As I have been saying there is no risk of high inflation for at least two years. It does not mean that the situation will change after that but instead it will depend on whether or not the economy and financial systems have been stabilized.
Let's hear what Mr Jean-Claude Trichet, president of the European Central Bank, had to say, and he is the only banker that I think can be listened seriously - the other are just reckless and only aim to make a quick fortune, rip off investors and shift the risks to their client and finally to the taxpayer-.
So Coming back to Mr Trichet, - after a few seconds anti stress banker punching- ...
As you know, the ECB has reduced the interest rates to 1,5% which is historic, it has never been so low - that tells you how serious is the situation-. The ECB has as well hinted that they will continue decreasing the base rate: my guess is that they will push it to 1% this june and they will wait at this level for a quite long period.
Here is the fact that make think they have not yet finished with rate cuts:
"As I said, we did not decide ex-ante that we were at the lowest level. If justified by facts and figures, if some of the risks that I mentioned are materialising, I clearly won’t rule out the main policy rate being changed, indeed going down. That is clear."Let's examine key points of the ECB statements:
"Overall, inflation rates have decreased significantly and are now expected to remain well below 2% over 2009 and 2010.
This outlook for inflation is due to the fall in commodity prices and diminishing domestic price and cost pressures, reflecting the severe downturn in economic activity."
So you can expect to have interest rates to stay at 1% for until at least end of 2010. They cannot add more debt on top of an ever growing debt burden in a deflationary environment.
"Looking ahead, the Governing Council expects that both global and domestic demand will decline in 2009 but thereafter recover gradually.I suppose they ought to be optimistic for 2010. You cannot hide the fact that 2009 will be the worse economical episode witnessed since a very long time. They denied it last year, now they state the fact otherwise they will lose their credibility.
This assessment is also reflected in the March 2009 ECB staff macroeconomic projections for the euro area, which place annual real GDP growth in a range of -3.2% to -2.2% in 2009, and between -0.7% and +0.7% in 2010."
Having said that I have to highlight that the ECB has had a very good track record on their economical forecasting (contrary to the finance ministers around the world, which after all are political branches, that mislead openly their client i.e the citizens).
Of course it supposes that the measure they have taken and government stimulus around the world, are the right one and see their effect in 2010.
So 2010 will be a key year , such as was 1990, 1980, 1970 ... 1940, 1930 etc... looks like every decade the lesson learned vanish to be replace by greed and fanaticism...you can't help it, it is the human side.
Of course the ECB will fight hard the fact that they will achieve price stability, which in our context mean, the risk of deflation:
"We are looking very carefully and constantly at the possible risk of deflation.I still think that the risk of a deflation spiral is far bigger than the contrary hence the reason that central bank around the world have cut rates to around ZERO percent (UK,US,Japan, Canada, Switzerland etc...)
The conclusion of the international institutions in general is that such risks are very minimal in our case.
And one of the reasons why they are very minimal is that, to substantiate deflation, not only inflation on the basis of the CPI observed during a sufficiently long period of time must be negative but must it must also drive inflation expectations themselves to be negative, so that you have the downward spiral that characterises deflation."
In such conditions, investing large amount of money in one asset is foolish, risky and could jeopardize your stress balance.
I would like to highlight that most probably, the stock market will start a rally (from Monday?) for few weeks if not months, so maybe there will be a good opportunity for small investment and make some small profits - not taking big risks. This is the opinion of an amateur and this is no way a recommendation to be followed (see you bank adviser...sorry, better to avoid them...maybe ask the taxi driver or the barber, they might not know more but at least they are honest and not interested in sucking your capital). It is just an idea, a speculative one.
But bear in mind, the stock market has not yet bottomed and who knows when it will. The stock market up to now has already priced a very bad 2009 amid massive deleveraging, and has price a bad 2010. So my guess , is that the stock market will rally with the view that 2010 will not be as bad...but to only to be deceived and will continue its bloody correction at some point..so the reversal could be quite fast so the risk in being in the stock market.
In any case, cash is king. Staying away from any investments is probably the best strategy for the time being if you are risk averse and do not understand the stock market. And personally I will never invest more than 30% of my savings in stocks or anything else.
This crisis is far from being finished and interest rates cut will not be the cure.
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