Posts Tagged ‘eurozone’
We 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.
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
My father is 87 years old. He’s in great shape, drives on his own, plays cards with the guys each afternoon, and has basically been enjoying retirement since he sold his business when he was 65.
Like all retirees, he and my Mom have been living off their savings for years.
And like millions of Americans, the low interest rates we have been enduring since the Federal Reserve decided back in 2008 that it was best to bring rates down to historically low levels (and keep them there for six years) haven’t been kind to them.
But last week, the letter we got in the mail, well, it was the last straw.
My folks have some of their money in the wealth management division of one of the largest banks in North America. On Friday, we received a letter from them that said the bank would start charging a fee of $500.00 a year if the balance in my parents’ accounts fell below $125,000.
Yes, you got that right. If my parents keep less than $125,000 in their accounts at this (essentially) brokerage arm of the bank, they will be charged $500.00 a year for the bank to keep their money.
Nice. (If you are a small business owner, imagine treating your customers like that!)
The letter ended by saying that if we are not happy with the bank, we can transfer the money to another financial institution by a certain deadline date and the transfer fee will be waived. Nice, again.
Dear reader, I have been writing to you for months that my view is essentially that money is … Read More
In 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
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 … Read More
While the Federal Reserve has cut back on its money printing program, the fact of the matter is that the “official” U.S. national debt is closing in on $18.0 trillion. The unofficial national debt (when obligations like Social Security, Medicare, Medicaid, welfare, and now Obamacare are taken into consideration) is closer to $200 trillion.
The Japanese national debt just hit one quadrillion yuan.
Many countries in the eurozone are drowning under debt. The European Central Bank recently started talking about printing money to finally get the eurozone out of its mess.
All of this is very well-known to Profit Confidential readers.
Why do I bring this up again today? I’m back focusing on debt because it is becoming more and more apparent that the only way to reduce the record national debt many industrialized countries have accumulated since the Credit Crisis of 2008 is to print even more money.
And the collapse in the volatility of gold bullion prices could be pointing to just that. To see what I’m talking about, take a look at this chart:
In April of 2013, when the sharp decline in gold bullion prices began, volatility for gold prices was very high. Since then, the volatility index for gold, an index that essentially gauges investors’ fear factor for gold bullion prices, has collapsed.
And when we look at the price chart of gold bullion (see next chart below), we see strong support for the metal just below the $1,200-an-ounce level. This level has been tested twice and on both occasions, gold failed to fall below $1,200. In technical analysis, this is … Read More
From 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
Oil prices could be setting up for an upside break if the situation in Crimea intensifies and a military conflict emerges between Russia and Ukraine over the rights to Crimea.
Since the price of West Texas Intermediate (WTI) crude broke out to over $100.00 a barrel in early 2011, oil prices have done very little, trading largely in a sideways channel with support in the $80.00 level and resistance around $110.00.
The global economic renewal has helped to support oil prices in spite of the continued stalling in China. Return to growth in the eurozone is also adding some support, but for oil prices to shoot higher, there really needs to be a geopolitical event, such as what we are seeing in Crimea. Of course, don’t forget the Middle East, which still has its major issues, especially with the speculation that Iran is building nuclear-enabled weaponry.
There’s also the crazy dictator of North Korea, Kim Jong-il, who has continued on the same path his father was on, isolating the country. His testing of several missiles earlier this week into South Korea was just another signal that he craves attention.
At the end of the day, to make money in oil will largely be dependent on the hot spots of the world.
While I doubt Russia will launch a military assault on Ukraine, you never know with President Putin. If this should happen, oil prices would vault higher to above $110.00 a barrel, and likely maybe even higher toward the $150.00 level, last reached in 2008 prior to the subprime crisis.
So while oil prices could ratchet … Read More
The U.S. national debt has skyrocketed from $9.2 trillion in the beginning of 2008 to $17.3 trillion today. This represents an increase of more than 88% in just a matter of a few years. (Source: Treasury Direct web site, last accessed March 11, 2014.) The national debt of the U.S. is higher than its gross domestic product (GDP).
Japan is in a very similar situation, if not worse. At the end of 2013, Japan’s national debt stood above one quadrillion yen. In U.S. dollar terms, this amounts to more than $10.0 trillion. (Source: Japan Ministry of Finance web site, last accessed March 11, 2014.) Japan’s national debt is more than 200% of the country’s GDP.
In its fiscal 2012–2013 year, the national debt of Great Britain stood at 1.18 trillion pounds; in U.S. dollar terms, that’s close to $2.0 trillion. (Source: Reuters, February 28, 2014.) Great Britain’s national debt represents 74% of its GDP, and that percentage is rising.
The U.S., Japan, and Great Britain are only three countries whose national debt continues to increase. Include troubled countries in the eurozone, and the picture in respect to out-of-control debt and money printing starts to take a really ugly form.
Rising national debt pretty much means there will be higher inflation ahead; that’s one of the reasons why I can’t help but be bullish on gold bullion, one of the best hedges against inflation.
And that’s where the opportunity for investors lies today. Gold mining shares are trading at historically low multiples. Because of the sell-off in gold bullion prices over the last two years, many gold mining companies were punished. … Read More
The stock market in France has been on a tear! Below, I present a chart of the French CAC 40 Index, the main stock market index in France.
Looking at the chart, we see the French stock market is trading at a five-year high. With such a strong stock market, one would expect France, the second-largest economy in the eurozone, to be doing well. But it’s the exact opposite!
As its stock market rallies, France’s economic slowdown is gaining steam. In January, the unemployment rate in France was unchanged; it has remained close to 11% for a year now. (Source: Eurostat, February 28, 2014.) Consumer spending in the French economy declined 2.1% in January after declining 0.1% in December. (Source: National Institute of Statistics and Economic Studies, February 28, 2014.) Other key indicators of the French economy are also pointing to an economic slowdown for the country.
Chart courtesy of www.StockCharts.com
And France isn’t the only place in the eurozone still experiencing a severe economic slowdown. In January, the unemployment rate in Italy, the third-biggest nation in the eurozone, hit a record-high of 12.9%, compared to 11.8% a year ago.
I have not mentioned Greece, Spain, and Portugal because they have been discussed in these pages many times before; as my readers are well aware, they are in a state of outright depression.
Just like how investors have bought into the U.S. stock market again in hopes of U.S. economic growth, the same thing has happened in the eurozone. Investors have put money into France’s stock market in hopes of that economy recovering—but it hasn’t. We are dealing with a … Read More
On February 24, the S&P 500 broke to a new all-time high. There was panic buying as soon as the markets opened that day, as the chart below depicts.
Looking at this, I can’t help but ask if investors have completely lost touch with reality. It seems the fundamentals that drive stock prices higher—corporate earnings—have been ignored.
And as investors are driving key stock indices higher, the state of the global economy is becoming worrisome. This can’t be stressed enough: the U.S. economy isn’t immune to a disturbance in the global economy. But this isn’t all; if the global economy sees an economic slowdown, the companies on U.S. key stock indices suffer as well.
One clear example of this, as it stands, is Caterpillar Inc. (NYSE/CAT), a giant industrial goods manufacturer and component of the S&P 500. The company reported that annual sales declined 16% in 2013. Caterpillar’s revenues were $55.65 billion compared to $65.87 billion. The company’s corporate earnings per share were down more than 32% in 2013. The reason for this: a challenging business environment in the global economy. (Source: Caterpillar Inc., January 27, 2014.)
The global economy is going to disappoint in 2014.
First in line is Asia. Look anywhere on that continent, and you will see economic slowdown looming in the air. China, the biggest economic hub in the region and the second-biggest in the global economy, is outright slowing down. In February, the manufacturing activity in the country dropped to a seven-month low. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered at 48.3 in February compared to 49.5 in … Read More
The 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
Some prolonged downside is exactly what this stock market needs—a market that’s been looking for a catalyst to sell for quite some time.
While there has been pressure on long-term interest rates, we still have virtual monetary certainty this year with the Fed funds rate staying where it is. Weakness abroad in China is still a story of overcapacity, but there has been some refreshing economic data out of the eurozone.
What’s clear in Western economies is that positive economic data is sporadic and mostly without trend. The lack of consistency in mature economies has equity investors in a bit of a loop. Ten percent downside across the main stock market indices would be a healthy development for the long-term trend. We never did get a stock market correction last year, only consolidation, as investors were only too happy to keep buying.
Fourth-quarter earnings season has been modest so far, with outperformance (according to Wall Street) mostly coming in at the bottom-line, meaning that genuine sales growth is still a very tough thing to accomplish. Furthermore, a lot of corporations aren’t guiding 2014 above previous outlooks, and this makes it very difficult to be a new buyer.
Global capital markets are gyrating on a reassessment of investment risk and the prospect for real economic growth. Add in currency volatility, and there are the makings of a flight to the U.S. dollar and a sell-off in the stock market.
Still, the most important data now is what corporations actually say about their businesses. Beating the Street is less important than a true assessment of business conditions and expectations for the future. … Read More
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