On January 1, 1999, 11 European countries came together in an attempt to form an economic and monetary powerhouse. Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain were the first members of the eurozone.
Today, 17 of the 27 members of the European Union (EU) are part of the eurozone, the name for the collection of EU countries that utilize the euro. Over the last decade, the euro has become one of the world’s most powerful currencies, used by more than 320 million Europeans in twenty-three countries.
In 2011, the United States exported $268 billion in goods to the eurozone and imported $368 billion, making it the America’s biggest trading partner. According to S&P 500 data, roughly 14% of all S&P 500 company sales come from Europe. Not surprisingly, economic deterioration in the eurozone would have serious implications for the U.S. (Source: “Trade in Goods with European Union,” United States Census Bureau web site, last accessed December 19, 2012.)
The European debt crisis cannot be laid solely at the feet of the U.S. financial crisis. There was a build-up of debts in Spain and Italy before 2008, but it had little or nothing to do with governments. The private sector—companies and mortgage borrowers—were taking out huge loans. When southern European countries joined the eurozone, interest rates fell to unprecedented lows, fuelling a debt-laden boom.
That said, the European debt crisis became critical after the U.S. financial crisis of 2008–2009, as the slowing global economy exposed unsustainable financial policies of certain eurozone countries. In October 2009, Greece’s new government admitted the budget deficit would be double the previous estimate and would hit 12% gross domestic product (GDP). After years of uncontrolled spending and non-existent fiscal reforms, Greece was one of the first countries to buckle under the economic strain.
Fast-forward to the present, and the European debt crisis is pushing the 17-country eurozone toward recession, helping drag down the global economy. Ten European countries have already slipped into a recession. Three more have needed to be bailed out in order to avoid default.
In Spain, where the unemployment rate is 25%, there have been general strikes and civil unrest. In France, the European Central Bank (ECB) injected more than a trillion dollars to rescue three of the country’s largest financial institutions. Seven European countries have changed leadership because of the crisis, and Greece reneged on $133 billion in debts.
The chance of an economic recovery for the eurozone has been fading. With huge question marks looming over the health of some of the region’s biggest economies, a near-term rebound for the eurozone seems very unlikely. That may have to wait until 2014, maybe even later.
While Germany and France, the two largest eurozone countries, are expected to avoid recession, the euro will need to weaken in value for southern European nations to eliminate their current deficits and cut reliance on foreign borrowing, or to export enough to return to growth.
The multiple sovereign debt crises of European countries have placed pressure on the euro currency. With general high unemployment rates and anemic GDP growth, avoiding a recession doesn’t look likely.
Long term, we do not believe the euro will survive. We believe that Germany, the sole growth engine of Europe, made a mistake in joining the euro currency. And, at some point, we expect Germany to either withdraw from the 17-country eurozone or simply ask the weaker European countries to leave the euro currency.
For Americans, the struggles of Germany and the eurozone are a constant reminder of the interconnectedness of the global economy. What happens with the euro will have a profound affect on the value of the U.S. dollar and the price of gold bullion. You can find regular commentary on the euro in Profit Confidential.
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
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
When news first broke from the Federal Reserve that it would slow down the pace of its quantitative easing program, the consensus was that the U.S. dollar would start to rise in value as the Fed would be printing fewer new dollars and actually eliminating all new paper money printing by the end of 2014.
But the opposite has happened.
Below, I present the chart of the U.S. Dollar Index, an index that compares the value of the dollar to other major world currencies.
Chart courtesy of www.StockCharts.com
As the chart clearly shows, the dollar started on a strong downtrend in July of 2013. When I look at the dollar compared to individual currencies like the euro and British pound, the picture looks even worse.
The common belief since the Credit Crisis of 2008: when there’s uncertainty, investors run towards the safety of the U.S. dollar. But something started to happen in mid-2013. Despite China’s economic slowdown, despite the situation with Russia and Ukraine, and with the Federal Reserve cutting back substantially on its money printing program, one would think the U.S. dollar would rally in value—but the opposite is happening.
Two reasons why the greenback is falling in value so fast:
First, world central banks have been slowly selling the U.S. dollars they keep in their reserves, as the percentage of world central banks that use the dollar as their reserve currency has fallen from more than 70% in the year 2000 to just over 60% today.
Secondly, with the Japanese and Chinese reducing the amount of U.S. Treasuries they buy and with the Federal Reserve reducing the paper … Read More
Whenever I got stuck solving a problem in elementary school, my teacher would say, “go back and see where you went wrong.” This lesson—“learn from your mistakes”—was taught again in high school, and then throughout my life. It’s very simple: you can’t do the same thing over and over again and expect different results. Albert Einstein called it “insanity.”
When I look at the Japanese economy, I see the most basic lesson you learn in business school being ignored. The Bank of Japan, and the government, in an effort to improve the Japanese economy has resorted to money printing (quantitative easing) over and over, failing each time to spur growth. One might call it an act of insanity.
Through quantitative easing, the central bank of Japan wanted to boost the Japanese economy. It hoped that pushing more exports to the global economy from its manufacturers would change the fate of the country. It wanted inflation as well.
The result: after years of quantitative easing, the government and the central bank have outright failed to revive the Japanese economy. In fact, the opposite of their original plan is happening.
In January, the trade deficit in the Japanese economy grew—the country’s imports were more than its exports. Imports amounted to 7.70 trillion yen and exports were only 5.88 trillion yen. The trade deficit was 3.5% greater compared to the previous month. (Source: Japanese Customers web site, last accessed February 20, 2014.) Mind you, January wasn’t the only month when imports were more than exports in the Japanese economy. This is something that has been happening for some time.
Inflation in the Japanese … Read More
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