This is the monthly letter of Mr. Frank Zinnecker who is an advisor to our bank and the manager of the fund HAIG Return Global. This newsletter represents his personal view and may, or may not, coincide with the view of Banque Thaler.
The Continuous Erosion of Investors Confidence II
The fear of deflation in connection with a renewed recession has again driven not only US long term investors’ into flight to safety. As already witnessed in the month of June they have continued to liquidate equity holdings and have returned the proceeds into lower risk treasury bonds, even at these historically low yield levels. This cautious attitude has also spilled over to the European markets and even more so to Japan, where this malaise has existed for much longer than a decade and with no end in sight. These trends are even more concerning as the US reporting season of second quarter earnings has generally been extremely good and much better than predicted. It also has been the case in Europe, where the economic recovery under the lead of Germany has been in full swing until now. Looking beyond 2010 it becomes more and more obvious that these countries together with Asia and South America will be able to economically decouple from the USA. It definitely lowers the risk of a recession which until could not totally been ruled out.
It is not the present uncomfortable condition of the US business cycle with poor inventory, housing and unemployment figures that is worrisome. It is the allover concern that the US government and the Congress together with business are no more able to congregate and act together, at a time where it would be absolutely necessary. The single centers of power seem to be too much employed with them, be it President Obama with his various agendas, the Congress in view of the November elections and the managements of the multinational financial and industrial companies in respect to the rising existential challenges of the steadily progressing globalization. The historically strong democratic forces and the pragmatism of the American society that over the course of the last century have built the strong and healthy America seem to have been fading after the break down of the Russian communistic empire. At its place a certain public perplexity seems to have crept in today. Another round of monetary easing by the fed is definitely not the right answer to the solution of the outstanding problems. It is the government - and I repeat myself - that has to take fiscal action vis-à-vis the allover modernization of the American infra structure. It does not produce goods, but it creates jobs and income!
The various financial markets have already responded under the leadership of the USA. The bond markets unanimously have given the answer predicting the collapse of inflation. Government bond yields through all maturities have achieved new lows and the run into these “save” investments has been even more intensified through the repatriation of fortunes into the home markets of the USA and Japan. It also explains the renewed strength of the US Dollar, the Yen and the Swiss Franc against the Euro and other European currencies. Greece still is not yet out of the way, although there are certain signs that the Greek government is seriously working on the resolution of its financial problems. The strength has forced US American and Japanese export companies to hedge the foreign currencies. The ongoing hedges tend to increase the upside pressure and at the same time effect further falling import prices, which by nature is deflationary.
This of course has not been good news for the equity markets. The large US institutional investment companies have been plagued with redemptions of national and foreign equity positions over the course of recent months setting the tone for again declining stock prices all over the world. The Korean and Indian stock markets, which recently achieved new recovery highs, have so far been an exception. The still overwhelming US American dominance in the world equity markets just prohibits a decoupling, although the earnings progress of many globally operating companies still is on trend, even in a somewhat slower growing world economy in 2011. Equities have become relatively cheap and attractive for long term investors in terms of valuation and dividend yields. Strategically, however, they will further stay on the sidelines as long as the fundamental long term outlook for the world economic growth remains pessimistic. Tactically they are worried about the historical statistics of the negative equity performance of the months September and October. The technical research and the media have been full of that and it is already public knowledge. The allover pessimism seems to have reached such a low and could therefore have been already priced in to a great deal. Why should the surprise not be on the upside this year and the investment community would then have been fooled again as so often witnessed in recent times? May it be as it is any major dips from this point, however, should favor equities over bonds, which technically are totally overbought.