Latest thoughts by PIMCO’s Kashkari.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” – Chuck Prince, CEO of Citigroup, July 2007.
This infamous quote from the then-CEO of Citigroup appropriately outraged many people because it suggested that large banks knew their actions leading up to the financial crisis were risky, but they lacked self-discipline. They felt compelled to continue to increase risk to try to drive their stock prices higher. They said they hoped regulators would restrain the market as a whole, so no one bank could be criticized for excessive caution. They sought short-term gratification even if they had doubts about the long-term effectiveness of such risk-taking.
Today equity investors are facing a similar situation. As I discussed in my prior Equity Focus, “Three Years and Counting,” equity investors have enjoyed strong returns over the past three years due in part to the Federal Reserve’s massive monetary intervention via its quantitative easing programs – QE1, QE2 and Operation Twist. While QEs have made some headline economic data temporarily look better and pushed asset prices higher, we at PIMCO don’t believe liquidity alone can engineer sustainable, real economic growth in the context of a secular deleveraging cycle. In fact, we believe there are costs and risks associated with such easy money, and Federal Reserve Chairman Bernanke has acknowledged some of those unintended consequences. As taxpayers and citizens of the global economy, we fear that the costs and risks from further quantitative easing could outweigh the benefits, and it will not, by itself, lead to sustainable growth. But as investors working to help our clients meet their investment objectives, we acknowledge that equity portfolios would likely benefit should the Fed keep the music playing a little longer.
Super Mario swings the sledgehammer. ECB will do whatever it takes. Let’s see for how long this works this time. From Bloomberg.
European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc.
“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.”
After the Second World War Germany evolved to a strong economic power and exporting nation.
Yet the debt crisis and the euro crisis both injured the giant – but how bad is the level of debt today and what damage could it cause?
Get a glance at the aftermath and the latest developments.
Must see infographics below, courtesy Ge Vestor.
Guest post by Lance Roberts of Streettalk Live.
For some time now we have been warning about the danger to portfolios given the deteriorating fundamental, economic and technical backdrop in the markets. Our warnings, for the most part, have been ignored as individuals continue to chase stocks in hopes that “this time will be different”, and that, somehow, stocks will continue to ramp higher even though all three support legs are weakening. Currently, it is the imminent arrival of the next round of Quantitative Easing (QE) that keeps “hope”elevated, but further Central Bank intervention is unlikely in the near term leaving the markets at risk of a further correction.
My job is to analyze the trend of the data, both economic, fundamental and technical, to build a framework of possibilities and probabilities about what might happen soon. Like any good poker player before making a “bet,” which requires putting my capital at risk of loss, I want to make sure that the odds of winning are in my favor. If I am highly confident of success, I bet a lot. If not, I don’t. The same philosophy goes into managing money. Wall Street tells you to be invested all the time because that is how they make money. However, the reality is that investing is very akin to playing poker: You are making bets today based on the possibilities of some future outcome.
The reason for this framework is that I have been negative on the markets since early April. The weight of evidence has clearly been negative. While the mainstream media continues to look for glimmers of “hope”, hope is not an effective investment strategy. However, when the flow of data changes and price action becomes more constructive, my outlook will also. (Read Thoughts On Long Term Investing).