Monetary policy is the mechanism through which the supply of money is controlled by monetary authorities. The goal of almost every monetary authority around the world is stability of prices. If prices are unstable—either too high or, in some circumstances, decreasing—this causes unforeseen and unwanted consequences for the economy as a whole. Monetary authorities usually enact changes to interest rates for the purpose of changing the demand for money. Monetary policy can be either expanding, when interest rates are lowered and more money is available at a cheaper, or contracting, when interest rates are raised to make money more expensive to slow price increases.
Monetary Policy was last modified: July 19th, 2012 by admin
Although the U.S. labor market has seen steady declines in unemployment, wage growth has ground to a near standstill, suggesting the U.S. economy is far less stable than commonly believed. The Employment Cost Index edged only 0.2% in the second quarter; the smallest gain since the index was created in 1982. The new data has stoked fears.
Historically low interest rates over the last several years did more than dramatically increase the money supply; they set the stage for a monumental economic collapse that could send bond yields sky high. Or at least that’s the opinion of billionaire investor Bill Gross, also known as the “The Bond King.”
Improving unemployment numbers added fuel to the rise in the U.S. dollar. While the U.S. dollar’s strength is likely to be a major issue this year, long-term investors shouldn’t worry.
Let me explain…
U.S. Dollar Gaining Strength
There is a glimmer of hope, as the U.S. dollar index (a measure of the U.S. dollar’s strength relative.
Lots of corporate earnings are still streaming in for the third quarter, though mostly among smaller-cap companies. Top-line growth certainly isn’t robust, but it’s not bad either. The surprise I’ve noticed in third-quarter reporting has been the profitability. There has been plenty of double-digit comparable earnings .
Credit card companies are some of the best indicators in the global economy. Visa Inc. (V) just reported a pretty decent quarter. While earnings were down comparatively due to a one-time charge, adjusted earnings handily beat consensus.
The company’s fiscal fourth quarter came in solid, with growth of 10% on a constant dollar basis.
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.