The Center Vs. Periphery: Shifting Risk

by: Larry Trefz

As the global economy continues to deal with the aftermath of the financial crisis, it is clear that the investment landscape is much different than before the 2008-2009 crisis. For decades, the primary concern in the more developed economies was inflation. Since the crisis, the primary focus of central banks is fighting deflation. For more detail and a broader treatment of this topic please see my article: "Gold And The Super Bubble."

All of the major central banks in the world have been actively engaged in unprecedented monetary easing measures to counteract the bursting of the Super Bubble. This has caused major imbalances and far-from-equilibrium investment conditions. The Bank For International Settlements treated the subject of imbalances created by central banks in great detail in their annual report released on June 24, 2012.

To be clear, I would qualify the "center" as being those places that are perceived to be safer and less risky in the investment environment since the financial crisis. I would qualify the "periphery" as those places perceived to be dangerous and risky by investors since the crisis.

Here are some examples of the center vs the periphery:

Germany vs Greece.

USD Reserve Currency vs Other Currencies (much greater volatility is seen in the peripheral currencies vs the relatively steady USD as measured by DXY)

Creditors vs Debtors

Bonds vs Stocks

High Grade Bonds vs High Yield Bonds

Urban vs Rural

Large Corporate Retailers, such as Walmart vs Mom and Pop Retailers

These examples are clearly not all of equal weight. High Grade Bonds would qualify as the center and High Yield Bonds would qualify as the periphery (in their class) but both lean more toward the center of the investment world than other more risky types of investments--so both are potentially overvalued.

Although the U.S. has been experiencing a slow recovery from the housing and financial crisis, it has benefited greatly by being identified with the center by global investors. The U.S. dollar being the world's reserve currency has allowed the U.S. to have enormous flexibility with monetary easing while it has remained fairly stable due to global safe-haven inflows. U.S. treasury bonds have likewise benefited from the center perception. More recently, the U.S. stock market has experienced a boom, as the U.S. is perceived to be the safest place for global money to ride out the ongoing deflationary cycle.

One of the most pointed investment examples of center vs periphery is German Bund Yields vs Greek Bond Yields over the last couple of years.

The "center" seeking investment monetary flows has caused unprecedented crowding in many assets that are perceived as safe. The result has been high prices in many of these assets.

If we want to get a good deal, we may need to start looking to the abandoned and neglected periphery. It may just be that bargain basement prices have been created by the far from equilibrium conditions of the "center vs periphery" mindset that has gripped the investment world over the last few years. As with most bargains, the periphery should be approached with all the caution of caveat emptor.

Some peripheral investment ideas include:








Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.