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

Posts Tagged ‘european union’

First Cyprus, Then Poland, Now These Savings Accounts to Get Confiscated Next

By for Profit Confidential

What Happened in Cyprus, Then in Poland, to Happen Next in the EU CountriesThe savings of 500 million individuals living in the European Union are on the line.

Let me explain:

We all know Cyprus, one of the smallest countries in the eurozone and part of the European Union, went through what many feared. To save itself from default and pay down its out-of-control national debt, the government imposed a one-off capital levy on the bank accounts of individuals in that country. If you had more than a certain amount of money in your savings account, the government outright confiscated a portion of it.

Poland, another European Union country, did something very similar. In an effort to reduce its national debt, the government took assets from private pensions and made them public. (This incident never even made the big mainstream headlines.)

When these events took place, I started writing how this would be a new trend—governments would find new and crafty ways to take money from savers in their efforts to make the governments’ dire conditions better, be it for paying off their national debt or bailing out banks.

Now, we learn of documents from a European Union official stating more of the same is on the way. The savings of the individuals in those countries will be used to fund the countries’ long-term investments and reduce the gap that the region’s banks have created by pulling back on their lending.

The document, revealed by Reuters, said, “The Commission will ask the bloc’s insurance watchdog in the second half of this year for advice on a possible draft law to mobilize more personal pension savings for long-term financing.” (Source: “EU executive sees personal … Read More

In the End, Why Going Back to the Gold Standard May Be the Only Alternative

By for Profit Confidential

What no politician has the guts to do:

Step 1: stop printing more fiat currency; Step 2: have all fiat currencies backed by gold.

It wasn’t too long ago that the global economy had the gold standard—only a certain amount of money was printed and that printing was based on the holdings of gold bullion a country had.

Now, after a few decades of running away from the gold standard and flooding global economy with paper fiat currency that can be created out of thin air, countries are regretting what they’ve done.

We are starting to see countries in the global economy turning their attention towards gold as a source of safety—something that has stored value for much longer.

Since the inception of paper money, the amount of economic risk in the global economy has simply increased. The biggest concerns are inflation and the constant debasement of money. A dollar U.S. in 1970 is now worth $5.96 in the U.S. economy. (Source: Bureau of Labor Statistics, November 14, 2012.) For American citizens, their currency value has declined almost five-fold since we stepped away from the gold standard. It’s the same situation elsewhere in the global economy. Fiat paper simply has less purchasing power as the year passes.

All this leads to a simple question: to stop the erosion of the purchasing power of paper money, what do we do? Go back to the gold standard?

The Prime Minister of Turkey thinks we should do just that. He is urging the International Monetary Fund (IMF) to consider gold as its base currency. He suggested that the IMF has heavily relied on … Read More

America’s Only Choices Left: Raising Taxes, Introducing Austerity Measures

By for Profit Confidential

Introducing Austerity MeasuresWhile debt-infested countries in the eurozone are struggling to decrease their budget deficits, the U.S. government is reporting an increase in its deficit. For the fiscal year of 2012, the federal government budget deficit was $1.09 trillion, slightly below 2011’s deficit of $1.29 trillion. (Source: U.S. Department of the Treasury, October 12, 2012.) As a percentage of gross domestic product (GDP), the U.S. government’s budget deficit for the year 2012 stands at seven percent.

Yes, some might jump on the “decline” in the federal budget deficit in 2012 over 2011, but there is more to it. For the first month in the current fiscal year of 2013, which ended October 31, the deficit increased by $120 billion. This is an increase of almost 22% from the same month last year—$98.0 billion in October 2011. (Source: Department of the Treasury, November 13, 2012.

In the month of October, U.S. government spending was much higher than the previous month. In September, the U.S. government spending was $186.3 billion, in October 2011, it was $261.5 billion. In October of this year, government spending reached a staggering $304.3 billion—an increase of 63.3% from a month earlier and 16.4% from October last year.

So all this talk of lowering the government’s annual budget deficit seems to be just that; talk. Increasing budget deficits is not good for any country; every economist would agree with me on this one. So, where do we go from here?

The issues in the U.S. economy are becoming similar to the ones in the eurozone countries. For example, in those countries, government spending simply was greater than tax revenue, … Read More

Why You Shouldn’t Be Fooled by the Market

By for Profit Confidential

Why You Shouldn’t Be Fooled by the MarketFollowing a weak second quarter, the Dow Jones Industrial and S&P 500 indices are now in positive territory for the first time since the end of the first quarter on the backs of a positive July and August.

So far, August has proven strong for technology, growth, and small-cap stocks, with the NASDAQ and Russell 2000 up 4.2% and 3.4%, respectively, as of the close of Thursday. The S&P 500 is holding at 1,400, a level that I believe will be tough to hold. Every time I look at the long-term technical picture of the S&P 500, I’m concerned about the vulnerability. Since 2000, there have been two major tops at above 1,400, and the current bull market rally from March 2009 appears to be heading for a third top.

What I continue to see is an expectation-driven buying based on a best case scenario that includes a third round of quantitative easing (QE3) from the Federal Reserve, the saving of the eurozone, and strengthening in the U.S. economy. And then you have the uncertainty of the upcoming presidential election.

Yet the reality is that Europe remains in a financial mess, with six eurozone countries in a recession and straddled with major debt and growth issues. Britain is also in a recession. Germany, the largest and strongest economy in the eurozone, is showing positive signs, but the problem will be the country’s focus and distraction in helping to save the eurozone. German Chancellor Merkel appears to be backing the desire of European Central Bank (ECB) to keep the eurozone together, but so far, we have yet to see any concrete … Read More

Countries in the European Union with “AAA”
Credit Rating Starting to Crack

By for Profit Confidential

Italy’s economic contraction deepened, as its GDP fell 0.7% in the second quarter of this year. What is more disconcerting is that, year-over-year, in the first quarter of 2012, GDP contracted 1.4%; while, in the second quarter, the economic contraction worsened, as GDP shrunk by 2.5%.

Italy’s Retail Confederation predicted last week that consumer spending would fall by the most in 2012 since WWII!

In Spain, the economic contraction continues unabated as well. What this means, dear reader, is that these countries will require help from the stronger nations of the European Union.

The problem is that the AAA countries of the European Union—Germany, Austria, and the Netherlands—are starting to show evidence of economic contraction within their countries and could follow their weaker counterparts into recession!

Austria’s manufacturing contracted in July and the country’s new orders—a gauge of future demand—fell at the fastest pace in eight months. (Source: Markit Economics.) Manufacturers cut jobs for the second straight month in Austria and the economic contraction is worsening, as the number of jobs being lost has accelerated to levels not seen since 2010!

The Netherlands experienced a continued decline in manufacturing, with new orders falling for five straight months. The economic contraction continued to worsen, as job cuts took place for the fourth consecutive month.

Finally, there is Germany. With 60% of its exports making their way to the European Union, the most important AAA country of the European Union is showing signs of renewed economic contraction, which has German leaders talking about a possible recession in the second half of this year. (Source: Reuters, Aug. 10, 2012.)

It is not only … Read More

Global Economic Contraction Picks up Steam

By for Profit Confidential

I wrote a couple of months ago in these pages about the fact that the British economy officially entered a recession as of the first quarter of 2012, when the country released its GDP growth numbers. While Britain expected its third consecutive quarter of negative GDP growth in the second quarter of 2012, the economic contraction is worse than first thought, because GDP growth contracted by 0.7%!

This was the biggest falloff since 2009, when the world was in the midst of the financial crisis. This number means the British economy has a long way to climb in order to get itself out of this recession. From the services sector, to the manufacturing sector, to the construction sector, many of the key GDP growth components experienced declines.

The Olympics will provide a temporary boost to GDP growth, but the fear of how rapidly the economic contraction is accelerating right now has Britain talking about more quantitative easing (QE): money printing.

Britain is not being helped by the continued economic contraction and recession occurring with its significant trading partner, the European Union. The 17 nations of the European Union saw manufacturing remain flat in the month of June, but still deep into economic contraction territory. (Source: Markit Economics.)

According to the eurozone manufacturing report, jobs were lost for the seventh straight month, with June representing an acceleration of the job losses not seen since January of 2010. New orders for manufactured goods fell at the fastest pace since 2009!

This severe economic contraction was not been labeled a recession simply because Germany has been able to produce numbers that are barely … Read More

Apple’s China Ventures Keep it at the Top of My Stock List

By for Profit Confidential

Apple’s China VenturesApple Inc. (NASDAQ/AAPL) will report its fiscal third quarter on July 24, but the real excitement for the company will be the second half, when Apple releases the highly anticipated “iPhone 5,” an “iPad” mini (to challenge smaller tablets), and the next version of “Apple TV.” I recently played around with Apple TV, and I can tell you it is quite impressive. The ability to wirelessly stream pictures and video from your “iPhone” and iPad to the television is great.

 While the stock price of Apple fell to the $530.00 level in May after trading at a record $644.00 in April, the stock has since rallied to above $600.00 on July 5 in anticipation of strong results in the second half.

The arrival of the latest iPad in China on July 20 will be seen as a critical time, as Apple is trying to add to its lead in the global tablet market, including the high-potential Chinese market that Apple currently counts as its second-largest market, trailing only the U.S. In the fiscal second quarter, sales in China accounted for 20.2% of total sales or $7.9 billion, up over 300.0% on a year-over-year basis, and expected to grow. Yet there is ample room for growth in China, as Apple has less than 20.0% of the smartphone market in China compared to around 70.0% for the Google Inc. (NASDAQ/GOOG) “Android”-platform phones.

In spite of all the talk about stalling in China, the Chinese economy is still considered a major area for long-term growth as the country’s income levels rise.

China’s mobile phone sector is enormous, with mobile phone users eclipsing one … Read More

Consumer Spending Broken

By for Profit Confidential

Consumer Spending BrokenHope springs eternal; many believe consumer spending will resume in 2012 as the jobs market improves, preventing the U.S. economy from entering a recession. But the hard evidence shows otherwise.

As the U.S. Senate and Congress are split between democrats and republicans, there are at least 15 job bills that have not been passed or that are still stalled, as the jobs market continues to deteriorate. (Source: LA Times, June 22, 2012.)

This stalemate is unlikely to resolve with the upcoming election so close. As the stalemate continues, 19.1% of college graduates under the age of 25 are in lower-paying jobs for which they are overqualified, while the overall youth unemployment rate in this country is 16.4%. (Source: USA Today, June 6, 2012.) These are the same graduates who are saddled with debt before they even enter the jobs market.

We can all agree that the prime working ages at which people buy homes, pay for children’s education, save for retirement and spend the most range from their 30s to their 60s.

As of May, 2012, there were 3.5 million people in this country between the ages of 45 and 64 who were unemployed, with a full 39% of them unemployed for more than one year. (Source: Wall Street Journal, June 23, 2012.) For as long as jobs market records have been kept, this level of unemployment among this group has never been this high.

It has been four years since the financial crisis began. The extraordinary length of time that the jobs market has experienced such sluggish growth means that more and more people have been … Read More

Europe Had a Glorious Past, but
Its Future Is Full of Potholes

By for Profit Confidential

European debt crisisThe eurozone is on shaky ground.

European Union leaders will be meeting on Thursday to begin an emergency two-day summit as the region’s leaders attempt to localize and corral the European debt crisis.

Spain has formally requested emergency funds to help save its fragile banking system. It is unknown how much cash Spain is asking for, but about USD$130 billion is available. The overriding concern is if Spain collapses, it would likely send a ripple effect beginning in the eurozone and spanning globally since Spain was the 12th largest economy in the world in 2011, according to the International Monetary Fund (IMF). Before, Spain’s economy was the 9th largest, but was surpassed by Russia, Canada, and India in 2011. Australia is now also looking to catch and surpass Spain. (Read why Spain is facing financial chaos in “Why Spain’s in for Some Hurt.”)

The yield on the 10-year Spanish bond hovered at 6.7% on Tuesday after recently trading over the critical 7.0% level. The yield has been on a steady upside move since trading around 5.0% in late February. This high yield is unsustainable and not payable by the government; Spain is broke so high financing costs are not desirable. Recall when Greece’s 10-year bond yield surpassed 7.0% and eventually was over 90.0% on fears of a country default before the IMF, European Central Bank, and European Commission came in with $146 billion in cash. Unfortunately, as we all know, it was not enough, as Greece had to ask for more funds just to make the debt payments on its initial loan.

In Greece, the situation remains unclear … Read More

The Three Most Likely Outcomes of the Eurozone Crisis

By for Profit Confidential

Eurozone CrisisThe focus this past weekend was squarely on the Greek elections and whether the vote was one which would precipitate the exit of Greece from the European Union.

The focus instead should have been on the fact that Greece will run out of money very soon and hence will require another bailout from the European Union.

In the first quarter of 2012, the Greek unemployment rate hit 22.6%. As the unemployment rate now approaches that of Spain, it is very important to note how fast this situation is deteriorating. This same time last year, the unemployment rate in Greece was 16.1% (source: ECB)!

Youth unemployment has gone from 42% in Greece last year to an incredible 52.7% in the first quarter of 2012!

Due to the financial crisis, tourists are staying away from Greece. The country reported that tourism fell over 15% in the first quarter when compared to last year (source: Irish Time, June 14, 2012).

It doesn’t matter which coalition party governs Greece; all parties have said they want to renegotiate the terms of the country’s bailout and its austerity measures with the European Union.

With the Greek economy continuing to contract at a rapid rate due to the financial crisis, revenues to the government are falling faster than the government can make its bond payments.

This means Greece is going to need more money from the European Union. In the meantime, no one knows how the European Union will structure the supposed 100-billion-euro bailout for Spain.

Now that more lenient bailout deals are currently being proposed for both Greece and Spain, Ireland and Portugal—which had … Read More

Switzerland Debating Gold-backed Currency

By for Profit Confidential

A few weeks ago, members of the Swiss parliament discussed introducing a gold bullion-backed currency to trade alongside their paper-based currency (source: Forex Pros, May 22, 2012).

In Switzerland, the official currency is the Swiss franc. What was proposed was a gold franc that would be backed by gold bullion. It would initially be circulated in Switzerland, with a fixed exchange of one gold franc containing 0.1 grams of gold bullion for five Swiss francs.

This proposal was initiated by the country’s largest elected party, the Swiss People’s Party. The party initiated the proposal because it felt gold bullion could play a role—as it has in history—in protecting the Swiss currency from debasement.

This is parallel to another role gold bullion has played throughout history: to preserve wealth. Gold bullion maintains purchasing power and value not only for an individual, but also for a country, as the Swiss are alluding to.

Considering the global financial crisis that is ongoing and is currently visiting the European Union, the parliament had a wider discussion on returning the Swiss franc itself to being backed by gold bullion, instead of by the promises of politicians and bankers.

What the members of the Swiss parliament are alluding to is the loss of confidence in paper currencies that could develop due to the global financial crisis. Should the situation continue to worsen, it is not out-of-the-realm of possibility that investors and people will lose faith in the ability of politicians and bankers to actually solve the financial crisis.

Loss of confidence means investors and people will sell their currencies, which they perceive to have no … Read More

U.S. Retail Sales Numbers Now at Worst Point in Two Years

By for Profit Confidential

financial crisisFor the first time in two years, the U.S. has experienced two consecutive months of declining retail sales (source: Commerce Department).

Not only did May 2012’s retail sales, month-over-month, decline 0.2%, but this was on the back of April’s retail sales numbers being revised downward from a decline of 0.2%. If this weren’t bad enough, the Commerce Department revised March’s 0.7% growth in retail sales downward to just 0.4% in growth!

So much for consumer spending, which represents 70% of gross domestic product (GDP) in this country, by the way.

These downward revisions simply highlight how quickly an economic slowdown is taking hold in the U.S.

Gas prices have come down at the pump over the past two months, which should have spurred consumer spending. While consumers are certainly grateful to pay lower gas prices, the extra money in their pockets is not translating into consumer spending.

The fact that last month was weak for retail sales in the U.S. and April’s retail sales were revised downward should come as no surprise to Profit Confidential readers. As I have been writing, personal real incomes in the U.S. have been falling, which means consumers’ wealth is not increasing. If consumers don’t have more money in their pockets, there can be no increase in consumer spending.

Eight of the 13 major categories of consumer spending decreased in the month of May. When car sales are removed from the retail sales numbers, the drop in consumer spending can be seen as the largest in two years!

Weak consumer spending is having a knock-off effect on other parts of the U.S. economy. If … Read More

Two Lost Decades for Americans

By for Profit Confidential

recessionIn 2010, the average American family was no wealthier than they were in early 1990s—meaning the financial crisis of 2008 erased two decades of wealth (source: New York Times, June 11, 2012).

The Federal Reserve released this very sobering but not surprising news this week. The average American family’s wealth has been wiped out with the financial crisis of 2008 to the tune of 38.8%!

The Federal Reserve also noted that three-quarters of the loss of wealth was attributed to the decline in housing prices; no surprise here. The reports pointed out that middle-class families were the ones hardest hit.

The Federal Reserve’s survey also highlighted how the average American family income declined to $45,800 in 2010 from $49,600 in 2007. Add the fact presented by the Federal Reserve that real disposable income for the average American household continues to decline, and there can be no consumer confidence or spending.

Another disturbing trend noted in the Federal Reserve’s survey, which other current economic data have been pointing to as well, is a lack of savings by consumers.

Only half of American families have any type of retirement account!

The Federal Reserve report found that those who did save were doing so to ensure they could make their payments should they lose their jobs. This is the clearest sign of the lack of consumer confidence out there…which means there is no chance of increased consumer spending.

Consumers not only have less wealth and lower income, but also, when many assets dropped in value with the economic crisis, their debt stayed the same—a major contributor to a lack of consumer confidence…. Read More

U.S. Economy Following Path of Greece & Spain?

By for Profit Confidential

national debtThe U.S. Congressional Budget Office (CBO) has issued another scathing report on the state of the mountainous U.S. national debt.

The CBO says the national debt will double by 2026 and reach 200% of gross domestic product (GDP) by 2037 unless firm action is taken to stem America’s annual trillion-dollar deficits. (For the benefit of my new readers, Greece got into trouble when debt-to-GDP in that country hit 130%.)

There is no doubt tax increases and radical spending cuts are needed to reduce the national debt. The CBO notes that, if congress allows the tax increases and the removal of spending programs on January 1, 2013—the “fiscal cliff”—then it will be the important first steps in reducing the budget deficit and so the national debt.

However, as I’ve mentioned many times in these pages, if congress does allow these tax increases and removal of spending programs to occur on January 1, 2013, it will send the U.S. economy further into recession. Does the elected government want to be responsible for sending the economy into a recession after just being elected in November? Not a chance.

As usual, the CBO assumes some pretty rosy numbers in its calculation of the national debt. The CBO assumes that the 10-year U.S. Treasury note will average roughly three percent during the next 20 years!

I can’t see this happening; long-term interest rates will eventually rise, which will increase the interest payments on the national debt, which will widen (not shrink) budget deficits…leading to a doubling of debt-to-GDP much sooner than 2037.

Of course, as the economy worsens towards the end of this year … Read More

Spain’s Move of Desperation

By for Profit Confidential

Spain’s Treasury minister—equivalent to Timothy Geithner here in the U.S.—issued a public plea yesterday to the European Central Bank (ECB) stating it was “technically impossible” for Spain to bail itself out.

While everyone assumed the future of the European Union was centered on the upcoming elections in Greece, Spain and the ECB instead have taken center stage. Spanish banks need money from the ECB and they need it now.

How dire is the situation? The Group of Seven (G7) industrialized nations have called an emergency meeting to discuss the crisis in the European Union, with Spain at the top of the agenda. The meeting will take place at the end of June.

But the situation is so bad that the Spanish banks and Spain’s Treasury minister are not waiting on the G7 meeting or the ECB.

The Spanish banks have decided to open their books and allow auditors from Germany and the U.S. to evaluate their financial statements in order to decide how to draft a bailout solution that would work for all sides, including the ECB and Germany.

The current estimates have the Spanish banks needing anywhere from 75 billion euros to 100 billion euros from the ECB.

These estimates will be moved higher—and the ECB knows it—because, as I’ve highlighted in these pages, the real estate collapse in Spain continues. As house prices fall relentlessly in Spain, the mortgages that the Spanish banks hold are worth less and less.

The fact that Spanish banks are opening their books to outside auditors smells of desperation and illustrates how badly they need ECB money now.

The ECB—or Germany … Read More

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