People Have 'Huge Disbelief' in Government: CIO
A big risk for markets is the fact that faith in the US government's ability to fight the economic markets, as well as in central banks' monetary policy tools, is eroding, Steen Jakobsen, Chief Investment Officer at Litmus Capital Partners told CNBC Friday.
More quantitative easing will follow, in the US as well as in Europe and Japan, but the Federal Reserve and its chairman Ben Bernanke will prefer to wait until after the November mid-term elections, Jakobsen added.
"The fact of the matter is that people have a huge disbelief in government," he said.
"The real crisis 2.0 is not about the new normal or whatever term is being used, the new crisis is a crisis of faith in the US system. We're far away from that point now but that is a clear risk," Jakobsen said.
US stock markets fell Thursday on worries about the economy following a series of disappointing numbers.
An anticipated gain for the job market which turned out to be a loss re-ignited economists' worries about the direction the US economy is going to take.
Because people are losing faith in the governments' ability to bring the economy back on track, the impact of various policies is smaller, while keeping interest rates at record lows has altered investors' perception about what this actually means for the market, Jakobsen warned.
Investors no longer perceive low rates as good for stock markets because they create liquidity, but as a sign that a slowdown in economic growth is coming, he said.
Jakobsen predicts zero or even negative growth for the US economy for the third and fourth quarters.
With expectations of more quantitative easing well anchored, the best place to be in for the short term is stocks, according to Jakobsen.
"The market has this belief that every time the market is down 5-10 percent you should buy… it would be naïve for me as an investor to sit here and think that Bernanke is not going to do anything, the ECB is not going to do anything, the Bank of England is not going to do anything," he said.
"I think we have a self-fulfilling prophecy in the sense that we are going to get lower rates whether we want it or not because we're just into that mode now, the momentum is that way," Jakobsen said.
Central banks will have to pump money into the system because the velocity of money is low, so they need to increase the monetary base, according to Jakobsen.
"This market has not seen a true deflation, so people don't truly understand the true risk of deflation," he said. "When you have deflation, having debt on your balance is a tax on your business."