Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Posts Tagged ‘ECB’

The Only Sector I See with a Ten-to-One Return Potential

By for Profit Confidential

Shattering the Myth Behind Interest Rates and GoldWe 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.

Effective Federal Funds Rate Chart

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

Negative Interest Rates: They’re Here

By for Profit Confidential

What Happens When You Toy with Nature's Boom & Bust CyclesIn 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

Next Stop for the Paper Money Printing Press…

By for Profit Confidential

Eurozone's Economic Troubles Far From OverWhen 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 … Read More

Should You Be Buying More Gold Ahead of the ECB’s Printing Decision?

By for Profit Confidential

The European Central Bank Presents Another Reason to Be Bullish on GoldFrom 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 … Read More

The Race That Will Not End Well

By for Profit Confidential

central bank Central banks around the global economy are involved in a race that will not end well. Of course, I’m talking about the race to the bottom of currency devaluation, which is being achieved through the printing of more and more paper money backed by nothing.

Almost weekly, I hear news about different central banks in the global economy cranking up the speed of their printing presses; they are fixated on printing money because these central banks believe they can solve their economic problems by printing. They are wrong!

Our own Federal Reserve is creating $85.0 billion a month in money with the hopes of bringing economic growth to the U.S. economy. But this strategy is failing the masses in America. Those who have benefited the most from this exercise have been big banks, Wall Street, and the rich. The poor and middle-class are in a worse situation now than in 2007!

But it’s not just the Federal Reserve that’s printing massive amounts of new money. Other central banks are doing the same under a fancy phrase: “quantitative easing.”

In its most recent monetary policy statement, the Bank of Japan reiterated it’s take on printing. It said the central bank will continue to work towards increasing the monetary base in the country by 60 trillion to 70 trillion yen per annum. The central bank will buy Japanese government bonds, exchange-traded funds (ETFs), and real estate investment trusts with the freshly printed money. (Source: Bank of Japan, November 21, 2013.) (Yes, the Bank of Japan is buying securities that trade on the stock market. As our next American financial crisis approaches, I … Read More

Warning: Stock Market Margin (Borrowing) Reaches All-Time High

By for Profit Confidential

key stock indicesI’ve been writing in these pages how more and more time-proven stock market indicators are starting to scream “Danger!” for the stock market.

Investors are getting too bullish on stocks (an omen of lower stock prices ahead), as seen in the American Association of Individual Investors (AAII) Investor Sentiment Survey. It shows 48% of investors were bullish towards key stock indices on November 7. Going back to just June of this year, the number of bullish investors stood at 32.97%. (Source: American Association of Individual Investors web site, last accessed November 11, 2013.)

Investors are flocking towards key stock indices, buying stocks in hopes they will go up in value. According to the Investment Company Institute, long-term equity mutual funds have been seeing inflows since the beginning of this year. (Source: Investment Company Institute, November 6, 2013.)

To me, this sounds all too familiar. I don’t have to go very far back to see what happened when the majority of investors turned so bullish. Remember 2007? Or the Tech Boom? In both of those situations, the common notion was that key stock indices would continue to soar and those who talked against it were ridiculed.

The reality is that the risks on key stock indices continue to increase. And the higher this market gets, I question how bad the market sell-off is going to be when it finally hits.

I’d say the “bubble” in the stock market has become the biggest I’ve seen in years, as evidenced by the amount of money investors are borrowing to buy stocks, which is often referred to as margin debt.

Leverage is a double-edged … Read More

Mario Draghi Bullish on Gold?

By for Profit Confidential

It’s “fairly good protection against fluctuation of the Dollar and risk diversification,” said the President of the European Central Bank (ECB), Mario Draghi, about gold bullion recently at Harvard University. He added, “Central banks which had started a program of selling gold a few years ago substantially stopped; by and large they are not selling any longer. Also the experience of some central banks that have liquidated the whole stock about ten years ago was not considered to be terribly successful from a purely money viewpoint.” (Source: “Central banks are unwise to sell their gold: ECB president Mario Draghi,” Mining.com, October 17, 2013.)

At the very core, the President of the ECB reiterated the point I have been trying to make in these pages for some time now: central banks are in dire need of gold bullion because the fiat currency they have created provides them with nothing but uncertainty. Gold bullion, on the other hand, keeps central banks’ reserves in check.

Dear reader, it’s a fact: central banks around the global economy are in a race to devalue their currencies to the bottom. They are printing money and keeping easy monetary policies in place to make sure that their currency value is suppressed. They think this act brings prosperity in the form of export demand. The central banks are wrong.

Our own central bank, the Federal Reserve, is printing $85.0 billion a month to bring economic growth to the U.S. economy. The Federal Reserve has also kept interest rates at artificially low levels for years. But if we take out the strengthening of big banks and the rally in … Read More

U.S. Credit Rating Downgraded to Same Level as Brazil?

By for Profit Confidential

171013_PC_lombardiThe U.S. government, after winning World War II for the Allies, was very convincing. It told central banks around the world that they should hold the U.S. dollar as their reserve currency instead of gold, based on the idea the U.S. dollar would be backed by gold. Only limited amounts of U.S. dollars could be printed, because the currency was tied to gold bullion. Central banks bought into the idea.

Unfortunately, a few decades down the road, the concept of a U.S. dollar backed by gold was thrown out the window (thank you, President Nixon). Eventually we were introduced to the modern day printing press—printing money out of thin air at the will of the Federal Reserve without the U.S. dollar being tied to any “hard” currency like gold.

Why would anyone agree to this horrible idea?

Back in those days, the U.S. economy was prospering. Our government was in good shape and didn’t have much debt. And the logistics made sense, too, as time passed. Why wouldn’t a central bank have in its reserves the currency of the world’s strongest economy and military? Why wouldn’t a central banker keep U.S. dollars in his vault as opposed to hard-to-carry and hard-to-store gold?

Years have passed since the U.S. dollar “unglued” itself from gold. Things have changed, too. America is not so glorious anymore. Ever-rising debt and the never-ending printing of U.S. dollars have resulted in some countries changing their policy on U.S. dollar-backed reserves. And the fundamental factors that keep the U.S. dollar strong are deteriorating quickly.

The balance sheet of the U.S. economy does not look as good as … Read More

If the Shanghai Composite Index Is a Leading Indicator, Watch Out!

By for Profit Confidential

Is a Leading Indicator Watch OutExport-oriented provinces in the Chinese economy have turned pessimistic and anticipate exports will only grow at the rate of five percent this year. In 2012, they targeted an export growth rate of eight percent to 10%.

What’s troublesome about this is that exports from the Chinese economy account for 20% of the country’s gross domestic product (GDP). This means that, if exports from China to other countries decline, the Chinese economy will suffer an economic slowdown. (Source: Epoch Times, February 7, 2013.)

The Chinese economy has become fragile due to the economic slowdown in the global economy. Its biggest trading partner, the eurozone, is still suffering, while other areas have anemic demand.

As export volume falls in China, it is creating trouble for China’s manufacturing sector. The Chinese Purchasing Managers’ Index (PMI) declined to 50.4 in January from 50.6 in December of 2012. (Source: National Bureau of Statistics of China, February 1, 2013.) A reading above 50 means expansion in manufacturing, while a reading below 50 means contraction. January’s reading is not far from the pivot point into manufacturing contraction.

Getting a read on the Chinese economy is not that easy. Some say statistics out of China are not that reliable. But here is the official word from the Chinese government: in the third quarter of 2012, GDP in the Chinese economy rose 7.4% from a year earlier—the slowest growth rate in three years. (Source: China Daily, December 30, 2012.)

While time and more data will make the picture clearer, with Chinese exports stumbling, a contraction in manufacturing activity could be next for the Chinese economy.

And it’s … Read More

No Quick Fix for Eurozone; a More Difficult Road Ahead

By for Profit Confidential

The eurozone credit crisis is taking center stage once again. As I have been saying in these pages, it is far from over, even though the European Central Bank (ECB) has announced that it will do “whatever it takes” to save the eurozone. Economic conditions in the region are still deteriorating.

The debt-infested countries in the eurozone are reaching their lows with widespread economic slowdown, but I am more concerned that the stronger nations are starting to show signs of struggle as well.

France, the second biggest economic hub in the region, is in a period of next to no growth. The country’s unemployment is higher than 10% and increasing. The International Monetary Fund (IMF) expects growth between 0.3% and 0.4% for the French economy this year. (Source: Wall Street Journal, February 12, 2013.)

In the fourth quarter of 2012, the eurozone countries saw the steepest quarterly decline in industrial production in more than three years. Industrial production in the eurozone declined 2.4% in the fourth quarter, compared to a meager increase of 0.2% in the third quarter—the sharpest decline since the first quarter of 2009. (Source: Wall Street Journal, February 13, 2013.)

Looking ahead, it seems the credit crisis in the region is there to stay. According to a study conducted by Ernst & Young, banks in the eurozone have a massive amount of bad loans sitting on their books. The auditing firm estimated that these bad loans make up a grand total of $1.23 trillion, or 7.6% of all the loans issued in the region. (Source: Deutsche Welle, February 11, 2013.)

Dear reader; the truth … Read More

Why the Media No Longer Talks About This Threat to the U.S. Economy

By for Profit Confidential

U.S. EconomyIt seems the media has gone quiet about the eurozone credit crisis, as I don’t hear much about it these days in the mainstream news. Maybe they are relieved about the European Central Bank’s (ECB) announcement about its plan to do whatever it takes to save the eurozone—even if it includes printing more money.

Read it here and read it loud: the eurozone credit crisis is far from over. Its economic slowdown is only going to get worse.

The unemployment rate in the eurozone reached another high in November of 2012—11.8 % compared to 10.6% a year earlier. In October, the unemployment rate in the eurozone was 11.7%. (Source: Associated Press, January 8, 2013.)

Particularly hard hit has been Greece, as its unemployment rate hit a record 26.8% in October. The unemployment rate for youth aged 15 to 24 is 56.6%. A record 1.34 million Greeks are unemployed. (Source: ELAST, January 10, 2013.)

The stronger nations in the eurozone are weakening at an accelerated pace. Consider Germany. Factory orders there fell more than expected, down 1.8% in November of 2012 from October. (Source: Bloomberg, January 8, 2013.) Germany is a major economic hub of the eurozone, but it’s not safe from turmoil in the region.

My question: what happens to the eurozone economy if Germany deteriorates further? The eurozone is in a recession for the second time in four years.

The economic slowdown in the eurozone due to its credit crisis is more severe than it appears on the mainstream news. People are affected across the board. Birth rates are falling. In Portugal, the number of births in 2012 … Read More

Why U.S. Dollar’s Continued Fall Is Written in Stone

By for Profit Confidential

Written in StoneWhen the U.S. economy was on the verge of collapse after the financial crisis of 2008, the Federal Reserve came to the rescue. The central bank provided the financial system with quantitative easing—it printed money and bought bad debt from the big banks.

Today, the Federal Reserve will meet and discuss the further purchase of bad debt from the big banks or some other form of monetary stimulus. To me, it won’t be a surprise to see it “add” to its balance sheet with more money creation. The Federal Reserve already announced three rounds of quantitative easing; I highly doubt it will be shy to announce more.

What is troublesome to me is the speed at which the Federal Reserve is building its balance sheet. In January of 2008, the Federal Reserve had total assets of $927 billion—before quantitative easing and other stimulus poured into the markets. (Source: Federal Reserve, January 3, 2008.) Now, the same balance sheet stands at $2.9 trillion. (Source: Federal Reserve, December 6, 2012.)

The Federal Reserve’s balance sheet has grown by almost $2.0 trillion—200% in less than five years all from money created out of thin air!

One goal of the Federal Reserve was to buy mortgage-backed securities to stimulate the economy, and then to start selling the mortgage-backed securities back into the market in mid-2015. (Source: Bloomberg, December 7, 2012.) This way the central bank is not stuck with these securities while it gets back to its “pre-crisis balance sheet.” I wonder if we will ever really see this happen.

My concern? Quantitative easing has caused the U.S. dollar to decline steadily. Like everything … Read More

Who’s Next to Fall into Recession: Germany, France, or Austria? You Pick

By for Profit Confidential

Newsflash: the central bank of Germany, the Bundesbank, is raising red flags about the growth of the German economy. The bank expects Germany’s gross domestic product (GDP) to only grow at 0.4% in 2013, compared to a previously forecasted 1.6% in only June of this year.

Similarly, another eurozone country, Austria, slashed its forecast for the next year. Austria’s central bank now predicts its economy will only grow at the pace of 0.5% next year, much lower than the bank’s previous forecast of 1.7%.

I really don’t have to go into details about how badly the other debt-infested eurozone countries are performing. These pages are often filled with that. What I want to say today is that the entire region is deteriorating quickly, and the dynamics of the next recession there are going to be much different than in 2008.

The stronger nations in the eurozone are starting to suffer. And it’s not only Germany and Austria slashing their GDP growth targets.

France, the second-biggest economy in the eurozone, narrowly by-passed a recession in the third quarter of 2012, when its GDP growth fell to 0.2%. (Source: Associated Press, November 15, 2012.) Going forward, the French government is skeptical about economic growth prospects.

While the media is fixated in North America on the pending fiscal cliff, the picture developing in the eurozone is alarming. The region’s governments simply have too much debt and do not have enough tax revenue coming in. The European Central Bank (ECB) wants to take the same approach to avert the crisis as the Federal Reserve took here in the U.S.—and we all know how well … Read More

Poor Italy Can’t Get a Break: Another Change of Government at Hand?

By for Profit Confidential

This morning there’s news that Italy’s Prime Minister Mario Monti could be out and former Prime Minister Silvio Berlusconi back in, clouding the future of the eurozone’s third largest economy. With politics at play in many troubled eurozone countries, and as I have been harping on in these pages; the eurozone sovereign debt crisis is far from over and it will be a very long time before we see any economic growth in the region—continued recessions are more likely.

In the U.S., after the financial crisis hit, the idea was to expand the money supply aggressively and force lending so citizens could consume more goods and services, causing a return to economic growth. Similar steps were followed in the eurozone, but to a much lesser degree, as Germany opposes outright money printing.

While not at the pace of the Federal Reserve multi-quantitative easing programs, the European Central Bank (ECB) did manage to pump cash into the financial system and lower interest rates. Since October of 2008, ECB’s official interest rate in the eurozone has fallen from 3.75% to the current 0.75%. (Source: European Central Bank, Accessed December 6, 2012.) And when the sovereign debt crisis was at its peak, banks in the eurozone region borrowed 1.3 trillion euros from the ECB. (Source: Wall Street Journal, December 4, 2012.)

The ECB wants lending to increase in the region. It wants banks, big or small, to loosen their purse strings and loan money out to business and consumers. Unfortunately, this hasn’t happened. According to the ECB, loans to the private sector in the eurozone fell 0.7% in October, continuing their decline … Read More

Auto Loans: Next Bubble to Burst?

By for Profit Confidential

Next Bubble to BurstAuto sales data just released for the month of November have caught my eye. Auto sales in the U.S. economy have increased to a level similar to the level in January 2008—15% in November 2012 from November of 2011. Car sales are now running at the annualized rate of 15.5 million vehicles. (Source: Associated Press, December 4, 2012.)

On the surface, sounds like great news for the U.S. economy. Consumers are spending money on vehicles again. For some it provides a good gauge of consumer spending in the U.S. economy, but for me these data are not good. Why? Because auto loans are out of control.

Outstanding auto loans in the U.S. economy sit at $768 billion and have been increasing for the last six consecutive quarters. In the third quarter of 2012, auto loans debt in the U.S. economy increased by $18.0 billion. (Source: Federal Reserve, November 27, 2012.)

The news of auto loans rising is welcome, especially for an economist like me who has often complained that banks are making credit difficult for consumers in the U.S. economy. But what is very troublesome is that the delinquency rate on those auto loans has risen significantly.

From the second quarter to the third quarter of 2012, 38 states in the U.S. economy have reported increases in their auto loan delinquency rate. Over all, we when take into account all the states, the delinquency rate on the auto loans increased 15.2% in the third quarter from the second quarter of 2012. (Source: TransUnion, November 27, 2012.)

Another reason to be worried: 32.8% of all new auto loans issued in the … Read More

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