Tags: Parisis | gold | uncertainty | long-term

Impossible for Long-Term Investors to Build Confidence Due to Global Uncertainties

By    |   Tuesday, 25 September 2012 02:18 PM

Speaking in Washington, D.C., on Monday, Christine Lagarde, managing director of the International Monetary Fund, warned that global growth, as regularly forecast by the institution, has continuously trended downward over the last 12 months and would likely be weaker than the IMF anticipated in July when the latest estimates are released in a couple of weeks.

Interestingly, in her prepared speech she used the word “uncertainty” seven times.

While this should not come as a surprise to well-informed investors, she nevertheless reiterated that uncertainty in the eurozone remains the greatest risk to the global economy today.

Investors should keep in mind that, according to Eurostat, Eurozone gross domestic product decreased by 0.2 percent during the second quarter after being completely flat (zero percent growth) in the first quarter. Standard & Poor’s just cut its 2012 Eurozone GDP estimate to negative 0.8 percent, down from negative 0.7 percent previously, and its 2013 Eurozone GDP to 0.0 percent growth, down from 0.3 percent previously. This would mean (technical) recession once again. S&P also sees a 1.4 percent contraction for Spain in 2013 and very weak growth in France and the United Kingdom.

That said, the second main source of uncertainty is the United States, where until today nobody really knows if current law that implies a dramatic tightening of the U.S. deficit by about 4 percent of GDP in 2013 will be amended/sweetened before it comes into force. In case nothing happens and the fiscal cliff scenario occurs, growth in the United States could easily be cut by about 2 percent, which would push the country definitively into the danger zone of stagnation or even danger of relapsing into a recession, as probably will already be the case in Europe. No doubt, if this happens, this should cause an extremely negative impact on most of the economies all over the world.

Besides all that, China and most of the major emerging economies continue to slow with no significant upswing in sight.

It’s interesting to take notice of what Caterpillar CEO Doug Oberhelman said at a mining conference in Las Vegas on Monday: “We expect fairly anemic and modest growth through 2015.” Number 64 of the Caterpillar slide presentation for the conference reads: “Our outlook on the worldwide economy: MODEST GROWTH LIKELY, BUT RECESSION REMAINS POSSIBLE. Much of Europe already mired in recession.” Caterpillar now expects to earn $12 to $18 per share in 2015, which is revised down from its previous forecast of $15 to $20 per share. Caterpillar is the world’s largest construction equipment maker and is generally viewed as a barometer for where the global economy is headed.

I don’t think it’s an overstatement to say that with all these “uncertainties” literally everywhere, it’s practically impossible for a long-term investor to start building solid confidence in what the future holds for healthy economic growth — growth that should be able to sustain itself without all these forms of massive money creation, which is in no way whatsoever backed by any form of real assets. The certainly non-pragmatic “band-aid policies” seem now the only game in town in all the important economies on the globe.

I still believe that the function of money should be: a medium of exchange; a medium of payment; and a store of value. The path today’s central banks and governments seem to prefer completely negate the third function, whereby money should also be a store of value.

In this context I’d like to come back for a moment on gold. As we all know, President Richard Nixon dropped the gold standard in 1971 and opened the era of a fiat dollar, and since that point in time, not a single important currency has been backed by gold reserve. Most industrialized economies want us to believe they try to avoid, at a cost of “whatever it takes,” deflation and therefore are willing to take the risk of debasing substantially their currencies. Please take care, this is an undertaking that will take many years, but be sure, they will reach their goal.

Therefore, I continue to believe in physical gold in real safe places. Never forget that paper gold can easily be confiscated under many forms and by any state authority in the world once the debacle of fiat money causes social, financial and economical havoc in too many places.

In my opinion, as a long-term investor I would start considering and re-adjusting my long-term investment portfolio to up to 25 percent in gold, which is because of today’s fully uncertain financial, economical and even geopolitical world. The rest of the portfolio I would allocate 25 percent in cash, 25 percent in real estate and 25 percent in dividend-paying shares of transnational companies that are not too dependent on profits generated in Europe, where the worst still has to occur, economically as well as politically. Europe could easily have to face 10 or even more years of multiple and divergent risks of recession with full depression in some of its peripheral states. Last but not least, unemployment will remain on top of the list of the causes that will damage severely and divide Europe. Of course, this is my personal opinion and I could be wrong. The end result is anybody’s guess, but you shouldn’t expect a final outcome any time soon.

Keep in mind, when building or adjusting a long-term investment portfolio, time should always be your friend and you should always try to buy on dips or corrections. This means in clear English, never buy when everybody is buying, and try to buy when the majority is afraid or isn’t able to buy. Believe me, that’s easier said than done, but it’s certainly worth trying.

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I don’t think it’s an overstatement to say that with all these “uncertainties” literally everywhere, it’s practically impossible for a long-term investor to start building solid confidence in what the future holds for healthy economic growth.
Tuesday, 25 September 2012 02:18 PM
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