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This Isn't the 'Best of Times' for Long-Term Investing

This Isn't the 'Best of Times' for Long-Term Investing

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Wednesday, 23 September 2015 08:19 AM Current | Bio | Archive

Although he obviously wasn't trying to describe the current investment environment, Charles Dickens couldn't have captured it better than in his 1859 classic "A Tale of Two Cities."

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."

Turning to market data, the Caixin/Markit flash China manufacturing PMI for September came in at 47.0 for September, down from 47.3 in August, which was its lowest level since March 2009 when the global financial crisis was still causing economic havoc.

In addition, the sub-index on manufacturing output came also in at a lower level than expected at 45.7 in September, down from 46.4 in August, which is also a 78-month low.

The PMI, output, new orders, new export orders, employment and output-and-input prices all decreased at faster month-on-month rates.

Wang Zhixuan, secretary-general of China Electricity Council said China’s electricity consumption (a key indicator of economic activity) is expected to grow only by 2 percent in 2015, which would be at its slowest pace in 17 years.

Electricity consumption grew by 3.8 percent in 2014, by 7.5 percent in 2013, by 5.6 percent in 2012 and by 11.9 percent in 2011.

During the first half of 2015 power use rose only by 1.3 percent.

Knowing manufacturing sentiment data are close-to-100 percent correlated to real, as well as to nominal, manufacturing activity, the latest data indicate China’s real growth is set to weaken further below the “official” 7 percent reading.

Such weakness in China could push global growth, especially in emerging economies, into “recession” territory, which is when global growth goes below 2 percent.

China’s slowdown shouldn’t be underestimated at all. It could become a major risk event.

When I compare the summer and early autumn of 1998 with what we have seen today, there are striking similarities between these two moments.

By July 1998, the dollar index as measured against the major currencies was up by about 27 percent since its low-point in April of 1995 while the Dow Jones was up by about 150 percent since its intermediary low on November 13, 1994.

On July 21, Fed Chair Alan Greenspan gave a rather hawkish semi-annual Humphrey Hawkins testimony.

By way of comparison, Fed Chair Janet Yellen on July 15 gave her semi-annual testimony. At that moment, the trade weighted dollar index against the major currencies was up by 35 percent since May 2011 while the Dow Jones was up by 70 percent since October 2011.

In 1998, between July 21, when Greenspan gave his testimony, and August 31, the Dow moved down by close to 18 percent and then rebounded until September 28 when the Fed hiked rates by 0.25 percent.

Please take notice that most of the damage to the stock markets and the dollar, which was down by 10 percent on October 16, was caused when the Russian government decided on August 27 to devalue the Russian ruble, to default on its domestic debt and to declare a moratorium on payment to foreign creditors.

Since Yellen gave her testimony on July 15, the dollar had gone nowhere until China decided unexpectedly to devalue its currency (CNY) on August 11. Between July 15 and August 25, the Dow Jones did fall about 13 percent and then the Dow peaked last week, precisely on the day before the FOMC decided not to hike rates.

Interestingly, in 1998 we had the hedge fund management firm named Long-Term Capital Management disaster that caused a bailout organized by the Fed.

Today, we have the China devaluation and the huge Volkswagen scandal, for which literally nobody knows at present how high the damages could amount for Volkswagen.

This combination has provoked a sudden jump in broad-based risk aversion.

Please don’t read me wrong. and I’m not saying it “will,” but I wouldn’t be surprised if today’s succession of events, which look very similar in various ways to the 1998 events, could give us some kind of a preview how events could play out from now and into 2016.

Turns out that maybe this isn't "the best of times" for long-term investing.

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HansParisis
Although he obviously wasn't trying to describe the current investment environment, Charles Dickens couldn't have captured it better than in his 1859 classic "A Tale of Two Cities."
investors, markets, economy, fed
786
2015-19-23
Wednesday, 23 September 2015 08:19 AM
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