Bright Spots for Investment After the Storm Has Hit

Excerpts from Dr. Enzio von Pfeil's July 15, 2009, appearance on CNBC Asia Cash Flow :

US data PPI and Retail numbers were released overnight - how do they match your outlook for the economic recovery?

• PPI: I assume that they will remain soft, in line with America’s Economic Time®, suggesting a clear excess supply of goods.
• Retail sales: the same story applies. Don’t forget the large structural shift from “C” (Consumption) to “S” (Savings”). That is going to favour fund managers running emerging markets and bond funds.

You have a bearish outlook for the financial markets. What investment strategy should investors be taking during these beleaguered times?

• Fear must exceed greed at this stage of Economic Time®.
  • This means that if one is in stocks, then only invest in those of a very defensive nature.
  • The same applies to bond sectors.
  • Currencies: the USD is probably going to play “safe haven” even if we will be seeing sparks fly from the US economy.

What asset allocation would you advise?

• The bulk of one’s money should be in short-dated fixed income instruments.
• If you are dollar-based, then stay there; if not, then stay in your home currency.
• Stocks have to be in the most defensive of sectors, e.g. consumer staples, utilities and the like.

Stimulus packages - have they run their course? Should governments be pump priming further?

• They have not even begun running their course in America.
  • So far $60 bn in spending and $43 bn in tax relief has hit the streets.
  • This accounts for 13% of the $787 bn package.
  • Remember that the stimulus package is just five months old: stimulus spending and tax cuts simply cannot restore a feel good factor within five months, especially when people know that unemployment has to rise in this “jobless recovery.”
  • Indeed, a case could be made that the current stimulus package is just preserving current jobs and not adding new ones; this is one reason why a new stimulus package is being mooted.
• In China and thus in Hong Kong, the same applies: nobody really knows what “RMB 4 trillion” in stimulus means. All that we do see is that bank lending is racing along far too quickly, and that the government, therefore, is scared and wants a “subtle change” in monetary policy.
• In Europe, the social welfare state tends to shield people from the savaging of incomes experienced particularly in America. But the result has to be higher taxes down the road.

What are some of the bright spots on the horizon?

• Once market crashes in bond and equity markets have occurred, the worst is behind us and one can load up.
• Inflation is not an investment-relevant theme for a long time, given that the global Economic Time® is characterized by an excess supply of goods and, therefore, any recovery will be of “jobless” nature.
• The American consumer will shift his/her behaviour to one of saving instead of consumption. This suggests that low short term rates are set to stay for a long time, suggesting an excess supply of money. That is good for markets in that the monetary arm of the Economic Clock® will stay stuck in the "excess supply of money" quadrant.