Charles Nenner looks at cycles to predict Eurozone outlook
Trouble in the European and global economies will persist for another eight or nine years, but the worst is behind us, says Charles Nenner.
Nenner has come to this conclusion based on his theory of cycles. He believes that by looking at cycles one can predict developments in the global economy and politics.
He has followed cycles for nearly three decades to predict market movements. In 2001 he founded the Charles Nenner Research Institute, which looks at cycles in equities, bonds, currencies and other asset classes.
From 2001 to 2008 Nenner has also worked for Goldman Sachs in New York and before this served as a technical analyst at the bank’s fixed income trading desk in London for several years.
The theory of market cycles was initially introduced by Joseph Schumpeter, an Austrian American economist and political scientist.
Nenner explains the idea is to predict the “interpretation of reality” by the public at a given point in time and use this to forecast market movements.
For example, Nenner says it is possible to predict the price of a stock based on the interpretation of this price by potential buyers. If buyers feel the stock is worth more than it sells for, prices will go up, and vice versa.
Applying the same theory to the situation in the Eurozone, Nenner points to the way Mario Draghi’s promise to do everything he can to support the euro improved market sentiment.
The reality in the Euro zone is also “not as bleak as people think,” he adds. He compares the situation in Europe to the budget deficit in the US to make the point that the US is in “much more trouble” than Europe.
Nenner believes Europe will outperform the US in terms of GDP growth in the coming years as focus shifts to the problems faced by the US. “My cycles show there will be a big down move in the dollar in 2014.”
As a result, he advocates buying European equities for investors keen to re-enter the equity markets. European equities are at the bottom of the cycle at the moment, so can only be expected to go up.
He picks out European countries with the healthiest fundamentals, such as Germany and the Netherlands, as attractive investment options.
He still thinks trouble in Europe will persist for another eight to nine years, but in his view the worst is over. “We will struggle through it,” is his verdict on the debt crisis.
His outlook for China, however, is much bleaker. If the Chinese choose to sell off the treasuries they hold, interest rates will “shoot up” he says.
His research shows that they will do so anyway in the three decades, he adds. He points to a chart (pictured below) which shows interest rates cycles for long bonds since 1780.
From this chart it is very clear that we are now at the lowest point in the cycle, so interest rates can be expected to rise for around 30 years from now on.
Nenner also predicts inflation will start picking up in the next couple of years, becoming a “huge problem” within around a decade.
Thus, he suggests staying away from bonds of any type, as these are the worst asset to hold in an inflationary environment.
Instead, he proposes investing in real estate as the only sure way to preserve capital. “Investors want to make returns, but it is just too difficult at the moment, because we are still in a deflationary cycle,” he says.
“If you buy real estate now it may still depreciate in price, but in a couple of years inflation will drive the prices up.”