German Yield Curve Inversion Will Signal A New European Recession: Would Germany Then Leave The Euro? An Exclusive Interview With Edward M. Dempsey Of Pension Partners
September 6, 2011 - The Wall Street Transcript has just published Large Cap Core and Investing Strategies Report offering a timely review of the Asset Management sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Edward M. Dempsey is the Founder and Chief Investment Officer of Pension Partners, LLC, a registered investment advisor which employs a proprietary macro-driven approach to asset allocation for its clients. For over 20 years, Mr. Dempsey has provided professional management and advice in the areas of pension planning and investment management. He has built a reputation for being an alternative manager able to position client portfolios in ways that traditional Wall Street firms don't in an effort to continuously maximize the amount of time and capital spent in potentially outperforming investments. His clients include principals of closely held businesses, high net worth individuals, executives of large corporations and small endowments. Mr. Dempsey is a Chartered Financial Consultant and Certified Financial Planner. He is also a Member of a number of industry associations, including the Society of Financial Service Professionals and the Institute for Investment Consultants.
TWST: What about the outlook for the euro, and how is that situation impacting your investment strategy?
Mr. Dempsey: What keeps me awake at night is the scenario of having a Lehman-type event in Europe, the failure of a bank, while I sleep. Unlike 2008 where Lehman happened in my country, in my language and in my time zone, because the risk is over there and not over here, I'm now hostage to events I don't have a complete understanding of.
If I'm a believer in buy and hold, and fully invested in markets, I could wake up and find my account down substantially before the U.S. exchanges even open. So now what do I do? Is it a time to buy or should I sell? If I don't sell, then I go to sleep on the same overseas news cycle and find out what happened when I wake up the next day. So it's a real, real problem for most investors.
If you get a Lehman-like event, all bets are off, not only for the euro but also for gold. You can easily see gold top $3,000. You can see the 10-year Treasury pushing towards all-time lows. Investors may be positioning for this by the way.
The German yield curve is beginning to invert. Yield curves should be positively sloped if all is well since it reflects healthy demand for money. When you get an inverted yield curve, it is a very reliable harbinger of a coming recession. It reflects concerns of an economic slowdown and deflationary period. So now you can have a scenario where if Germany enters recession, and given that Germany is the strongest link in the euro chain, what happens to Greece, Italy, Spain and Portugal? In that kind of a scenario, German public support for the euro can very, very quickly evaporate. Everyone is worried about Greece being kicked out of the euro, but what if you wake up and Germany says, "We are out of the euro"? I don't believe that is outside the realm of possibility.
As far as where we go from here, we're now entering the political season, which really makes it a very tenuous time because you get people saying all sorts of things to get attention. It seems obvious that the loss of the U.S.'s AAA rating will likely be blamed on President Obama as Republicans try to make it an election issue.
If Democrats are worried about losing the election because of that, it means they may implement more government spending cuts, more austerity. You are not going to get the AAA back in a low-growth environment any other way. If the election is about austerity, then that means a reduction of government spending, deflation and a difficult environment for stocks to make new highs.
If those are the conditions the U.S. is going to operate in, then the Federal Reserve will likely start queuing up QE3 through 30. That could mean you see an absurd move in stocks, say with the Dow trading at 25,000 some time beyond 2012. You'll also have a $6 cup of coffee, but you'll see Dow 25,000. Should that be the case, the U.S. dollar would collapse relative to the euro, assuming that the euro is still in existence. So we have to be very tuned in to what is happening and which way money is positioning.
TWST: What does it mean to you to be risk off?
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