Tags: Japan | China | US | crash

Don't Buy the Dips, as Downward Process Could Take Years

Tuesday, 23 July 2013 10:42 AM Current | Bio | Archive

So, the first ever G20 Finance and Labor Ministers' meeting, which was held in Moscow, concluded over the weekend without the members reaching any agreement on post-2016 numerical targets for public debt reductions. The numbers that were put forward by the participants only reflected so-called "budgetary plans." By doing so, they missed the opportunity to establish a trustworthy base for building the confidence that the G20 countries finally were starting to become serious about bringing their debt down in the long run.

Besides the usual carloads of talks and wishful thinking exercises, the only real, but nevertheless extremely small, positive that came out from the G20's final statement revealed that the G20 likes economic growth and likes lower unemployment, but that was about the only part everybody agreed on!

Laughable, but at the same time very worrisome, is the fact that the world faces about $350 trillion in "debt," including $200 trillion in debt plus an estimated $150 trillion in unfunded liabilities, which represents no less than 4.8 times "total" 2012 world gross domestic product (GDP) that will have to eventually be repaid, canceled or even definitively written off (bailed-in) in one way or another.

For 2012, the World Bank estimates total global GDP at about $71.7 trillion, compared with $70.4 trillion in 2011. This confirms the slowdown we've been experiencing globally since 2011 to nearly stagnation, but many optimists are saying we've bottomed out. Only time will tell if they (hopefully) are right.

Japanese Prime Minister Shinzo Abe's governing coalition won a majority in the Upper House, or the House of Councillors on Sunday, but didn't win the two-thirds majority he would need to change the constitution. The big question now will be what will happen to the absolutely needed fiscal reforms, which include, of course, the historically infamous consumption (sales) tax hike that has been promised to be raised in April 2014.

Putting the hot potato of the time bomb of "agricultural reforms" aside for the moment, I can't overlook the turmoil Japan experienced in 1996 and 1997 when the Prime Minister Ryutaro Hashimoto raised the sales tax by only 2 percentage points to 5 percent. This caused a monstrous debacle whereby the country started its long and profound slide into the crisis to which it now, thanks to "Abenomics," will try to emerge in a sustainable way.

The only thing I'd want to add at this moment is that I wish them good luck, because they are going to need it. Talking down the Japanese yen, which will be absolutely necessary to raise inflation, will not be sufficient, that's for sure. No, Japan, economically speaking, is certainly not out of the woods yet.

Remaining in the Far East for a moment, in China on Monday, the official Xinhua News Agency reported Premier Li Keqiang as saying that economic growth must be kept above 7 percent, because that's the bottom line of the government's tolerance in order to maintain labor market stability.

It's interesting to note that Li hereby actually confirmed what Japanese Finance Minister Lou Jiwei already first stated in Washington two weeks ago, but which was immediately officially corrected as a misstatement by the Minister of Finance.

Besides that small detail of the Chinese way of synchronization of their official statements in reverse, it remains clear that the "new" politburo doesn't want social tensions that would unavoidably come together with rising unemployment. It is also good to take notice it doesn't want asset bubbles to continue developing. I don't know if the 50 new airports they are now building will be one day be part of the bubble they want to avoid.

Anyway, in clear English, all that means is Chinese leaders confirmed the economy continues slowing and won't be accelerating anytime soon. No, China won't be the growth engine for the world as it has been in the past.

In the United States last week, Moody's raised the country's sovereign outlook to stable from negative and affirmed its triple-A rating, citing steady growth despite reduced government spending. Moody's also said the federal government's debt trajectory is on track and is in accordance with Moody's criteria it laid out previously, even, and that's interesting, without further budget measures from Washington. By the way, for now, Standard & Poor's is the only one of the three major rating agencies that rates the United States below the triple-A benchmark at a double-A plus.

On Monday, the Chicago Fed National Activity Index, which is a weighted average of 85 indicators of national economic activity, confirmed the United States continues growing at slightly below historical trend, but nevertheless improved a little bit to -0.13 in June from -0.29 in May.

Employment added 0.06 point, up from neutral in May, to the broad measuring index, thereby confirming June's 195,000 non-farm payrolls rise. It will be interesting to see what non-farm payroll number will come out next week.

In the context of how I see a long-term investor could allocate the bulk of funds today, I want to reiterate that I still expect the markets to correct in the foreseeable future. The new historical highs that are achieved on low volume don't represent strong fundamental value to me.

In my opinion, one should try not to be naive and realistically admit markets are "trading" at deliberately manipulated asset prices, which, of course, is not a trustworthy base for long-term investing as it, among a lot of other things, doesn't provide any guarantee of being based on solid fundamentals like marginal returns with respect to capital or labor.

What really destroys any form of confidence in the current market prices, and what any long-term investor should take into account, are the actual margin debt numbers, as for March, April and May, margin debt was $92.22 billion $105.89 billion and $86.79 billion greater, respectively, than the sum of cash plus credit in all accounts, by far the highest numbers ever registered at the New York Stock Exchange.

If you want a recipe for disaster, well this actual situation is one that will find its place in the history books.

The moment we experience a serious correction, keep in mind it will start against a deflationary environment. Anyway, notwithstanding all the optimism that's around, I still see troubling broad similarities falling in place, piece by piece, similar to what was seen during the crash period of 1928 to 1932.

Bond prices topped in 1928 and reached their crash bottom in 1932. So far, bonds have topped in 2012. Stocks started their way down in 1929, which was a year after the bonds started their downfall in 1928 and that stretched until 1932.

The question to me is if stocks will finally start their way down this year or if it will be next year. Nevertheless, whenever that's the case, one should be prepared to keep away from buying the dips, as the whole downward process could easily take some years. Of course, that's strictly my personal view and I don't have a crystal ball.

For the moment, I'm in no hurry to consider broad-based, long-term investing options and my preferences still remain concentrated on the United States and U.S. dollar-denominated Treasury/cash equivalent instruments.

About gold, I still expect lower prices and would only start to consider buying at or below the production cost of the precious metal.

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For the moment, I'm in no hurry to consider broad-based, long-term investing options and my preferences still remain concentrated on the United States and U.S. dollar-denominated Treasury/cash equivalent instruments.
Tuesday, 23 July 2013 10:42 AM
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