Investment Contrarians

European Union

Formally established in 1993, the European Union, often referred to simply as the EU, is a political and economic union established after the ratification of the Maastricht Treaty by members of the European Community. It has since expanded to include some Central and Eastern European nations. The establishment of the European Union provided for the creation of a central European bank and the adoption of a common currency: the euro. The idea behind the European Union is to create a single geographical market where goods, services, and money can be exchanged freely.

Gold Bullion Held Within America; Foreign Countries Question How Much Is Really There

By for Investment Contrarians | Nov 1, 2012

Gold BullionWith the rise of instability within the European Union (E.U.), gold bullion has become increasingly attractive as a backstop. Next to America, Germany has the second-largest holding of gold bullion, with approximately 3,600 metric tons. What is interesting at the current moment is that many voices within Germany are calling for the Bundesbank, its central bank, to check its international holdings, namely in the U.S., as not all of the gold bullion held by Germany is being stored on the country’s own soil.

A recent report by the German Federal Audit Office criticized the Bundesbank for its lack of a better international inventory system. While the German central bank has a strong handle on its domestic gold bullion inventory, its knowledge of its holdings in other countries, especially the U.S., is not as thorough as some would like. (Source: “Why Germany Wants to See its US Gold,” Der Spiegel, October 30, 2012.)

With gold prices at very high levels, there is a greater concern to ensure the accuracy of the level of gold bullion actually being held. With approximately half of Germany’s gold bullion being stored in America, the lack of proper auditing by German officials worries some within Germany.

Of Germany’s 3,600 metric tons of gold bullion in total, 1,536 are being held at the Federal Reserve Bank of New York. (Source: Der Spiegel.) Some within the German community have been calling for a return of the gold bullion to help fund other proposed ventures, including a natural disaster relief fund or an education fund. With gold prices so high, many people believe this would be a more practical … Read More

Shocking Numbers from China; What Do They Mean for You?

By for Investment Contrarians | Oct 17, 2012

economic growthHave you read or heard the recent economic data from China? Chinese exports for September grew 9.9% from the same period last year, almost double what the investment community expected.

The Chinese economy is extremely dependent on exports while it’s slowly developing its domestic economy. To get a better gauge of global economic growth, if China’s exports are indeed improving, then some economies around the world also must be improving, as the Chinese economy has grown to become a significant part of the global economy over the past decade. China makes up a large portion of many industries, and supplies numerous products to many parts of the world. Regardless of what one thinks about the Chinese economy, there is no question that it has a large influence on worldwide economic growth.

The European Union (EU) is a disproportionately large and important destination for the Chinese economy. With economic growth anemic within the EU, it was no surprise that exports to the Union fell 10.7% in September. This makes the overall increase of 9.9% that much more startling. It means that economic growth outside of the EU appears to be far stronger than anyone thought it would be so far.

Exports to America were up 5.5% for the September period as compared to year-ago levels. Neighboring South East Asian countries saw the biggest jump in exports at 25.5% for the month. This included Taiwan, up 19.9%, and South Korea, up nine percent. (Source: “China Sept. Exports Jump 9.9%, Imports up 2.4%,” The China Post, October 14, 2012.)

We will hear shortly from government officials regarding gross domestic product (GDP) numbers for … Read More

Sovereign Debt: The Elephant in the Room

By for Investment Contrarians | Jul 12, 2012

Sovereign DebtAs the European Union attempts to work out a solution to the sovereign debt crisis by getting money into the hands of the Spanish banks, it is important to take a step back and look at why the sovereign debt crisis is so important to resolve.

The prime minister of Spain has introduced new consumption taxes and spending cuts in the hopes of meeting the European Union’s budget-deficit target for Spain in the next few years. With an already weak economy and unemployment at almost 25%, these cuts are not going over well in the country and will make reaching these targets unlikely.

While the situation spirals out of control, Spanish 10-year bond yields spiked above seven percent, while Italian bond yields pushed above six percent. For countries that are struggling to meet their budget deficits, these high yields are impossible to take on. With lower tax revenue, due to the ongoing recession within the European Union, sovereign debt cannot be rolled over in the market, because these high-interest payments alone would be too much of a burden for these countries to pay.

Italy, as well, is attempting to implement its own austerity measures in order to cut its budget deficit, but Italian bond yields continue to spike, as the market believes the embattled country’s sovereign debt will only get worse. Spain and Italy continue to put pressure on the European Union to provide money at cheap interest rates.

The saga with Greece continues to unfold as well. The country’s sovereign debt is such that it will require another bailout, because with the worsening recession and its tax revenues continuing … Read More

The European Union’s Latest Deal: Smoke and Mirrors

By for Investment Contrarians | Jul 6, 2012

The European Union’s Latest Deal Smoke and MirrorsThe market cheered news out of the European Union that a deal was made to tackle this financial crisis head-on and provide capital to the Spanish banks. Forget the numbers for the moment; what is more important to note is that the money to help the Spanish banks is supposedly going to come from the European Stability Mechanism (ESM), which requires the approval of all 17 countries of the European Union in order to be enacted.

Immediately following the announcement, the dissenting countries of the European Union weighed in. The focus is always on Germany and how it looks like Germany caved to the needs of the European Union this time because the financial crisis is so severe. However, people ignore the other smaller countries of the European Union that remain under the radar: Finland and the Netherlands.

People tend to forget that Finland and the Netherlands are AAA-rated countries with low unemployment rates and stable economies. Certainly their economies have suffered and are continuing to suffer the effects of the financial crisis and the recession in the European Union; however, because they are sound, responsible economies that do not have high debt levels, they are tired of paying for other countries within the European Union that are neither sound nor responsible.

The European Union’s treaty states that the countries must maintain their budget deficits below three percent of gross domestic product (GDP). With the financial crisis, none of the countries have been able to adhere to this policy, not even Germany. In spite of slower growth, however, Finland made the sacrifices necessary to meet this target.

Since they are … Read More

The Emperor Has No Clothes

By for Investment Contrarians | Jun 27, 2012

European debt crisisThe European debt crisis continues to escalate due to the immediate needs of the Spanish banks. The Spanish government has asked for a government bailout from the European Union, since the country doesn’t have enough money to save its own banks.

To calm the markets and reassure them that the European debt crisis is under control, the European Union announced a government bailout of 100 billion euros.

The odd thing is that the government bailout is supposed to come through the European Stability Mechanism (ESM). Although it is difficult to know the exact numbers, the ESM has roughly 400 billion euros left in it, because the fund has been used as a government bailout mechanism for other countries over the last few years.

The reason the number is hard to pin down is that this money is only pledged from the members of the European Union; it is not actually there yet. The funds would be put into the ESM should a government bailout be required.

Now that Spain requires the government bailout, the nations within the European Union must come up with the money. Well, Italy is on the hook for roughly 20% of the money or close to 80 billion euros. That means that if the government bailout of Spain were to take place, Italy would have to borrow at over six-percent interest from the market, and then lend the money to Spain at between two percent and three percent. Talk about a losing proposition; and on 80 billion euros, that is at least 24 million euros lost on the interest cost alone. No way Italy goes for … Read More