FYI | Nov 25 2011
by Peter Switzer, Switzer Super Report
The predicament we investors find ourselves in is reminiscent of Woody Allen’s take on the Cold War where the threat then was a nuclear war. He said: “More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us hope we have the wisdom to choose correctly.”
The European Union (EU) is now at a crossroads and the path it chooses could have a massive bearing on what happens to the global economy, financial markets and our wealth-building portfolio of assets.
The last time I reported on the economic and market outlook I was chancing my arm, not on my training as an economist or on my 30 years of economic, financial and business commentary or on my 20-odd years of personal investment advising and education, but on what politicians might decide to do!
I’m not trained for this and deciphering politicians makes investing in stocks like what we see at the track, where our lack of knowledge and the many variables from crooked jockeys to temperamental horses turns it all into a big punt!
The Germans were given a big wake-up call on Wednesday — and it was overdue — when they were forced to pay over 2% for trying to sell their 10-year bonds. This poor bond issue now puts pressure on the longevity of the euro and should force the Germans to accept a Ben Bernanke-style role for the European Central Bank (ECB). This will help reduce interest rates for EU governments and add to money supply. It could also help European stock markets head up because it will shorten the continent’s expected recession.
Recently, some of the confidence I had in my last economic and market update has weakened with the US economic growth reading for the third quarter coming in at 2% rather than 2.5%. Other economic stats, such as durable goods orders, were softer than expected, but consumer sentiment was higher at about 64 in November when economists expected roughly 60. I think the Yanks are still on the improve and only a serious fallout in Europe could heighten the chances of a recession in the States.
Meanwhile, the failure of the US Congress’s super committee to outline new budget cuts is a problem, but I don’t think it’s a derail factor for the economy and Wall Street.
Over to China and the latest manufacturing numbers tell us that the country’s attempt to slow down growth and inflation has worked, but the question is: has it worked too well?
The recession troubles in Europe will hit China because the EU is its biggest customer. This, along with our lower interest rates, explains why the Aussie dollar is now around 97 US cents and is heading lower. Locally, I expect another rate cut in December if this market negativity persists and therefore the chances of a Santa Claus rally for stocks now rests with the EU and particularly the Germans.
This market slide can be arrested if we see the overdue ‘shock and awe’ from the EU, but if we don’t, the number of investors sitting on their hands, safe in cash, will escalate and share prices can only slide.
I would like to confidently predict that European officials will get their act together, but the historian in me, as well as my poor qualification as a punter, means for me that what happens to stocks in the short-term is all guesswork!
In the long-term, history says stocks go up and that’s why I will be a buyer of stocks soon, but I play a long game based on buying quality stocks at bargain basement prices, if they are available.
I am hoping that the EU gives the ECB the chance to nuke their problem. It will take guts, but that’s what leadership is all about!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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