Here’s a guess about what the Fed will say Wednesday following the FOMC meeting. There is no justification for another formal QE program, so I would be very surprised if one were announced (rather than hinted about). The two main reasons for this view is that the major crisis is in Europe, and the U.S. Federal government is having no problem financing the deficit sans QE. I tend to expect both of the following: extension of ZIRP (projected) perhaps until mid-2015 (i.e. three more years) and extension of Operation Twist for perhaps three months.
Next, I’d like to pontificate and engage in some speculation about investment themes. Please note that much of this is forward-looking!
By now, the investment community knows that Spain is toast. The public does not fully appreciate this, perhaps, so there may be more downside stock action as this thesis is demonstrated. The last domino to fall in Western Europe is Italy. This will be Spain and then some, since Italy is bigger. Watch for a crescendo of horror as Italian banks are revealed as insolvent. Mish had some articles over a year ago from a source who alleged that Italy’s national government has done some significant off-balance sheet financing. If this is true and not generally known, watch out for truly scary headlines.
The solution will, as always, be some combination of austerity and unsterilized money-printing. This will likely lay the groundwork for silver to hit my long-term target of $100/ounce, but the up-move in commodities prices cannot really begin until the global economic slowdown/regional rec(depr)essions gives way to some sort of panic bottom (my prediction). This cannot happen with the VIX (“fear index”) at 20! And of course, that long-term price target for silver would imply that gold would have long since left $1764 and $2111 behind.
In the meantime, while the Feds could let Lehman go amidst the sea of troubles they faced, I cannot “see” Spain or Italy going down the tubes in a disorganized way. “They” know that the world as we know it could truly be threatened by such a major event. As with the Russian hyperinflationary insolvency in 1998, one can expect some bank, hedge fund or other company to “unexpectedly” go belly up amidst the carnage involved in restructuring the governmental-banking nexus of two major countries, but so it goes…
With all this, my guess is that the U.S. and to a lesser degree China will remain economically stronger than most of Europe. The U.S. will, in this scenario, benefit from extraordinarily low interest rates, the continuing benefit of decreasing domestic costs of natural gas and fracked oil (plus cheaper imported oil costs), and price stability. That is of course in addition to its (our) other geopolitical and economic advantages. Further, the wind-down of the war in Afghanistan will remove costs from the Federal budget and will be a good thing economically.
Given the historically low interest rates that now prevail in the United States, I have sold all my Treasurys and replaced them with some combination of utility stocks, leveraged muni bonds funds (e.g. NIO and NVG), and a growing dollar amount of shares of dividend-paying ultra-high quality multi-national U.S.-based corporations. These companies are all at least as strong financially as AA- rated sovereigns, have unique business and technological models, and are cheap on a P/E and prospective 3-5 year price projection basis using conservative, slow-growth or even no-growth macroeconomic assumptions. With one exception, these are all strong free cash-flow generators with lots of ability to raise their dividends even in a global recession, and the dividend yields are in general well above those of the benchmark T-note.
(I generally keep matters thematic on this website, but in coming days I will be getting into detailed discussions of the merits of individual stocks I either own or have interest in at my trading blog at www.econblogreview.blogspot.com. I don’t necessarily post daily there, so if you have any interest in that sort of post, you may wish to add the site to an RSS-type feed.)
As in the U.S. post-Depression, and as in Japan since ZIRP began, after interest rates have taken a large decline, as they have in the United States in the past year, certain global equities out-perform bonds on a multi-year basis. The key to that outperformance is the compounding of earnings and dividends, which over time means that day-to-day price fluctuations even out. In these difficult times, where so many poor investments have been made during an era of easy credit, it becomes more and more difficult to challenge these market leaders.
I’m anticipating a turbulent hurricane season in the global economy, but the older I get, the more I want to own value when I see it rather than be scared off by the terrible but almost always transient terrors that could occur should 2008′s worst moments get repeated. Though I am keeping a non-trivial amount of cash reserves…
OK! Now that the above is in print, let’s see what really happens…