Tags: US | ECB | Russia | NATO

The US Is Where Economic News Remains Positive, But That Doesn't Mean All Is OK

By    |   Tuesday, 02 September 2014 09:50 AM

It's really interesting to see how markets have remained complacent and in fact have not reacted to the undeniably rising geopolitical risks, especially those caused by the further escalation of the situation between Russia and the Ukraine. In fact, Ukraine Defense Minister Valeriy Heletey noted, "A great war has arrived at our doorstep, the likes of which Europe has not seen since World War II."

This week, NATO holds its largest gathering ever of NATO Heads of State and Government at a summit in the United Kingdom. It has put the crisis in Ukraine and NATO's relationship with Russia on top of its agenda.

At the meeting, the 28 NATO member countries will be asked to endorse the creation of a 4,000-men strong rapid-reaction force (land-sea-air) capable of deploying on only 48 hours' notice. That force would be supported with logistics and equipment that would be pre-positioned in those Eastern European countries that share borders with Russia and/or were part of the Soviet Union.

To put it simply, I don't think it's an overstatement to say the first chapter of a new "Cold War" saga is already written, and, unfortunately, that will not be supportive for stimulating growth mainly in Europe, which desperately needs all growth it can get, but also in Russia and other places.

In my opinion, the United States will be much less vulnerable than its European counterparts will be. The only thing we now can hope for is that the first chapter of that saga will be the final chapter, but I'm afraid there is very little probability that will be the case.

By the way, Italian Foreign Minister Federica Mogherini, who is the newly designated EU High Representative, announced that the EU Ambassadors would take new sanctions against Russia by Friday.

Last week, Russian President Vladimir Putin made a belligerent statement in a phone call with outgoing European Commission President Jose Manuel Barroso saying he could take Kiev in two weeks if he wanted to. I'm sorry but that doesn't look good to me.

Besides all that, the Eurozone Purchasing Managers' Index (PMI) for August were far from was encouraging, but long-term investors should always take care interpreting some of the absolute levels of these PMI numbers.

On Thursday, the European Central Bank (ECB) Governing Council will meet in Frankfurt, Germany, and ECB President Mario Draghi will hold a press conference where I think he will give his rationale why the ECB will continue to avoid quantitative policy while the ECB will continue to seek other methods to expand the ECB's balance sheet, which would without any doubt disappoint many market participants.

In the context of this, maybe it would be good to remember what German Finance Minister Wolfgang Schaeuble told Bloomberg that "liquidity in markets is not too low, it's even too high. Therefore I think monetary policy has come to the end of its instruments."

One should also not overlook the fact that Sabine Lautenschlaeger, former vice-president of the Bundesbank who is now member of the executive board of the ECB, clearly remains stuck to the Bundesbank brief that certainly doesn't see the economy as a whole like the Federal Reserve does. Lautenschlaeger is mostly in line with German Chancellor Angela Merkel's financial ideologies, and might remind the markets of Germany's wariness of further radical proposals by the ECB.

All that said, the United States is where the news on the economic front remains positive, but that surely doesn't mean all is OK. Friday the all-important monthly non-farm payrolls number will be released. On Tuesday, the Institute of Supply Management's manufacturing index will be released, which could give us a hint of how the number on Friday could turn out, and on Thursday we'll have the international trade numbers and the weekly jobless claims, which are all very important data.

Now, if all these numbers come in good, I certainly would remain prudent when I'd have to make investment decisions. These days long-term investment advisors' bearishness is practically at a multi-decade low.

In my opinion, the moment of the start of rising rates that will begin in the United States sometime in 2015 (probably earlier than most think), and probably also in the United Kingdom, is rapidly approaching. Once that happens, it will cause damage, which means losses, albeit at various degrees and at various speeds, in a very broad range of investment categories, with extremely few exceptions, in all economies around the globe.

Former Federal Reserve Chairman Alan Greenspan recently gave a sobering warning saying the United States lacks the resources to adequately respond to external shocks like a foreign relations crisis or climate change event.

No, that doesn't bode well for investors. As Henry Kissinger wrote in The Wall Street Journal recently, "The concept of order that underpinned the new era is in crisis."

My preference remains dollar-denominated vehicles.

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It's really interesting to see how markets have remained complacent and in fact have not reacted to the undeniably rising geopolitical risks, especially those caused by the further escalation of the situation between Russia and the Ukraine.
US, ECB, Russia, NATO
Tuesday, 02 September 2014 09:50 AM
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