Taking together all of the countries, one would have a view of the global economy. Understanding the global economy and the shifts among countries, businesses can better allocate capital to the areas of the world that are growing. The U.S. currently is the largest economy in the world, now followed by China. Shifts among countries in their global economic ranking are the result of many criteria, including population growth and fiscal and monetary policies. Knowing which part of the world is growing economically and which part is shrinking is extremely important for businesses.
We all know that central banks around the world have taken a loose monetary policy stance, providing substantial quantitative easing measures to try and revive the global economy.
As I’ve written before, there are many long-term unintended consequences that could arise from such an aggressive monetary policy program. While quantitative easing has reduced the probability of a financial crisis occurring over the past couple of years, this does not eliminate such an event from happening at some point in the future.
One example of the impact of the current monetary policy initiatives is the global hunt for yield. Investors have been piling into all kinds of bonds regardless of the true long-term fundamental merit of the investment. France, as we all know, is suffering from a lack of growth, including downgrades by credit rating agencies. However, this has not stopped investors from piling into French bonds, which are up approximately 12% year-to-date.
Even though the economy is still weak, and there have been no real structural reforms within France to fix the economic potential of the nation for the future, investors have piled into bonds at such a rate that the 10-year French bonds are yielding approximately 1.7%.
I don’t know about you, but I would be more comfortable investing in a country or company that has the ability to grow revenue and run their economy or business efficiently. At this point, France is not that country.
This hunt for yield is one of the side effects of the current monetary policy program. Quantitative easing has pushed investors out of safe investments and into riskier assets. While this is creating … Read More
Don’t worry, folks, Federal Reserve Chairman Ben Bernanke is not going to take your money away anytime soon; the stock market is safe.
In his testimony to Congress on Wednesday, Bernanke made it clear that the central bank’s current aggressive $85.0 billion in monthly bond purchases will continue to move along.
The stock market surged upward on the news, which is exactly what I would have expected, given that the amazing run-up in stocks this year has largely been due to the flow of easy money into the U.S. economic system. So there’s no need to worry about the stock market and your assets—for now.
Bernanke emphasized the fragility of the jobs market and reinforced his view that it’s still too early to put an end to the stimulus. Allowing rates to creep higher would “carry a substantial risk of slowing or ending the economic recovery,” said Bernanke to Congress. (Source: Chairman Bernanke, B.S., “The Economic Outlook: Before the Joint Economic Committee, U.S. Congress, Washington, D.C.,” Board of Governors of the Federal Reserve System web site, May 22, 2013.)
The end result will see the stock market continue to rally higher to new record highs.
The chart below shows the upward move in the S&P 500 since 1980, shown by the green line, as the effective federal funds rate declines over time. Note the massive gap between the S&P 500 and the effective federal funds rate, shown by the purple oval on the chart.
Chart courtesy of www.StockCharts.com
The reality is that not only is the easy monetary policy flowing in America, it is also flowing across the global economy … Read More
With the introduction of monetary stimulus by many central banks around the world, a common question asked is: what’s a unique investment opportunity in a market sector that is not immediately obvious to the average investor?
If the global stimulus really begins to work, it should result in higher demand for commodities. If this occurs, an interesting market sector that might be an above-average long-term investment opportunity is the shipping industry.
Information just released shows that Greek shipping firms have recently ordered the most iron ore carriers since 2008. Greek shippers own a large number of vessels internationally. (Source: Sheridan, R., “Greeks Bet Ship Rout Ending With Most Orders Since 2008: Freight,” Bloomberg, April 30, 2013.)
While the average earnings per day for a Capesize ship (a type of cargo ship used to transport raw commodities) is only $4,900—a massive drop from the peak in 2008 of $229,000—many analysts are expecting this current level to be a bottom and are expecting earnings to increase to $17,500 per day next year.
Clearly, the Greek shipping market sector sees an investment opportunity over the next few years. From the time of ordering to delivery, the process of obtaining a carrier takes approximately two years. However, because of the economic slowdown, the costs of construction and secondhand sale prices have dropped precipitously.
As an example, a new ship that used to cost approximately $100 million to build in 2008, now costs only $47.0 million. Prices are even lower on the secondhand market sector for large ships, and some shipping firms see this time as an investment opportunity and are using the low prices … Read More
George Soros knows a thing or two about making money from big bets. In 1992, Soros made a $10.00 short wager on the British pound and walked away with a billion dollars in profits.
Soros is now convinced Germany needs to rethink its strategy toward the sustainability of the eurozone and, in a draconian manner, believes the country should leave the euro.
Of course, should this happen, the 17-country eurozone would collapse, triggering a massive economic Armageddon and financial crisis in Europe that would ultimately generate chaos for the global economy.
Now, I doubt Germany or France—the two pillars integral to the eurozone—will exit the euro, but the reality is that the situation in the economic zone remains in a financial crisis with little hope of revival.
The problem is that the eurozone is firmly in a financial crisis and recession, trying to find its way out.
Greece, Portugal, Spain, and Italy are a drag on the ability of the eurozone to get out of its financial crisis. The unemployment rate in Greece and Spain is over 25% and worsening.
Italy just formed a new government, but there’s tons of work left for that debt-ridden country before it can exit its own financial crisis that has been building for years.
With all of this bad news, it’s not surprising to see people in the eurozone feeling the despair. According to the European Commission, economic morale in the eurozone remains weak after declining in March and April. (Source: Emmot, R., “Economic mood in euro zone sours again in April,” Reuters, April 29, 2013.)
And it appears that the solution will again … Read More
You can tell a lot about the pulse of the economy by examining the retail sales and restaurant sector. When people are working and making money, they tend to be more confident and want to spend, especially non-discretionary spending.
In the fast-food restaurant sector, the “Best of Breed” is McDonalds Corporation (NYSE/MCD).
The company has numerous rivals and the sector is extremely competitive, but there is no real and valid threat on the horizon for McDonalds that could affect it.
Characterized by its familiar “golden arches,” which are sometimes visible from miles away, the company is a true American icon, just like General Motors Company (NYSE/GM).
Yet McDonalds is also a decent indicator on how the United States and global economy are faring.
The current level and valuation of stocks suggest everything is going well and on target with the global economy.
But, sorry to break it to you: the path to sustained economic renewal is still filled with potholes.
As I’ve previously written in these pages, the global economy and performance of the stock markets have been built by the easy money injected into the global monetary system by the world’s central banks, including our friends at the Federal Reserve.
So when I begin to see slowing at some of the key multinational companies, I wonder about the condition of the global economy.
McDonalds is a decent barometer on the global economy and, based on what I’m seeing, I sense there’s some stalling in the global economy.
In the first-quarter earnings season, McDonalds reported a marginal one-percent rise in its consolidated revenues due to the slowing in Europe and … Read More