Less Cylinders
Pfäffikon SZ, Switzerland – Last weekend I paid a short visit to the Netherlands for a wedding on a beautiful estate in the middle of the country. In conversation with several guests, it surprised me how easily certain age groups are entering into debt, and how easy this is facilitated. The craziness around the Amsterdam housing market was explained to me in detail, but solid arguments were missing. The zero percent or even negative interest rates distort the real economy as never before.
QE
Central bankers claim that they revive the economy with their monetary policy. Last week, I discussed productive shifts. Production figures are in general the best indicators of a vital economy. The fact remains, however, that the production increase in leading countries, such as the U.S., is lagging behind for more than five years now. It is no coincidence that these disappointing figures coincide with the quantitative easing (QE) program of central bankers.
Declining production
For the first time since 1979, the production in the U.S. is declining for the third consecutive quarter. Most central bankers dismiss this as short-term peaks in a robust picture. However, Japan proves that a low production including an extremely low-interest-rate and ditto inflation is dragging itself forward for over twenty years. Meanwhile, a large part of the Japanese stock market is nationalized.
Investments are a necessary driver of additional production. It is noteworthy that investments lag behind since the 2008 crisis. Companies use their surplus cash to repurchase shares and charity institutions think that dividend is equal to interest and step in the stock market on an ambitious level. Meanwhile, both pension funds and insurers are pushed into the wrong corner completely unjustified. This is a hard laughter for good citizens who thought to enjoy a comfortable retirement after many years.
Less cylinders
The world economic engine is running on fewer cylinders, but investors are not worried and put their fate in the hands of a few central bankers. However, it is inevitable that a period of stagnation and decline lies ahead. Ultimately, corporate profits are dependent on the real economy and not on the limitation of the number of outstanding shares. Job losses, declining pension benefits and higher insurance premiums will lead to more loss of purchasing power and defaults.
The home buyer in Amsterdam, meanwhile, thinks he sits on roses and thoroughly enjoy its fiduciary property, sometimes spiced with a paper profit. Inflating debt and exposure is a typically underestimated time-lag effect of the policy of Mario Draghi et al. in the global stock markets. On the global markets, a more or less equal picture emerge. It is striking that more and more prominent investors are ––rightly–– questioning the current market conditions. An ultimate breakdown (or multiple breakdowns) will probably be surprising, sudden, intense and huge from the current financial environment, says one of them. Apparently, nobody wants to face this.
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.
