Monetary Turbulence

Pfäffikon SZ, Switzerland – Many investors may not realize enough that we are still in one of the major financial shock waves. These waves sometimes last for decades with nasty unexpected aftershocks. What can we expect in a continued period of unprecedented monetary experiment?

Inflated
Investors would do well to take note of roughly two inflated investment environments. The first is the bond market and the second is the highly overvalued real estate industry, where that of China is most imagination. The cost to get money are simply too low and chases the risk further upwards. Prices are too high related to the current inflation. In an economy that has a relatively low unemployment rate, an interest rate of 3.5 to 4% would be a normal level; you know what the interest rate is doing now.

The above situation will sooner or later – and often unexpected – brought back into balance. Policymakers do everything to smoothly guide this process but may grossly fail in doing so. The Fed has pumped huge sums into the economy, but it has stuck with the commercial banks. Therefore, a panic scenario regarding inflation did not take place yet. That this moment will come closer rapidly is a ‘no brainer.’

Successful
QE1 and QE2 were successful programs for which former Fed Chairman Ben Bernanke deserves all the credits. He has brought peace and tranquility in a very hectic period. But now there has been an overkill of liquidity, which has become a global problem. Monetary turbulence lies ahead, and where significant currency shifts will be a result. A preview of this scenario, we have recently experienced with the British pound.

Currency shifts give investors – rightly – chills. The most likely scenario is that the dollar will continue to attract, what is extremely bad news for the world’s largest economy. The probability of monetary turbulence is increasing daily and should be seen as an extremely nasty aftershock within the timeframe of the most recent financial wave. The potential risk for many investors has further increased, with more and more top investors worldwide saying warning words and operating extremely reluctant.

Oddly enough, I believe that banks, in particular, will benefit from the upcoming rebalancing. They will profit most of an increase interest rate and ditto inflation as their margins will go up. This does not alter the fact that great reluctance among investors is desirable in the current era. Monetary turbulence is in no way priced in by the financial markets.

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 above mentioned shares and has no intention of doing so in the next 72 hours.