Posts Tagged ‘euro’
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.
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 … Read More
Many central banks within the global economy are involved in printing more of their paper money (often referred to as “fiat” currencies). There’s a race to devalue currencies in hopes to revive economies and maintain a competitive stance. Countries believe that by printing more of their fiat currency, they can improve their exports to the global economy, because the goods will be cheaper for those countries that have a stronger currency.
Recently, we heard from the central bank of Brazil that it will commence a program “with the aim of providing FX ‘hedge’ (protection) to the economic agents and liquidity to the FX market…” (Source: Banco Central Do Brasil, August 22, 2013.) In simple words: Brazil’s central bank is going to make sure the country’s currency stays low compared to the currencies of its trading partners.
Through this program, the central bank plans to sell US$500 million on Mondays, Tuesdays, Wednesdays, and Thursdays of every week. This intervention is expected to last until the end of this year, but the central bank also made it very clear that it will continue with its plan as long as necessary.
Similarly, Columbia’s central bank is taking steps to lower the value of its currency. It has bought significant amounts of U.S. dollars and printed pesos. The finance minister of the country, who also represents the government on the central bank’s board, stated that the government wants to keep the country’s currency value between 1,900 and 1,950 pesos per U.S. dollar. (Source: Reuters, August 20, 2013.)
Our own central bank, the Federal Reserve, has been putting pressures on the U.S. dollar. Though we … Read More
Back in late 2011, I created a widely circulated video that included six predictions. I hit it on the head with five of those predictions. But the winners are not what are important to my readers today; it’s the prediction I didn’t get right that’s vital now
Back then, I said the U.S. dollar was “dead” and wouldn’t go anywhere. I pointed out that if it were not for the continued crisis in the eurozone, the greenback would fall flat on its face. The dollar hasn’t gone anywhere since. And if it were not for investors taking their money out of European banks and moving them into U.S. dollars, our dollar could have collapsed.
My second prediction back then was that the euro would decline in value. And it has. Prediction three was that both interest rates and inflation would rise. The yield on the 10-year U.S. Treasury has risen about 50% since then. As for inflation, if we calculate it the way the Consumer Price Index (CPI) was calculated when Jimmy Carter was president, it would be almost three times the rate the government tells us it is today.
I compared the rally in stocks that started in 2009 to the period following the 1929 stock market crash (1934 to 1937) and warned that stock prices would eventually follow the same fate they did after the “fake” stock market rally that followed the 1929 crash. I still have that opinion today.
Mark my words—gold bullion has a great future ahead.
As the prices for gold bullion face severe headwinds in the short term, the fundamentals are getting stronger. The most important sign that makes me believe it is that central banks continue to buy more in spite of a sharp decline.
It’s not mentioned in the mainstream media very often, but central banks from countries like Russia, Turkey, and others have been continuously adding gold bullion to their reserves.
I wouldn’t be surprised to see these countries continue to buy even more as their currencies—their primary holdings—continue to become prone to wild swings. Have you seen the charts of the U.S. dollar, Japanese yen, Canadian dollar, and euro lately?
Consider this: From January 2011 to May 2013, the Russian central bank purchased gold in 22 of 25 months. Altogether, the Russian central bank has purchased 207.4 tons of gold bullion. (Source: World Gold Council web site, July 2013.)
The central bank of Turkey, which became a buyer in October 2011, has added 329.2 tons of gold bullion to its balance sheet for 16 of the 20 months since then. The central bank of Turkey has started to use gold as collateral. (Source: Ibid.)
Dear reader, you must keep in mind that central banks are very conservative investors and try to preserve their wealth. If they continue to buy gold bullion as the prices come down, it only tells me one thing—they like the precious metal’s future prospects.
As I always say, and it is very well documented in these pages, the central banks will never say when they are going to … Read More
The U.S. stock market needs to correct, but the sovereign debt crisis in Europe and the euro currency together remain a festering powder keg.
The real problem for the euro is the lack of leadership—in banking and politics—in the region. There is no flexibility in the euro currency to help those countries in need.
The failure of decisive action in the eurozone is pronounced, but it is too difficult. There is no unified political, financial, or regulatory leadership. So how can the euro work?
No situation is the same, but Sweden experienced a real estate crash and credit crunch in the early 1990s—the worst since the 1930s.
According to Bo Lundgren, known as Sweden’s “Mr. Fix-It,” here’s what Sweden did after a period of financial disbelief:
1. Sweden unified politically.
2. The government immediately guaranteed all cash deposits at all banks. Two banks (out of more than 100) were nationalized, and they had to give common stock to the government, which was later sold.
3. There was restructuring, the closure of tax loopholes, spending austerity, and a currency devaluation of 25%.
Currency devaluation is the very thing that struggling eurozone countries cannot do. The “Swedish Solution” was not perfect, but at the very least, it was decisive action. After several tough years, Sweden was back on the growth path.
Getting in front of sovereign debt is now critical.
Every quarter or so, there’s a shock in capital markets regarding the sovereign debt and banking crises in the eurozone. Then there are patchwork remedies and more sovereign debt.
Today, … Read More
Mark my words: the eurozone’s economic problems are here to stay, and the economic slowdown in the common currency region will get worse as we move forward.
The Netherlands, the fifth-biggest nation in the eurozone, is the new victim. The country, once looked upon as one of the strongest in the eurozone, is experiencing a collapse in its real estate market.
The Dutch economy has the most debt amongst its eurozone peers—banks have 650 billion euros worth of mortgage loans on their books, while consumer debt has hit an alarming 250% of income. (Source: Spiegel, March 4, 2013.) To give you some idea of the magnitude of that consumer debt level, in Spain, the ratio of debt-to-income reached 125% in 2011, the year Spain started to really have financial problems.
The official unemployment rate in the Netherlands just hit 7.7%, and 755 companies in the country declared bankruptcy in February—the highest monthly number of bankruptcies since 1981! The CPB Netherlands Bureau for Economic Policy Analysis now expects a decline of 0.5% in the country’s gross domestic product (GDP) this year.
We already know Greece is in a state of depression, and the economic slowdown in Spain, Italy, and Portugal is accelerating.
France, the second-biggest economic hub in the eurozone, is facing a staggering unemployment rate above 10%.
Similarly, Germany, the largest economy in the eurozone, is experiencing an economic slowdown, as well. The Markit Eurozone Composite Purchasing Managers’ Index (PMI) reports Germany’s all-sector output fell in March for the 19th consecutive month and March saw the largest drop in orders in three months. (Source: Markit, April 4, 2013.)… Read More
While the “official” numbers may not show it, inflation in the U.S. economy is a major problem, and it’s hurting any chance we may have of real economic growth.
The Bureau of Labor Statistics says inflation in the U.S. economy has caused prices to increase by only 12% since 2007—what $1.00 could buy in 2007 costs $1.12 today. (Source: Bureau of Labor Statistics web site, last accessed April 5, 2013.) As my readers know, I believe these inflation numbers are materially understated.
In February, the U.S. Producer Price Index (PPI), what many economists consider to be an early signal of where inflation might be headed, posted the highest month-over-month rate of change since October 2012. The PPI rose 0.7% in February from January. (Bureau of Labor Statistics, last accessed April 5, 2013.) Using February’s number as a base, the PPI is rising at an annual rate of 8.4%.
Corn futures at the beginning of 2007 were priced around $350.00 per lot. Now the same future costs $630.00 each—an increase of 80% in the last five years. As corn is an ingredient in a significant number of different foods, general food prices have also increased.
But despite the inflation we are experiencing, Americans’ wages aren’t rising. In the first quarter of 2007, the average hourly earnings of all private-sector employees in the U.S. economy was $20.70 per hour. In the first quarter of 2013, it increased to $23.80 an hour—a six-year increase of less than 15% (source: Federal Reserve Bank of St. Louis web site, last accessed April 5, 2013); not enough to keep up with inflation.
Adding more to the … Read More
If you go to Europe and you find yourself in Holland (the Netherlands), you’ll likely fly through Schiphol Airport on the edge of Amsterdam. It’s one of the best airports in the world, in my humble opinion. When you go through security, you are treated like a paying customer—which you are. The euro currency has become a lot more affordable for obvious reasons.
I visited Europe and Holland, specifically, in 2011 to visit my great-uncle’s war grave at the Begraafplaats Crooswijk cemetery in Rotterdam. It is a strikingly beautiful cemetery. The Dutch do a masterful job of maintaining war graves. Thank you.
My trip was subsidized by an old college buddy who has a huge (for Europe) apartment in Amsterdam. It’s the best location in town. In his job, he is the second-most powerful person on ING Group’s trading floor. He is the information technology (IT) guy.
Amsterdam is one of the most unique cities I’ve ever been to (ahem, not for those reasons). It is one of Europe’s top destinations (perhaps for those reasons). It boasts stunning architecture and is home to the world’s oldest stock exchange. The NYSE Euronext N.V. is Amsterdam’s stock exchange today.
Amsterdam was the financial center of the world a long time ago, centuries before the euro. Apparently, the Dutch East India Company was the first multinational corporation and the Bank of Amsterdam was the first central bank. It financed the company in guilders, which eventually joined in creating the euro currency. The city is still a financial center in Europe, but history keeps repeating itself.
Like many banks in Europe, ING Group … Read More
There was another reminder on Monday morning that the eurozone continues to be in a financial mess. In an unprecedented move, Cyprus plans to tax bank deposits at 6.75% and 9.9% to raise US$7.6 billion in capital as part of the country’s bailout deal. (Source: Steinhauser, G., Stevis, M., and Walker, M., “Cyprus Rescue Risks Backlash,” Wall Street Journal March 18, 2013.)
But what is alarming is the proposed tax would apply to all deposits, regardless of size, and in my view, this cannot be good. For the stock market, the news is renewing fears the eurozone may be set for another potential financial backlash. Investment bank Nomura suggests the tax move could result in the Cyprus economy contracting 15% over the next two years.
What the move indicates is that there are clearly financial issues in the eurozone, which I feel traders have largely pushed aside here for the recent stock market rally.
When you have 17 different countries with their own political and economic systems come together to form the eurozone, you know there will be problems. Unfortunately, it has not been smooth sailing since the beginning of the euro in 1999. The region is in a recession.
As I have discussed in the past, the problem is that the global economy is so interconnected now that problems in the eurozone will impact economies around the world, including the United States and China.
The reality is that the eurozone financial crisis is still around, and the problem overseas is not going away. Consumer confidence in the eurozone came in at a muddled -23.6 in February, according to the … Read More
If you’ve heard the old stock market adage “Sell in May, and go away,” you might consider 2012 as being the perfect year to represent this trend. The S&P 500 had a strong start to the year, appreciating to over 1,400 from 1,250. At the beginning of May, the S&P 500 broke down considerably, giving up almost all of its gain for the year, only to significantly reaccelerate until mid-October. The stock market has definitely been uninspiring over the last few years, but you can’t argue that it hasn’t gone up over time.
From my perspective, we’re still in a long-term bear market, simply because the stock market hasn’t been able to surpass its previous highs. But using the S&P 500 as the benchmark, if you eliminate the huge technology bubble created in the five years before 2000 and the big dip of the subprime mortgage crisis, you still have a stock market that’s gone up tremendously. It’s the volatility over the last 15 years that’s been the big story, and it has scared away a lot of investors.
There are two things the stock market has in its favor going forward over the short term. Firstly, it’s reasonably priced. The S&P 500 is running below its historical valuation, and this has been a real cushion for the stock market this year. Secondly, we have very low interest rates and an accommodative Federal Reserve. In spite of flat earnings, the interest rate cycle favors stocks, and the S&P 500, combined with the generally fair valuations, can still tick higher in 2013 on an expansion of earnings multiples.
The one thing … Read More
Is it me or is there something wrong with the picture in Spain? Even with over a quarter of its population looking for work (and this is only according to the official numbers), over 50% of its youths unemployed, a recession, and massive debt levels, Spain says that all is fine.
Is the water different in the beautiful country of Spain? Do they not see a financial crisis?
Spain is clearly delusional regarding its ability to avoid having to ask the European Central Bank (ECB) and International Monetary Fund (IMF) for emergency capital. In October, Spain’s finance minister Luis de Guindos suggested, “Spain doesn’t need a bailout at all.” (Source: “Spain FinMin’s ‘No Bailout’ Remark Causes Laughter,” Yahoo! Finance via CNBC, October 5, 2012, last accessed December 14, 2012.) The country is unrealistic in its view and is facing a financial crisis that will likely worsen.
On Friday, Prime Minister Mariano Rajoy suggested the country did not need any financial help to lower its high borrowing costs (Source: “Spain says no need for bailout right now,” Yahoo! Finance via Associated Press, December 14, 2012.) The current yield on Spain’s 10-year bond is 5.36%, which is much improved from the over seven percent yield in July but still relatively high, given the debt buildup. High rates mean high carrying charges that add to the debt load and drive a possible financial crisis.
The Spanish economy is in a recession with gross domestic product (GDP) growth contracting 0.3% in the third quarter after falling 0.4%, 0.3%, and another 0.3% in the previous three quarters. Now, the European Commission is predicting Spain’s … Read More
John, a friend of mine who is also an economist, believes the worst is behind for the eurozone crisis. He’s definitely not the only one with this opinion. John told me, “The European Central Bank has been very reactive to the sovereign debt situation and now, with Greece planning to buy back some of its debt, optimism will pour into the markets.”
Unfortunately, what John doesn’t see is the trouble still ahead for the eurozone. Think of it this way: it’s easy to go down the hill, but it takes a lot of courage and stamina to get back to the top of the hill from the bottom.
The eurozone is in a very similar situation. I think the region is experiencing a deepening economic contraction. It’s still falling down the hill and hasn’t reached the bottom yet.
Sure, it’s easy to listen to the politicians and almost believe them. But the truth of the matter is that the fundamental data are getting worse in the eurozone.
The eurozone unemployment rate reached a new record high of 11.7% in October, up from 11.6% in September. There are 18.7 million people unemployed in the region, with the Spain and Greece unemployment rates both exceeding 25%. (Source: Eurostat, November 30, 2012.)
Recent reports show that manufacturing in the eurozone nations has taken a nose dive, deteriorating now for 16 consecutive months. In November, the Purchasing Managers’ Index (PMI) was observed at 46.2—any reading below 50 represents an economic contraction. (Source: Markit, December 3, 2012.) Companies in the eurozone are struggling to find new work, and demand in the region is dismal.
Now, … Read More
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