Tags: Parisis | long-term | buying | opportunities

Good Buying Opportunities Will Come for Long-Term Investors

By    |   Tuesday, 02 October 2012 11:55 AM

As a long-term investor, I fully agree with Federal Reserve Chairman Ben Bernanke when he stated on Monday at the Economic Club of Indiana in his prepared speech: “Only a strong economy can create higher asset values and sustainably good returns for savers. And only a strong economy will allow people who need jobs to find them.”

This is in fact nothing more than good common sense. But, besides a lot of other interesting subjects he mentioned in his speech, there is one thing I have difficulty agreeing with: when he tries to reassure that the Fed has the tools to keep inflation under control after having reiterated the Fed will keep interest rates down longer than normally should be expected, even after a sustainable/good recovery takes hold.

To me, intentionally postponing any logical increase in interest rates to control incipient inflation creates serious risk of significant increases in inflation as well as inflation expectations. Of course, we aren’t there yet, but if the Fed, one day, would act like Bernanke says today (Bernanke obviously believes this time is different), investors would do well to remain skeptical and keep the option ready of protecting themselves effectively against inflation when the need comes. You know, once the genie is out of the bottle.

That said, on Monday the Institute of International Finance, which is the world's only global association of financial institutions, stated there is a non-negligible risk the global economy will enter into another recession in 2013 if policymakers in Europe and the United States don’t act quickly in addressing their financial and budget problems. For the eurozone, this means the ongoing crisis should have been resolved yesterday, and for the United States, this means the fiscal cliff should be resolved before the end of the year.

Unfortunately, at this moment, there are too many politically driven counter currents that impede any quick and reasonable solution to practically all these urgent problems that both sides of the Atlantic, and for this reason economic growth in the world, are facing. Yes, both of the most important economies (China is third) in the world are “kicking their cans down the road,” which implies continuous and endless smoke-and-mirror schemes. These policies seem to be, until now at least, some of the very few things that are performing well.

In the meantime, the most recent JPMorgan Global Manufacturing Purchasing Managers’ Index (PMI) shows global economic growth continued to deteriorate for the fourth month in a row. The JPMorgan Global Manufacturing PMI for September came in at 48.9 (a reading below 50 means a decrease compared with the prior month.) It’s important to note that the U.S. manufacturing PMI for September fell to a three-year low of 51.1, which signals only timid expansion, but expansion nevertheless.

For now, nobody knows if the United States will remain in positive territory and escape the global slowdown, whereas the European Union will remain at the epicenter of the contraction for years to come. Nevertheless, I think the coming months could bring some clarity to the answer of the million-dollar question of whether we’re heading for a recession in the United States.

For Europe, there is very little doubt bad news is most likely to continue coming. For example, Ernst & Young’s Eurozone Forecast report states eurozone unemployment is expected to continue to rise, peaking at 19.2 million, or just over 12 percent, in the first quarter of 2014, while only coming down to 11.4 percent in 2016. Long-term investors should also take notice that Ernst & Young sees the euro effective exchange rate dipping to 106.4 in 2015 (2012 is expected at 115), which translates to $1.12 per euro in 2015. Today we are at $1.29 to $1.30 per euro.

Yes, long-term investors should take their time because good buying opportunities will come, no doubt about that, but we aren’t there yet, not by a long shot. Today’s market prices are completely disconnected from reality and fundamentals. Of course, that’s my personal opinion and I don’t have a crystal ball.

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Long-term investors should take their time because good buying opportunities will come, no doubt about that, but we aren’t there yet, not by a long shot. Today’s market prices are completely disconnected from reality and fundamentals.
Tuesday, 02 October 2012 11:55 AM
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