In the European Union (EU), the European Central Bank (ECB) is the institution that administers the monetary policy of the eurozone member states, giving it great power as a world central bank. Headquartered in Frankfurt, Germany, the ECB was established in 1998 by the Treaty of Amsterdam. As one of its primary tasks, the ECB controls and issues the currency of the EU; the euro. Mario Draghi is the current President of the ECB.
With nine months behind us this year, today we look at how two popular forms of investment have done in 2014 and where I think they are headed for the remainder of the year.
Starting with stocks, the Dow Jones Industrial Average closed yesterday up 2.8% for the year. Given the risk of the stock market, 2.8% is no big gain. I wrote at the beginning of 2014 that the return on stocks would not be worth the risk this year. I was on the money. When we look at the broad market, the Russell 2000 Index is down 5.4% for the year.
Going forward, as you know as a reader of Profit Confidential, I see stocks as risky. Plain and simple, stocks are overpriced in an environment where the Federal Reserve is putting the brakes on paper money printing and is warning that interest rates are going higher.
On a typical day, I see the Dow Jones up 100 points; the next day, it’s down 100 points. This is happening in an environment where trading volume has collapsed. I wouldn’t be surprised to see October deliver us a nasty stock market crash.
Moving to gold (and this is very interesting), gold is flat for the year in U.S. dollars. But if we look at gold in Japanese yen, gold is up 4.6% for 2014. If we look at gold in Canadian dollars, bullion is up 4.6% as well this year. And if we measure gold in euros, we find gold bullion prices are up 10.4% in 2014.
What explains this?
Yesterday, the U.S. dollar hit another six-year high … Read More
We are hearing more and more about interest rates getting ready to rise. The Federal Reserve itself has said it expects the federal funds rate to increase to 1.5% by the end of next year and to 2.25% by the end of 2016.
Before the Fed came out with its forecast, I was writing about how the Fed will have no choice but to raise interest rates because inflation is rising too quickly.
And I have been reading what clueless reporters and analysts are writing about how gold bullion prices don’t perform well in a high interest rates environment. I want to set the record straight for my readers.
Shattering the myth about the high interest rates, today’s rates are still very low compared to the historical average. In the chart below, you will see the changes in the Federal Reserve’s federal funds rate since 1980.
Chart courtesy of www.StockCharts.com
Over the past five years, the benchmark interest rate set by the Federal Reserve has all but collapsed to zero. Moving rates to 2.25% by 2016 will have a significant impact on the economy. But at 2.25%, over the long-term, it’s still a very low rate. Prior to the financial crisis of 2008 and 2009, the federal funds rate stood above five percent.
Bringing it back to gold bullion, if you are old like me and remember the early 1980s when interests were very high, you will also remember gold bullion was trading at a then-record high of more than $800.00 an ounce, or about $2,500 in 2014 dollars.
The higher interest rates went then, the higher gold bullion went. … Read More
In 2012, I predicted that if the Federal Reserve couldn’t get the economy growing again, it would take interest rates into the negative zone.
Well, yesterday, the European Central Bank (ECB), the second-biggest central bank in the world, trumped the Fed and became the first major central bank to offer depositors negative interest rates.
What does “negative interest rates” mean?
Each night, major banks in the eurozone collectively deposit USD$1.0 trillion with the ECB. By cutting its overnight rate to negative, these banks will end up paying the ECB to hold their funds.
The ECB hopes that instead of getting a negative return on their money, the major banks in the eurozone will start lending their money out to borrowers, which will get the economy in the eurozone moving again.
This won’t work. Here’s why:
1) Preservation of capital is the most important thing for banks in the eurozone. If they can deposit their $1.0 trillion with the ECB, even if they have to pay for the safekeeping, it’s a more secure move than lending money to businesses that are still far too risky because the eurozone economy is far too weak. The government regulation of opening and running a business in the eurozone is overwhelming.
2) If the eurozone banks are getting a negative return on their money, how can they possibly pay savers a return on the money they have sitting in the bank? Yes, savers are punished once again with this latest central bank move.
3) Smaller countries like Sweden and Denmark tried negative interest rates during 2009 and 2012; they didn’t work in stimulating those economies…. Read More
When we asked our readers what they enjoy reading the most on Profit Confidential, less than 10% of them said they like to read about the eurozone. We understand it’s not a topic of interest with the majority of our readers, but I can’t stress enough that what’s happening in the eurozone right now is very critical to the U.S. economy.
American-based companies have massive operations in the eurozone and generate significant portions of their sales from the region. American companies are already struggling to post revenue gains in 2014. If the economic slowdown in the eurozone continues, American companies’ revenues will be pressured further, and that means lower corporate earnings.
While giving its 2014 outlook during it first-quarter earnings release, Caterpillar Inc. (NYSE/CAT) said, “The Eurozone economy is recovering but is far from healthy. The ongoing decline in business lending, slowing inflation and recent strengthening in the euro are all concerns. The unwillingness of the ECB to take more aggressive actions risks leaving the economy struggling for years. Continued weak growth would make it difficult for businesses to maintain existing operations, let alone make new investments.” (Source: “Caterpillar Reports Higher First-Quarter Profit Per Share and Raises its 2014 Profit Outlook,” Caterpillar Inc. web site, April 24, 2014.)
But when you listen to the mainstream media, they are saying the opposite of Caterpillar; they are saying the economic slowdown in the eurozone is over. I think they are completely wrong.
And the situation with “bad debt”—the reason the eurozone got into trouble in the first place—is getting worse, not better, as debt-infested countries like Spain and Italy are seeing … Read More
From our recent reader survey, I see our readers are not that concerned about what happens in the eurozone. But there’s a phenomenon occurring there that I believe every investor who is interested in gold bullion should be aware of.
Let me explain…
It’s a known fact that when central banks print more of their paper money, it’s usually bullish for the yellow metal. We saw this after 2009, when the Federal Reserve started to print more paper money; gold bullion prices skyrocketed.
In the eurozone, there continues to be major economic problems in the region. Italy, the third-biggest economic hub in the eurozone, has reported its unemployment rate hit 13% in February—the highest unemployment rate ever recorded in the country. (Source: Reuters, April 1, 2014.)
To help countries like Italy, Greece, Spain, and Portugal with their economic woes, the European Central Bank (ECB) has lowered its benchmark interest rate—but that hasn’t spurred bank lending as bad debts on the books of major eurozone banks keep piling up. Even once-strong eurozone countries like France are under economic scrutiny.
Now, as no surprise, the ECB has started talk about following the same route the Federal Reserve has taken—printing paper money.
At a conference last week, one of the ECB’s Executive Board members, Yves Mersch, said the ECB is ready to turn on its printing presses. The president of the ECB, Mario Draghi, has also said quantitative easing in the region may be needed if inflation in the eurozone continues to remain subdued. (Source: Reuters, April 7, 2014.)
Hence, to the printing presses of the Federal Reserve, the Central Bank of Japan … Read More
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