Make No Mistake — the Federal Reserve Has No Choice

By Mitchell Clark, B.Comm. — Ahead of the Street column

There’s a lot of investment risk in global capital markets, and it isn’t going away anytime soon. Fundamentally, sovereign deficits and debt represent the greatest risks to investors going forward. This issue continues to have the potential to be a confidence crusher and could be the catalyst for another global financial crisis.In addition, there are a lot of issues with China these days. There is no doubt that the real-estate market in China is in a bubble, and nobody wants to see it burst. If it does, then the rest of the world will feel its effect. Then there’s the issue of China’s currency, which seems to be artificially low compared to other global currencies.

If this isn’t enough, there is the impending inflation/interest-rate cycle that is about to reverse itself after about two decades of trend

As we all know, capital markets don’t like uncertainty, and there’s a lot of it to go around right now. In my view, policymakers should be talking a lot more about sovereign debt and ways to reduce annual deficits. This would go a long way toward settling the nerves of institutional investors who are still nervous about Greece.

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As investors and consumers, I think that we all need to be prepared to hunker down and get our financial positions in shape. Debt is going to become a hot-button issue when short-term interest rates take off next year, and those with too much leverage are going to be in a pickle. The economy could also be in a pickle in that the very stimulus that is now being applied (reduced interest rates) is quickly going to change. This could serve to keep the economy growing in a lackluster state. It is probable, in my view, that the Federal Reserve will not have any choice about interest rates. The marketplace won’t let it going forward.

From an investor’s perspective, I think that a really conservative stance is warranted. You can be playing with U.S.-listed Chinese stocks, but make no mistake that when the tide turns in China, it’s going to be a tidal wave for equity investors here. Chinese stocks — especially speculative Chinese stocks — move in a group, and when the bubble bursts in Chinese real estate, it will also burst in equities.

I like domestic large-caps now, and I like large-cap technology the most. I like a little bit of oil, and I like a little bit of precious metals. I suppose you could say that I just like the Dow Jones Industrial Average.

First-quarter earnings are expected to be strong. This is no big surprise. What will be a surprise in the not-too-distant future is the fervor with which the Federal Reserve must raise interest rates. Global capital markets will settle for nothing less, so we have to prepare for this eventuality now.