The insufficient job creation, stagnant earnings and alarming long-term unemployment highlighted by May's disheartening jobs report underscore America's persistent unemployment crisis. The numbers also speak to a synchronized slowdown that is now taking hold of the global economy -- a phenomenon that is being signaled by virtually every other data release out of Europe, the U.S. and emerging countries.
The realization of lower global growth, together with increasing financial instability in some parts of the world (particularly Europe), is an important driver of the recent sharp selloff in equities and other risk assets. It has also turbocharged the collapse in yields on higher quality government bonds, with the 10-year U.S. bond at a record close of 1.46 percent on June 1 (and Germany even lower).
To state the blatantly obvious, the best investor positioning for the last few weeks was an across-the-board defensive, "up in quality" one. The much more difficult (and urgently relevant) question on many people's mind last week is whether this still makes sense -- particularly in view of the dramatic valuation moves.
Already, several analysts have come out recommending that investors react to the recent selloff by significantly adding risk assets to their portfolios now. And those who favor this "mean reversion" approach, a theory that assumes highs and lows are temporary and that prices will eventually move back toward the mean or average, cite historical levels to support their recommendation. They see enticingly cheap price-to-earnings ratios for stocks to unsustainable low yields for government bonds.
They would be right if history does indeed provide a good guide to what constitutes "fair value" at this moment in time. And in extrapolating from what has been to what is and will be, investors are advised to consider four issues as they confront one unthinkable scenario after another.
Europe, the world's largest economic zone and a highly interconnected one, is stumbling from bad to worse. The fundamental issue here goes well beyond the usual questioning of whether the euro zone will have an ugly recession (it will) and policy makers will intervene again (they will).
The construct of Europe is in play. This adds meaningful risk by supplementing the usual credit, intertemporal and policy components with convertibility, settlement and complexity risk premiums.
The second factor involves the unusual level of political dithering and bickering which, in some countries (e.g., Greece), has led to heightened disillusionment and rejection on the part of citizens. This serves to undermine responsive policy making and exposes economies to new threats.
While Europe is again the most obvious example, it is far from the only one. America's unusual level of political dysfunction/polarization has resulted in policy paralysis; it will also expose the country to the possible disruption of a "fiscal cliff."
Third, with some segments in the global economy still highly indebted and not growing properly, ugly deleveraging dynamics are re-imposing themselves. The longer this persists, the lower the probability of a much-needed "safe delevering."
Central banks could once again intervene through their experimental combination of exceptionally low policy rates, unusual policy communication and additional balance-sheet purchases. But there is growing recognition that this policy bridge is only effective if other policy-making entities are both able and willing to get off the sidelines. Regrettably, there is little evidence that this will happen any time soon.
Finally, the risk of a synchronized global slowdown requires a coordinated global response. Yet there is no conductor to speak of. The U.S. has lost an important part of its global leadership role. The G7 and IMF lack legitimacy and credibility. And the G20 is still working on its operational effectiveness.
All this speaks to continued uncertainty and volatility -- economic, financial, political and social. Since the world starts naturally long risk assets, we could well see more investors seeking less risky asset allocations, including cash in what they deem as "safe jurisdictions." In the process, valuations -- for bonds, commodities, currencies, and equities -- could well diverge for a while from what many deem to be historically fair valuations.
As Will Rogers is said to have observed decades ago, investors should be concerned with the return of their money and not just the return on their money.
For more information, including the analysis and findings, please go to http://media.pimco.com/Documents/Secular%20Outlook%202012_Global%20Final.pdf
Cross-posted from CNBC.com.
Abby Huntsman: Obama Has Some Explaining to Do
We need to turn off our computers and spreadsheets and apply some pragmatic common sense:
1) SWINDLING & CON-ARTISTS: The bigger the number is, the more people believe in it and the less it is true.
2) HIGH CRIME: What "Ike" Eisenhower called "untoward influences." Governments consist at their core of well-connected insiders in very small numbers. High Crime is inevitable; is euphemized, and unpunished.
3) NATIONS: Hundreds of millions of people collectively working for their common defense and prosperity. The only "real" thing. Not dependent on "banker's books."
Banks will not lend at lower rates.
Business Debt rates stay at 5-6 %. No gain from lower rates, you can't have them.
System seems broken. Ester George says, "Call Your Insurance Company" !
Wait and see what happens. Hunker down despots. The French, Spanish, and Greeks have way more behind them than inherent numbers. They have worldwide CITIZEN support.
Trillions of Dollars disappear from World Markets !
OPEC Countries have Machine where you can buy Gold Bars .
Do you have to be slapped with a Rubber Chicken ?
You attack their Religion and they withdraw all their Money ! DUH !
http://www.rockypeakfunds.com/
Readers, what our bought-sold-and-paid-for (by the banks) web pundits and economic analysts such as Mohamed will NOT tell you is the truth: that the root causes of our problems are deep, yet simple:
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
--Henry Ford
A little info never hurt, for "understanding" as Henry Ford calls it.
The award-winning documentary film, "The Secret of Oz" provides honest, eye-opening discussion of the root cause and (very importantly) solutions to our nation's and the world's economic problems. Precisely the info the "fat cat" 1% from Wall Street/IMF want the 99% Main Streeters to remain ignorant of.
The Secret of Oz: http://www.youtube.com/watch?v=swkq2E8mswI (Winner, Best Docu of 2010)
Excellent further resources to open eyes are: (1) Ellen Brown's recent and popular book “Web of Debt”, (2) the earlier “Creature from Jekyll Island” by G. Edward Griffin, and (3) the book that first probed: “Secrets of the Federal Reserve” by Eustace Mullins. The third one's the true eye-opener...
More great info at http://www.monetary.org
Thank you, and Enjoy.
The problem is there are way too many political decisions that lead to depression, and way too little consensus between politicians to solve the problems. In every case the debt problems are eminently solvable. Even in Europe but also in the U.S. the solutions all require increasing taxes to a level that pays the bills. Yes this will hurt some people - likely the very wealthy. But they do not determine whether we go into a depression or not, in every case the middle class and poor make that determination. When they stop buying, when they start hoarding, when they get so worried they change their habits - then the depression begins. And there is nothing the wealthy and big corporations can do but sit and watch their assets drop in value.
And they know it. And the lack of consensus when things are sitting on the edge, is a prescription for falling off the edge of the cliff.