The Game of Musical Chairs
Pfäffikon SZ, Switzerland – Slowly, the ECB is changing direction to unknown financial waters. The Fed sets the tone in the U.S. The last company of the economic game of musical chairs is a fact. To find a good chair when the music stops is becoming increasingly difficult. Central bankers determine the music. Meanwhile, investors seem not to be at all worried and are extrapolating the effect of extremely low-interest rates.
Recession
Trading in the world is under pressure for quite some time and shows a negative picture. This has never happened without being followed by a recession. The previously indicated ‘earnings’ recession now shows a decline six quarters in succession. Previously, in 1991, we already saw a similar situation, in which investors initially paid no attention to the ever-declining revenues of businesses. Investors also seem convinced that they are right and join the game of musical chairs. The increased price of oil is seen as a party; however, this will just pave the way for a recession.
Interest Rate
In my view, it is unlikely that the Fed chairperson – Janet Yellen – will soon increase the interest rate. Indeed, the latest figures on U.S. employment are disastrous and would also be an advantage for China. In this case, China possibly will be forced to devalue its currency, and that is not what the U.S. is calling for. Moreover, a possible devaluation of the Chinese currency anyhow a concern this year. The relative calm around the large country is only temporary.
QE
The Fed ended its monetary easing in 2014 (QE). It is no coincidence that ever since the S&P 500 shows a sideways pattern. The correlation between the inflated balance sheet of the Fed and the increased S&P 500 is striking. The gross domestic product (GDP) of the U.S. has hardly benefited of all maneuvers; this explains why the man in the street is left out in the cold. In Europe, Mario Draghi of the ECB is implementing a copy of this policy.
A side effect of this approach is that weak companies can mask a lot because of the extremely low-interest rates. In general, a company goes bankrupt when the debt burden is too high, but nowadays these companies are sometimes able to raise cheap money. It would not surprise me if, in particular, the energy sector will be faced with some requisite defaults. Shell ––the cornerstone of many Dutch portfolios–– is currently suffering a debt of $ 70 billion.
The financial game of musical chairs is in full swing. The equity investor who wants to buy attractively will have to be patient, but will be well rewarded. And when the time comes, he must still feature strong nerves and have done his homework.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above mentioned shares and has no intention of doing so in the next 72 hours.
