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(Half) Full or (half) empty?

July 6, 2013

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This week, while America celebrated its independence day, political turmoil in Egypt caused the price of oil to move above $103 a barrel. Aside from that, US employment numbers came out better than expected pointing to 195.000 new jobs created in America in the past month while the trade deficit balloned last month. The stock market rallied a little and bonds sold off further as less QE is now expected to come from the Federal Reserve as soon as September.

On the surface, the jobs number did appear to be positive yet the details were less glorious. Apparently, 240,000 full-time jobs were replaced with even more part-time work at minimum wage levels. The core unemployment number stayed at 7.6% while the U6 number that includes the underemployed and discouraged workers climbed from 13.8% to 14.3%. Below, you can see the stagnant development in manufacturing jobs versus the booming job market in (part-time) restaurant/bar employment.

Restaurant and bar employment USA

While it is great to have lovely restaurants and bars it is obvious that value should be created first before being consumed as discretionary income. This imbalance between production and consumption grows on a daily basis and I would encourage you to revisit where you can find out the current stats broken down on many levels. If the likes of Paul Krugman are correct, this Fed induced “party” will continue indefinitely and we will all be able to play and not pay. My understanding of cause and effect is different but time will be the judge of that philosophical difference.

Financial markets

It is interesting to talk to folks about the financial markets because most assume that the glass is either (half) full or (half) empty and that the future is either black or white. This dogmatic view on markets is probably the most dangerous flaw that most of us intuitively carry within. So, here’s my take on the cups and the future. The distinction between the glass being half full and half empty is irrelevant in finance. All that matters is how much liquid is in the cup and the market tells you that every second of the day. As for the cup being emptied or filled(the future), most of the time the assumption of extreme imminent outcomes are very improbable and bear in mind, no markets move in one direction all of the time, indefinitely. If that were to be the case, it would be impossible to match buyers and sellers at any price.

Having said all of this, let us look at the global markets at the current moment. With the exception of the US and Germany, equity markets globally are rather weak reflecting a desire to stay out of the economic woes of struggling economies. Given the fact that German and American debt yields very little, the allure of high quality equities in those countries is rational. We also observe a strengthening of the dollar consistent with weak global growth, something I expect to intensify in the short term. The possible indicator of trouble ahead is the price of oil which reflects growing problems in Egypt and Syria. Needless to say, if energy prices spiral out of control, it could tip even the perceived safe havens into decline. However, the gold price is trending lower, a sign of less distress in the markets given the inflationary monetary agenda by global central banks.

The Fed and the American markets

Let’s return to the glass analogy. Consider the bartender to be the central bank and as of now it is pouring one drink after another and hoping to keep the crowd happy. The short-term future of the financial market will likely be decided by Federal Reserve actions in September. Given the rosy economic assumptions that Bernanke has expressed over the years(see below), he may actually start to print less money than he currently does. It will be rather interesting to see the reaction to such policy change should he dare to go ahead and “taper”.

Federal Reserve economic projections


Bundeskanzlerin Angela Merkel

As for the European safe haven, Germany, I expect the election in September to be crucial in determining the future of the EU and the euro. Southern Europe is once again on the edge of disaster economically and needs “help”. It is too early to say what exactly will happen this fall but I am very confident that something will. Let us hope it’s a benevolent outcome.

Is the cup currently half empty of half full?

That question can not be answerd in financial terms as there are different situations for different people and countries. Considering that bread prices have doubled in Argentina in the past 12 months , Italy’s “economic” suicide rate is through the roof and the political present/future of Egypt is uncertain, life may be better or worse for some than others. Financial markets are merely a mathematical reflection of reality whether we like it or not. Time to refill my coffee cup and Cheers to all of you!


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