Tags: Parisis | eurozone | risk | off

Stay on the Defensive as Lots of Data Coming Soon

By    |   Tuesday, 04 September 2012 10:56 AM

Last Friday, at the Federal Reserve Bank of Kansas City Economic Symposium at Jackson Hole, Wyo., Fed Chairman Ben Bernanke told us in fact what we already knew. That the Fed, if needed, is ready to act again in one form or another with further quantitative easing.

Interestingly, Bernanke also stated the effects of “nontraditional policies” on economic activity and inflation are uncertain and certainly cannot neutralize the fiscal and financial risks the United States is facing.

The stagnation of the labor market is a grave concern because persistently high levels of unemployment will wreak “structural” damage on the U.S. economy that could last for many years. In this context, the monthly employment numbers that are due on Friday will be very interesting to see.

Let's hope they will allow us to do some “guess” work on what the Fed could decide or not decide at its next Federal Open Market Committee meeting on Sept. 12 and 13.

Believe me, the week of Sept. 12 could really become an interesting one, not only for what will happen in the United States, but also because what will take place in Europe.

First, Germany's Constitutional Court will let us know whether the crucial eurozone financial rescue fund, called the European Stability Mechanism, and fiscal pact can go forward. If yes, which normally could be expected, the question is under what conditions.

Second, in the Netherlands, the Dutch will vote for a new government that could very well oppose austerity and reject the pro-discipline EU treaty known as the Fiscal Compact.

Finally, the European Commission is expected to unveil plans for a EU banking union.

In the mean time, most of us are looking for what European Central Bank (ECB) President Mario Draghi will tell us this Thursday about his proposed EU bond-market intervention at the press conference that will follow the ECB’s Governing Council meeting.

Already, German Finance Minister Wolfgang Schaeuble has warned against placing too much hope in Draghi’s non-standard, bond-buying plans that consider the purchase of EU sovereign bonds of up to three years’ maturity by the ECB. Keep in mind that whatever proposal(s) Draghi announces on Thursday, it must fall within the central bank’s mandate that aims for all price stability. No, the “European Economic and Monetary Union 2.0” is not here yet, but as they say, they are moving in the right direction.

As a long-term investor, I try not to confuse hope and wishful thinking with reality. So, don’t be surprised if markets get somewhat disappointed on Thursday, as has happened so many times before.

For what it’s worth, yesterday, Moody’s Investors Service changed the EU’s Aaa credit rating outlook from stable to negative, stating “the EU's rating is particularly sensitive to changes in the ratings of the four Aaa countries with large contributions to the EU budget, i.e., Germany, France, the UK and the Netherlands.” These four countries together represent 45 percent of the EU’s budget revenue.

While all this is under way, it becomes clearer by the day that most of the important world economies continue to slow further down, with the eurozone definitively in recession territory and worsening.

One of my favorite EU leading coincident growth indicators is the EuroCOIN indicator from Banca d’Italia and the Center for Economic Policy Research. The EuroCOIN indicator, which is a proxy for eurozone gross domestic product growth, fell in August to its lowest level in more than three years and the current reading is at a worse level than the average during the first wave of the crisis was.

Anyway, in the markets there is a lot of unfounded hope sloshing around. By the way, no one from anywhere in the world has a plan. Watch out when disappointment comes in.

I will remain on the defensive and stick with “risk off” as long as it takes because time is not my enemy. But I will be ready. Of course, everybody has to decide for himself or herself.

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Tuesday, 04 September 2012 10:56 AM
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