Tags: Russia | Putin | US | Crimea

History Doesn't Repeat Itself, But it Does Rhyme

Tuesday, 18 March 2014 11:18 AM Current | Bio | Archive

While we'll have to wait until Wednesday to finally hear what new Federal Reserve Chair Janet Yellen will say in her very first press conference after this week's two-day Federal Open Market Committee (FOMC) policy meeting. With what we know today, it looks like there won't be that much new on the agenda and the $10 billion of tapering each month of the Fed's bond-buying program should go forward as expected.

On Monday, we got encouraging data on U.S. industrial production, which bounced back to an increase of 0.6 percent, which was better than the 0.3 percent increase expected and up from the upward revised 0.2 percent contraction in January, thereby confirming the slowdown at the beginning of the year was for the most part caused by the extremely bad weather conditions in large parts of the United States. This should normally be sufficient for not scaling down the planned $10 billion cut of the Fed's bond-buying program.

Nevertheless, the press conference could become interesting because of what Yellen will say about how she sees the employment situation and what should be taken into account and what the Fed could do to create a "better" employment-generating environment, including her take on wage increases, as well as how she evaluates inflation expectations. I hope the press conference to become really enlightening and take away the many doubts that are still out there.

In the meantime, in my opinion at least, the United States remains on its path, albeit still too slowly, to recovery, notwithstanding somewhat weaker data as of late.

In the context of what's going on globally and what's probably more important from an investor's standpoint is the fact that the United States is much more economically "in-vulnerable" than the European Union is if the ongoing Ukrainian situation would deteriorate significantly in the near to median term, which cannot be fully excluded albeit the probability that to happen remains very slim.

Meanwhile, Russian President Vladimir Putin has recognized Crimea as an independent state and has approved a draft treaty that paves the way for the Republic of Crimea's accession into the Russian Federation. In a speech Tuesday to the Russian parliament, the Duma, Putin confirmed that Crimea and Simferopol would become part of Russia. He also said Russia doesn't want the Ukraine to become part of the Russian federation. I personally don't believe Putin. Of course, his words can only be judged by his deeds. So, we'll have to wait and see.

That said, I still think the negative impacts that a widening of the Ukrainian crisis, which is strictly spoken an exogenous event to the European Union, could easily derail the European Union's still fragile recovery, because its economical impact and costs could be far greater than many investors seem to be willing to consider so far.

It's really fascinating to see in the mainstream markets, especially in Europe and the United States, the defining feature of the price activity has been an absolute search for "premium" and yield irrespective of crystal clear, at least to those who've remained realistic enough, perceivable economic and/or political risks.

To me it looks like we are in a somewhat similar environment than the one we experienced in the summer of 2007, when real estate investors in the United States continued to take on big and fully irrational risks despite all the obvious warning signs blinking red at that time.

Then came of course June 22, 2007, when the investing community learned the New York-based investment firm Bear Stearns pledged a collateralized loan of up to $3.2 billion to bail out one of its own funds, the Bear Stearns High-Grade Structured Credit Fund, which in the end proved to be exactly the moment in time we entered an 18-month-long global financial crisis that brought the world as a whole extremely close to a total economical and financial collapse.

Investors should also keep in mind that during that summer of 2007, the yield spreads between the core and peripheral euro area government bonds were very close to zero.

Today we aren't that far from some kind of a similar situation in spreads among the yields of core and peripheral euro area government bonds, which is of course unjustifiable for fundamental economical and financial reasons.

We all know what happened thereafter when the European Union's "smoke and mirrors palaces" suddenly shattered and markets put their attention back to "realities."

Interestingly, for the European Union it was precisely the completely "exogenous" event of Bear Stearns' problems that brought the European Union to its knees and from which it hasn't fully recovered yet.

History doesn't repeat itself, but it does rhyme . . . and that doesn't bode well when we consider the Ukraine crisis because, as we have seen in the past in Georgia, only Putin knows what he is going to do.

As an investor, I prefer to remain extremely cautious.

Yes, there are unknown "Black Swans" out there in and related to the Ukraine. Be prepared for the unexpected. Complacency is, at least for the moment, far too dangerous.

Investors would do well remembering that only on March 4 Putin told reporters Russia was not considering annexing Crimea.

Everybody can make the conclusion for themselves.

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Investors would do well remembering that only on March 4 Putin told reporters Russia was not considering annexing Crimea.
Tuesday, 18 March 2014 11:18 AM
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