anybody relying on past data because we are in a world that has never been experienced before.

Mr. King also stated: “And I am very struck by the fact that over many years, central banks, governments and individuals have always, despite the protestations of economists, held some gold in their portfolio. Obviously, there is no high running return, but when unexpected things happen, particularly when governments rise and fall, then gold is a means of payment that everyone is always prepared to accept. And I think that’s why even central banks have always had a role in their portfolios for gold.”

Maybe, it could be wise for any long-term investor to think about Mr. King’s words and, perhaps, give gold a role, even a small one, in his or her portfolio. It doesn’t matter if we are talking about a big or a relatively small portfolio.

The only thing I would like to add is never to buy gold when everybody is buying gold, and, if possible, never buy all at once, but try to accumulate progressively.

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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The situation wherein we are today also doesn’t permit anybody relying on past data because we are in a world that has never been experienced before.
investors, gold, economy, bill gross
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2016-12-10
Friday, 10 June 2016 10:12 AM
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