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Never Forget the Golden Investment Rule: When It's Too Good to Be True ...

Never Forget the Golden Investment Rule: When It's Too Good to Be True ...
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Wednesday, 21 October 2015 10:23 AM Current | Bio | Archive

As global economic growth remains a major worry among long-term investors, with good reason, the release of Japan’s export data didn’t give any reason for joy.

Exports rose only 0.8 percent y/y, down from 3.1 percent in August and far below expectations of 3.8 percent, which was the exports' worst performance since August 2014.

Important in context of global growth is the fact that exports to China contracted by -3.5 percent y/y after contracting by -4.6 percent in August, which was the first back-to-back decline since March 2013.

Exports to Asia declined by -0.9 percent y/y after rising 1.1 percent in August, which was its first decline in 7 months.

Again, one could ask, “Where is global growth finally going to come from?” as I did here in October 2014.

We know the main risks to global growth remain:
  • Slow growth lingering in China and the emerging markets.
  • The Federal Reserve raising interest rates.
  • The eurozone, where Greece remains an unresolved matter for not mentioning the colossal refugee crisis that has the potential of becoming an existential crisis for the single-currency union.
  • Financial-market turmoil such as in China, where stocks dropped most in a month with the Shanghai composite index losing 3.06 percent while the Shenzhen composite index lost 5.94 percent
All this points to the fact the long-term consequences of the Great Recession of 2009 continue to haunt us. That makes the challenges for long-term investing extremely difficult and risky.

It's helpful to refresh our memories with what happened once the Great Recession of 2009 was in full swing.
  • The Great Recession was triggered by the collapse of the U.S. housing bubble in 2007, which was caused (in part) by easy subprime mortgage lending. 
  • The whole debacle started in 2007 with the freeze of three investment funds of France’s biggest bank, BNP Paribas, in August 2007 because they "couldn’t fairly value" their holdings amid collapsing subprimes.
  • In September 2007, the Bank of England was obliged to bail out the British mortgage giant Northern Rock and in February 2008 the British government was obliged to nationalize the Northern Rock bank.
  • In the meantime, Brent crude oil prices increased from $53/bbl in January 2007 to $133/bbl in July 2008.
  • In March 2008 in the U.S., Fannie Mae and Freddy Mac had to be bailed out.
  • On September 15, 2008, we saw the largest bankruptcy filing in U.S. history of Lehman Brothers.
  • On September 16 the world’s largest insurance company AIG had to bailed out.
  • On September 25, 2008, the Washington Mutual (WAMU) bank was seized and then sold to JP Morgan; Finally the U.S. Asset Purchasing Program started on October 3, 2008.
  • However, it all didn’t end there. After October 2008, three major banks failed in Iceland. Also in October 2008 in the U.K., the Royal Bank of Scotland, Lloyds TSB and HBOS had to bailed out.

Maybe what investors should learn from all this is that when it’s too good to be true, it probably isn’t true.

In November 2008, the U.S. finally started quantitative easing (QE), intended to increase capital liquidity in the markets and create economic activity.

On December 16, 2008, the Fed set the target range for the Fed Funds rate at 0-0.25 percent, where it has remained until today.

In simple words, it all started in the U.S. (first wave) and it didn’t take long to cause dire consequences in Europe and the rest of the developed world (second wave) and to end up in the emerging markets (third wave).

Nobody knows when and, above all, how that’s going to bottom out and what will be the impact on the world economy.

Uncertainty about global growth is so powerful that nobody has any idea whether we are heading into the trap of “secular stagnation” that goes together with real deflation risks, or if the third wave of the crisis with its weakness in the emerging markets (EM) will be the final chapter of the Great Financial Crisis.

But, if Barclays is right and the commodity super-cycle is over, then the EM slowdown hasn't ended yet.

I think long-term investors should try to be “realists” when long-term investment decisions have to be made. Yes, that is easier said than done!

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Maybe investors should learn from all this when it’s too good to be true it probably isn’t true.
investors, stock, economy, fed
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2015-23-21
Wednesday, 21 October 2015 10:23 AM
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