inflation
Coast Isn’t Clear for America, Economic Growth Slowing
By Sasha Cekerevac for Investment Contrarians | Jun 17, 2013
Over the past few months, it appears that the first-quarter economic growth spurt has begun to decelerate in America. This is troublesome, as stock market investors had anticipated that we would be seeing economic growth finally gain steam.
Unfortunately, we don’t have the global economy on which to rely. Much of the world remains quite weak, and this lack of demand in the global economy is creating a drag on our own nation.
While first-quarter economic growth was relatively strong at 2.4% real gross domestic product (GDP), it appears that in the second quarter, economic growth slowed to less than two percent. This was on the heels of tax increases, a slowdown in manufacturing, and budget cuts by the federal government.
The real goal for economic growth is to have a rate of increase that is close to optimal, which is approximately 2.5%. An economic growth rate above this level would be extremely positive, as it would quickly eliminate any slack in the labor market; however, it would be best if it didn’t grow too high,because that would create strains in the economy and could lead to inflation.
We have seen only anemic job creation, partly because the economy has averaged an economic growth rate of just 2.1% since hitting a bottom in 2009. While the growth is positive, it simply is not strong enough to generate the number of jobs needed to fill the void left by so many lay-offs during the recession.
This weakness in the global economy is also a factor in the lack of manufacturing jobs. Many of the jobs created over the past two years … Read More
Who Really Benefits from Inflation and Why You’re Not Wealthier
By Sasha Cekerevac for Investment Contrarians | Jun 10, 2013
The Federal Reserve Bank of St. Louis released an interesting report analyzing the underlying fundamentals of why America’s economic growth level still remains quite anemic. The results won’t surprise many people—most American households have rebuilt only a fraction of the wealth lost during the recent recession.
According to the Federal Reserve Bank of St. Louis, household net worth peaked at $67.4 trillion during the fourth quarter of 2007. Household net worth then sunk to a low of $51.4 trillion in 2009, and has since rebounded to $66.1 trillion. (Source: “Annual Report 2012,” Federal Reserve Bank of St. Louis web site, May 2013, accessed June 6, 2013.)
While it appears that nominal net worth has recovered 91% of the losses, the St. Louis Federal Reserve notes that this is not an accurate representation of either household wealth or economic growth.
Since inflation was present during this time—for a total of two percent per year over the last five years—and the number of households increased by 3.8 million, the real recovery rate is only 45% of household wealth, according to the St. Louis Federal Reserve.
Why is economic growth still lagging, and why don’t most Americans feel wealthier? As the St. Louis Federal Reserve reports, the vast majority of the gains have been in the stock market. Because the stock market is primarily an investment for a relatively small number of Americans, this leads to significant differences in wealth creation.
Increasing or decreasing wealth is just as important as income for economic growth. Because a large percentage of the population has not had an increase in total wealth or has not seen … Read More
Gold Bullion Trading Hitting Record Levels; Chinese Leading the Pack
By Sasha Cekerevac for Investment Contrarians | May 10, 2013
The massive sell-off in the price of gold bullion has certainly shaken up some investors. However, it seems there are others whose investment strategy has been to wait for a pullback in gold to continue accumulating the precious metal.
Recent data has shown that China imported gold bullion from Hong Kong at a record-high level in March. Net imports into China of gold from Hong Kong were 130,038 kg, compared to 60,947 kg of the yellow metal in February, according to Bloomberg. (Source: “China’s Gold Purchases From Hong Kong Expand to Record,” Bloomberg, May 7 2013, last accessed May 8, 2013.)
While these imports happened prior to the sell-off in the price of gold bullion in April, China has clearly been using an investment strategy to continually accumulate the precious metal whenever it can. With the price of gold in April dropping 14% in just two days—the biggest sell-off in 30 years—this led to an increase in demand for jewelry and coins in China.
Essentially, gold transactions have increased as many more participants use the metal for trading purposes as an investment strategy. Exports of gold from China into Hong Kong were 93,481 kg, a huge jump from February’s exports of the yellow metal of 36,159 kg. Profiting from the volatility, trading in gold continues to skyrocket globally.
The volume of gold bullion on the Shanghai exchange hit a record high on April 22 of 43,272 kg. As more traders use gold in their investment strategy, transactions continue to increase substantially. Following the sell-off in gold bullion prices on April 15 and 16, the China Gold Association reported that retail … Read More
Higher Inflation Rate Expected; Long-Term Investors in Danger?
By Sasha Cekerevac for Investment Contrarians | May 9, 2013
One of the biggest concerns for investors when it comes to long-term investing is the safe return of their capital. Following the 6.75% levy imposed by Cyprus on deposits of less than 100,000 euros, many investors were shocked that such an event could take place.
Certainly, long-term investing does have risks, including a hidden hazard of the possibility that a rising inflation rate will erode wealth just as easily as the levy imposed by Cyprus on bank deposits.
A study done by The Economist showed that people in the U.S. who placed their capital in six-month certificates of deposit (CDs) from 2009 until 2012 earned 3.2% (before tax). Many believe that a CD is among the safest of short-term investments. However, the inflation rate was 6.6% during this time period, resulting in a loss of wealth for the investor of 3.2%. (Source: “The financial-repression levy,” The Economist, March 23, 2013.)
While bank depositors in Cyprus are in an uproar over the one-time levy, American investors have also been hit with a loss of wealth of approximately 3.2% during a three-year period due to inflation, as noted above. Now, imagine the full impact on long-term investing over many years and decades as the inflation rate erodes wealth.
Understanding the real impact of the rate of inflation should alter one’s portfolio allocation when it comes to long-term investing. Simply placing capital in U.S. Treasury notes will not have the rate of return that investors need for retirement.
Many people only look at the nominal return, and not the real return on an investment. Remember, regardless of what the expected return is, for … Read More
Did the Federal Reserve Just Signal More Monetary Policy?
By Sasha Cekerevac for Investment Contrarians | May 6, 2013
The latest meeting by the Federal Reserve was quite significant regarding its monetary policy program, and many economists will now need to revise their analyses.
The key sentence in the Fed’s statement was, “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” (Source: Board of Governors of the Federal Reserve System web site, May 1, 2013, last accessed May 2, 2013.)
Why is this so significant? For the past few months, many economists and analysts have been expecting that the Federal Reserve would begin to discuss when it would be appropriate to begin reducing its aggressive monetary policy program, specifically the monthly $85.0 billion bond-buying level.
Many were thinking that at this meeting the Federal Reserve would indicate that at some point in the future it would begin reducing its aggressive monetary policy stance. While the Fed did indicate that it might be prepared to reduce bond buying and lower monetary policy measures, this is the first mention in its press releases that an increase is possible.
In my opinion, this indicates that the Federal Reserve now believes that additional monetary policy might be necessary, whereas we all had been hoping that the U.S. economy would begin to improve. Clearly, the recent data has shown otherwise.
Job creation remains very weak, and various sectors, such as manufacturing, do not indicate that they will increase their level of production anytime soon. Internationally, we are also seeing continued weakness in many countries, which can only put downward pressure on our own economy.
With … Read More
Global Central Bank Money Printing to Cause Long-Term Damage
By Sasha Cekerevac for Investment Contrarians | Apr 30, 2013
One of the most confusing topics of late is the low level of the inflation rate even though monetary stimulus has been quite aggressive worldwide. The most recent data point came from Japan, in which consumer prices dropped by 0.5% in March versus the same time in 2012.
The Bank of Japan is just now beginning a new monetary stimulus plan in the hopes of moving the inflation rate back into positive territory, with the target at two percent. However, some analysts question the possibility of reaching the target inflation rate over the next couple years, even with this monetary stimulus plan. (Source: Fujioka, T., et al., “Bank of Japan Sees Inflation Nearing Target in 2015: Economy,” Bloomberg, April 26, 2013.)
This aggressive monetary stimulus package has driven the yen weaker, benefiting export-oriented companies; however, while the general inflation rate is low, prices for imports such as energy will continue to rise as the currency declines. Additionally, the monetary stimulus program to drive up the inflation rate will have an impact on property prices and will raise rent levels.
However, monetary stimulus is not enough to gain traction and increase the inflation rate. Japan needs structural reforms to its business sector to encourage expansion and growth. Psychologically, the average Japanese citizen has been used to price declines for many years—this mentality will be hard to change. As an example, the latest report showed that TV prices fell by 19% from last year. (Source: Ibid.)
In America, we’ve had monetary stimulus for quite a while, yet the inflation rate is still quite low, below the targeted level. In March, the consumer … Read More
Latest Retail Data Sending Warning to Investors
By Sasha Cekerevac for Investment Contrarians | Apr 17, 2013
With the market hitting all-time highs, many investors are wondering how investor sentiment can be so positive when job creation is still not as strong as it should be. This divergence between the financial markets and the real economy cannot last forever.
Investor sentiment has been propped up by the Federal Reserve, which is trying to prime and ignite the U.S. economy. While job creation is certainly better now than it was a few years ago, there is still much more work that needs to be accomplished.
One very visible sign that the economy is not running at 100% capacity was the recently released retail sales data. For March, retail sales decreased by 0.4%, although this did follow a very strong February that showed a one-percent gain. A survey of 85 economists by Bloomberg had a median forecast of zero (unchanged) from March. (Source: Kowalski, A., “Retail Sales in U.S. Declined by Most in Nine Months,” Bloomberg, April 12, 2013.)
Job creation obviously plays a very important role when it comes to retail sales. And remember that like most developed nations, a vast majority of the U.S. economy is based on consumer spending.
In this case, investor sentiment might have become too bullish on retail-oriented stocks. If job creation does not accelerate, we could see a further impact on discretionary spending, which would break down investor sentiment throughout this year.
However, this recent retail sales data might have been a blip, as the trend is still fairly strong. Remember that one data point does not make a trend. Following stronger-than-expected data earlier in the year, a pullback was expected due … Read More
How to Profit from Bank of Japan’s Aggressive Money Printing
By Sasha Cekerevac for Investment Contrarians | Apr 9, 2013
Last week, the new governor for the Bank of Japan (BOJ), Haruhiko Kuroda, announced a game changer for that nation’s quantitative easing policies. The BOJ now plans to initiate monthly bond purchases in the amount of 7.5 trillion yen (US$77.8 billion) per month in an attempt to increase inflation to two percent within the next two years.
When it comes to creating an investment strategy based on this quantitative easing policy, there are two initial takeaways. The first is that this will put pressure on the Japanese yen to weaken its value; the second is that stocks will rise within that nation, since many firms are exporters and will benefit from this quantitative easing plan.
This investment strategy has already begun, as large institutional investors have started front-running this announcement, starting with the election of the new Prime Minister of Japan last fall. However, the country is just about to embark on this new aggressive quantitative easing plan that will last approximately two years—if not longer. There is still plenty of time to profit from an investment strategy using this quantitative easing announcement as a catalyst.
The Japanese yen has already weakened, but it’s poised for additional decline with such an aggressive quantitative easing policy. One investment strategy is to consider the possibility of shorting the yen. Recently, George Soros and Bill Gross stated that this quantitative easing policy could significantly push the yen down further than most people believe.
Soros commented, “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then … Read More
Put the Party Hats Away; S&P 500 Move Boring
By George Leong for Investment Contrarians | Apr 2, 2013
The party hats came flying out on Wall Street last Thursday after the S&P 500 broke above its record close of 1,565.58, following numerous failed attempts.
But hold on to those party hats. Now the real fun begins, as we’ll see if the broader market can continue to move higher after this break, or if a near-term top has been reached.
What I saw was a break that really amounted to very little and had little conviction. The move to the promise-land occurred after a move of less than three points. Again, not a big deal! The trading volume on the New York Stock Exchange (NYSE) was 650 million shares, and only 55% of the companies on the NYSE moved higher. About 41% of the issues moved lower.
These are not the great metrics you expect from an earth-shattering event, but then again, the move by the S&P 500 above its record close was, well, a bore, in my view. Keep in mind that the all-time intraday record high for the S&P 500 is 1,576.09, reached on October 11, 2009.
If the S&P 500 can break to 1,600, I would be more impressed; but then I really doubt that will happen in the near term unless, of course, we see an explosive non-farm payroll reading on Friday.
Chart courtesy of www.StockCharts.com
I’m not trying to be a party-pooper, but trust me when I say I have seen more eventful market moves in my more than 20 years of trading.
I actually may get off my chair and jump for the stars if the NASDAQ can achieve its record high of … Read More
Dangerous Investments Fueled by the Federal Reserve
By Sasha Cekerevac for Investment Contrarians | Mar 20, 2013
One of the biggest concerns I have regarding the current monetary policy program implemented by the Federal Reserve is the cost that will need to be paid once the program ends.
While the Federal Reserve believes it can bring monetary policy back to normal levels without severe adjustments in the market, I don’t believe this to be the case.
Don’t forget that when interest rates rise, bond prices decline. Investors clamoring for any yield will suffer a massive decline in the price of the asset, all in the hunt for that small yield. As an example, in 1994, when the Federal Reserve increased interest rates, the price of the 30-year bond declined by 24% in one year.
The hunt for yield is so strong due to the aggressive monetary policy program by the Federal Reserve and investors are so worried about the possibilities of inflation that Treasury Inflation Protected Securities (TIPS), which adjust with the inflation rate, have been in such high demand that they now offer a negative yield.
According to the Lipper unit of Thomson Reuters Corporation (NYSE/TRI), for the last week of February, there was a record amount of cash moving into mutual funds that invest in floating-rate loans. (Source: Wirz, M., “Preparing for day when rates rise,” Wall Street Journal, March 10, 2013.)
The aggressive monetary policy program by the Federal Reserve is creating distortions in the market. The real worry is when the monetary policy program begins to tighten, shifting away from the current easy money policies.
With the Federal Reserve’s meeting scheduled this week, it’s interesting to note that a survey by the Wall … Read More
Can America Restart the Engine of Growth and Prosperity?
By Sasha Cekerevac for Investment Contrarians | Mar 7, 2013
With the relative calm in the eurozone lately, one might be led to believe that the worst is over and economic growth is about to ignite. Nothing could be further from the truth.
The latest data on the eurozone show that unemployment increased in January to a record high of 11.9%. This is the highest unemployment rate since 1995, when the 17 nations within the eurozone started to keep record. (Source: Brittain, A., “Unemployment Worsens in Euro Zone,” Wall Street Journal, March 1, 2013.)
Recent elections in Italy revealed the growing anger from the eurozone’s citizens at the country’s lack of economic growth. Italy experienced one of the largest increases in unemployment within the eurozone for January, jumping to 11.7%, an increase of 0.4% from December.
While the European Central Bank (ECB) and politicians in every country have been trying to re-ignite economic growth, the fact is that the eurozone reported a decline in its gross domestic product (GDP) of 0.6% from the third quarter to the fourth quarter 2012.
This isn’t just far from economic growth; it’s a serious contraction. This should worry Americans, because our own economic growth is stalling. If the major industrialized nations have no economic growth, who’s going to pull us out of the quagmire our economy is in?
The ECB still has some ammunition left in its arsenal, since inflation is actually receding. The latest inflation numbers for the eurozone showed an annual rate of 1.8% in February, a decrease from the two-percent level in January. With the ECB holding its main interest rate at 0.75%, there is room for additional monetary easing.
The … Read More
Venezuela Cracks under Pressure, Currency Plummets by 32%
By Sasha Cekerevac for Investment Contrarians | Feb 13, 2013
In their attempts to stimulate economic growth, more countries are looking at the possibility of devaluing their currencies. The latest to fall into this pattern is Venezuela, which has just devalued its currency, the bolivar, by 32%.
No one should be surprised by the latest move from the Venezuelan government, since this is the fifth currency devaluation in nine years. The net result has been stagnant economic growth and a very high inflation rate.
The annual inflation rate in Venezuela was approximately 22% in January, and it’s certainly set to move above 30% following this latest devaluation. (Source: Devereux, C. and Pons, C., “Chavez Devaluation Puts Venezuelans to Queue on Price Raise,” Bloomberg BusinessWeek, February 11, 2013.)
Considering 70% of the goods consumed in Venezuela are imported, this will have a huge negative impact on its citizens.
Unless the government is willing to tighten monetary policy to prevent a runaway inflation rate, which is unlikely, look for a significant decrease in consumption of foreign goods within the country.
While the official exchange rate has now moved from 4.3 bolivars per U.S. dollar to 6.3 bolivars per U.S. dollar, the unofficial exchange rate is even weaker at more than 20 bolivars per U.S. dollar.
Venezuela’s repeated attempts at trying to stimulate economic growth while increasing the amount of U.S. dollars available for foreign purchases has led to a decline in purchasing power by the average citizen and a pathetic economic growth rate.
Foreign companies selling into that market will be hurt by the higher inflation rate, since the government imposes some price controls. Venezuela’s President, Hugo Chavez, previously seized retail stores … Read More
What’s Needed for Higher Wages?
By Sasha Cekerevac for Investment Contrarians | Jan 14, 2013
Sometimes it is interesting to get a different perspective by looking at other nations around the world and how they are dealing with their economies.
The U.S. economy is certainly not booming, although the latest data have shown some contradictory indications. On the one hand, job creation is not occurring at an extremely fast pace; however, there are signs of an economic recovery in certain sectors, including housing, vehicle sales, and energy.
Germany, on the other hand, has had a lot of success, even though its neighbors have been embroiled in a large amount of economic stress due to their financial crisis. The economic recovery of Germany goes back many years, with structural reforms, made over a decade ago, that have prepared its economy to be extremely competitive internationally. The decrease in the euro has only helped the country’s economic recovery.
According to the German Federal Statistics Office, exports for the first 11 months during 2012 grew 4.3% to $1.3 trillion. This includes a 10.4% increase in exports to non-European Union (EU) countries. In another report, conducted by the Federation of German Wholesale, Foreign Trade and Services, export growth is expected to increase by five percent in 2013. (Source: “Booming Sales Beyond Europe German Exports Seen Hitting New Record in 2012,” Der Spiegel, January 8 2013.)
These are record levels of exports for Germany. Clearly, that nation has been able to engineer a decent economic recovery in spite of its weaker European partners. Job creation throughout the financial crisis has been quite strong, as Germany currently employees over 41 million citizens, the highest level ever recorded.
Much of the problem … Read More
The Rich and Poor Divide Isn’t Good for America
By George Leong for Investment Contrarians | Jan 9, 2013
There is a crisis in America, relative to the widening income gaps between the rich, the middle class, and the poor. This ultimately impacts consumer spending.
In the fiscal cliff talks, President Obama decided to compromise on the Bush-era tax cuts after raising income taxes on those individuals earning in excess of $400,000 annually and over $450,000 for married couples. These groups account for roughly the top one percent of income earners, according to the Tax Policy Center. (Source: “Fiscal Cliff Deal Will Raise Taxes On 77 Percent Of Americans: Tax Policy Center Analysis,” Huffington Post via Associated Press, January 2, 2013.)
The World Economic Forum suggested the widening of the income gap will have a global impact. (Source: “Income disparity, debt lead risk list,” Yahoo! Finance via Associated Press, January 8, 2012.)
The failure to achieve tax increases for all income earners making over $250,000 was a disappointment to President Obama, and it further increases the widening gap between middle-class America and the top one percent. With the income gap between the rich and poor widening, this is becoming more of a major issue that will need to be addressed, as it impacts consumer spending.
In my view, this is an issue that needs to be dealt with, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution needs to be looked at. This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with … Read More
The Worst Investment for 2013 and the Next Decade
By Sasha Cekerevac for Investment Contrarians | Jan 4, 2013
One of the biggest investor mistakes by the average retail investor is to be late to cash in on an investment theme. These investor mistakes are not limited to just the stock market, but all types of investments. If we look at investor mistakes by the retail public for buying real estate, most people were bullish at the top of the market and were selling, or were forced to sell, their real estate at the bottom. Buying high and selling low is one of the most common investor mistakes by the majority of the public.
Since 2008, the biggest trend for the average investor has been to get out of stocks and to park money in U.S. bonds. EPFR Global, a provider of data, reports that since 2008, equity funds have had a net redemption of $467 billion, compared to bond funds that have seen an influx of $1.1 trillion. (Source: “Desperately Seeking Yield,” The Economist, November 10, 2012, last accessed January 2, 2013.)
According to Morningstar, money flowing into bond mutual funds accelerated in 2012, with 26% of household investments in U.S. bonds up from 14% in 2008. This was during a year in which the S&P 500 was up a solid 13%, now up over 111% since the low in March 2009. Meanwhile, 10-year U.S. bonds are currently offering a negative yield after inflation, meaning people are willing to lose money over 10 years because they are so scared of the market. (Source: “Bond Craze Could Run Its Course in New Year,” New York Times, December 31, 2012.)
This type of thinking is one of the most common … Read More
What a Great Strategy: Need Money? Print More Money
By George Leong for Investment Contrarians | Dec 14, 2012
Federal Reserve Chairman Ben Bernanke has spoken, and to no one’s surprise, the printing of money in America will continue and intensify under the soon-to-be newly launched “Quantitative Easing 4” program, or “QE4.” So now we have had several Federal Reserve programs to keep the flow of money going, and now it looks like there will be more money printing.
Under this aggressive money printing strategy, the Federal Reserve will pursue a more aggressive stimulus strategy in September that will involve the additional monthly buying of $45.0 billion in longer-term treasuries on top of the existing $40.0 billion monthly buying of mortgage-backed bonds under QE3. (Source: Press release, Federal Reserve, December 12, 2012.) The concern is that the additional buying of bonds will add another trillion dollars to the Federal Reserve’s balance sheet in 2013, driving the amount up to $4.0 trillion and keeping the money-printing machine going.
While the aggressive move by the Federal Reserve is needed to make sure the U.S. economic recovery doesn’t falter, many are concerned that the easy money will drive inflation higher. Of course, this has yet to happen, as consumers appear more worried about paying down debt levels than spending. The Federal Reserve suggests it would keep interest rates near zero as long as the unemployment rate hovers above 6.5% and inflation remains manageable.
The market view on the Federal Reserve appears to be unfavorable, based on the initial reaction following the announcement of QE4. Based on the Federal Reserve’s assessment, there’s concern that the U.S. jobs picture and economy may be worse than we expect. “Although the unemployment rate has declined somewhat … Read More
Why the 98% Matter in the U.S. Economy
By George Leong for Investment Contrarians | Dec 7, 2012
President Obama is on a fiscal cliff campaign to show why middle-class America really needs the help. Of course, Republicans want the Bush-era tax cuts to also apply to the top two percent of income earners. This is the major sticking point holding up a deal.
I love capitalism and the idea that you can generate unlimited wealth to drive consumer spending. This is the reason why the United States is one of the richest countries in the world, with its gross domestic product (GDP) growth driven by consumer spending. Yet despite the ability to create wealth, the income gap between the rich and poor has been widening, which ultimately impacts consumer spending. In my view, this is an issue that needs to be addressed, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution may need to be fixed.
This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the Great Recession that began in 2008. Lower income levels impact consumer spending and economic growth.
The median family income plummeted to an inflation-adjusted $45,800 in 2010 compared to $49,600 in 2007, according to the Survey of Consumer Finances, a publication of the Federal Reserve. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into less consumer spending by the middle class as income levels fade…. Read More
Will the U.S. Economy Follow Brazil’s Rapid Drop in GDP Growth?
By Sasha Cekerevac for Investment Contrarians | Dec 4, 2012
With the world economy slowing, it is possible that we could see a global recession in 2013. Gross domestic product (GDP) growth for many countries has significantly declined in the third quarter of 2012. While some countries experienced an increase in GDP growth in the first part of the year, it’s quite apparent going into the third quarter that, for most nations, the estimates were far too high.
One recent example of the economic decline that’s occurring in various nations around the world is Brazil’s mere 0.6% GDP growth in the third quarter, compared to a survey conducted by Bloomberg of 54 economists that had estimated a 1.2% increase in GDP growth. (Source: “Brazil GDP Growth at Half Forecasted Pace as Investment Dives,” Bloomberg, November 30, 2012.)
Two interesting points are apparent. First, the significant decline in Brazilian GDP growth increases the possibility of a global recession in 2013; and second, the country’s economy has some similarities with America that we should be cognizant of.
In America, retail sales, including car sales, have remained somewhat resilient, even though the economy has been weak. In Brazil, the situation is quite similar, as retail sales increased 8.5% in September from the same time in 2011. Yet industrial production in Brazil fell 2.8% in the third quarter, as compared to the same quarter in 2011. (Source: “Brazil GDP Growth at Half Forecasted Pace as Investment Dives,” Bloomberg, November 30, 2012.)
While America certainly has larger issues, our third-quarter GDP growth was 2.7%, versus an annualized GDP growth rate for Brazil of only 2.4%. A big issue for both countries is not the willingness … Read More
Federal Reserve Money Printing to Continue in 2013
By Sasha Cekerevac for Investment Contrarians | Dec 3, 2012
The Federal Reserve has embarked on a path that is historically unprecedented in monetary policy initiatives, in the hope of reviving the U.S. economy from the depths of the most recent recession. Since 2008, the Federal Reserve has bought $1.0 trillion in long-term treasuries and approximately $900 billion in mortgage-backed securities, all in the hope of stimulating the American economy.
Everyone should know, at least by now, that there are definite limits to what monetary policy can do. It’s unfortunate that so much of the burden in reviving the American economy has been left to the shoulders of the Federal Reserve. A large amount of the blame for the current economic circumstances has to be placed on politicians in Washington. With the current fiscal cliff fiasco, once again, we are witnessing the ineptitude of our elected officials in their ability to resolve structural issues that are fundamentally crucial to the long-term economic stability and vitality of America.
Having said that, the Federal Reserve does have a dual mandate that must be met, and it is enacting monetary policy in a way in which it considers appropriate, considering the lack of action from Washington.
The next Federal Reserve meeting will be held December 11–12, and it will be extremely important. At this meeting, the monetary policy program called “Operation Twist” will end. This monetary policy initiative involved selling short-term treasuries to fund purchases of long-term treasury securities at a rate of $45.0 billion per month.
For the Federal Reserve, one issue with an extension of this monetary policy program is that the amount of short-term treasuries left to sell will soon … Read More
Inflation Keeps 12 Days of Christmas Out of Reach
By John Whitefoot for Investment Contrarians | Dec 3, 2012
The results of PNC Wealth Management’s annual Christmas Price Index were recently released, and it’s not looking good for consumers. If you want to financially re-create “The Twelve Days of Christmas,” in which a rich lover goes to town on a shopping spree, you’ll have to shell out a little bit more this year.
According to the 29th annual survey, it will cost $25,431.18 to purchase one set of each of the gifts given in the song. That represents a 4.8% increase from last year, a 3.5% increase in 2011, and a 9.2% increase in 2010. This year also represents a 101% increase over the $12,623.10 price tag from the original 1984 survey results.
Now granted, the Christmas Price Index is not a serious economic indicator, and the average consumer is not going to throw down cash for eight maids-a-milking, five golden rings, or a partridge in a pear tree…but it does go to show the disconnect between the inflation rate and what consumers are really paying.
Considering the modest economic growth we’ve had, the increase is a little unexpected. The Christmas Price Index would have been even higher in 2012, except that minimum wage hasn’t increased.
At 4.8%, the 2012 Christmas index significantly outpaced the government-tracked Consumer Price Index (CPI), which rose 2.2% in October from the year-earlier period. (Source: News release, “Consumer Price Index – October 2012,” Bureau of Labor Statistics, last accessed November 30, 2012.)
Digging a little deeper, month-over-month, the shelter index increased 0.3%, its largest increase since March 2008; the food index increased 0.2% in October, with the index for food-at-home rising 0.3%, its largest … Read More
How to Protect Your Portfolio from a Slumping Dollar in 2013
By John Whitefoot for Investment Contrarians | Nov 21, 2012
No one said austerity measures would be an easy pill to swallow. But, after decades of overspending, they’re become an unwanted necessity. And the fed-up workers of Europe are uniting!
Protests broke out Wednesday across Europe in a coordinated day of action over ongoing austerity policies. While some of the largest and most violent protests took place in Spain, Portugal, Greece and Italy also took to the streets.
Over the last three years, Spain, Portugal and Greece have all slashed spending on pensions, public sector wages, hospitals, and schools in an effort to get public finances back on track.
It hasn’t kicked in yet. In Portugal and Greece—both rescued with European funds and under strict austerity programs—the economic downturn increased in the third quarter. Portuguese unemployment jumped to a record 15.8%. In Spain and Greece, one in four of the workforce is jobless. (Source: Tisera, F., and Alvarena, D., “Anti-austerity marches turn violent across southern Europe,” Reuters, November 14, 2012.)
Sound familiar?
In an effort to stem the economic slide of the U.S. housing collapse that first surfaced in 2005, the Federal Reserve initiated quantitative easing in November 2008. To date, the Federal Reserve has printed off close to $3.0 trillion. That number climbs by an additional $85.0 billion each month. It was supposed to increase lending, create more jobs, kick start housing, and lower the unemployment rate.
What has really happened? After three rounds of austerity measures, unemployment is rising, company profits are falling, financial markets are fragile, and the housing sector is still in disarray. What has it done? It’s created a weak dollar and an anemic economy…. Read More
Worried About America? You’d Better Watch China
By George Leong for Investment Contrarians | Oct 16, 2012
What happens in China will have an impact on the U.S. economy and the global economy. The linkage between economies worldwide has become more profound over the past decade. This is why, as an investor, you need to be fully aware of the situation across the Pacific.
The state of the Chinese economy continues to ramp up heated discussion specifically concerning the immediate need for further monetary stimulus to drive domestic consumption in China.
China’s inflation rate is currently manageable at 1.8%, which allows for added monetary stimulus. (Source: National Bureau of Statistics.)
China’s recent industrial production is a sore spot compared to the sizzling results from 2003 to 2006, as reflected on the chart; albeit, the number has risen in the past three straight years. Industrial output improved from 2008 to 2011, but the current year is heading for the lowest levels since 2008, when the global recession started and there was a need for monetary stimulus. According to China’s Ministry of Industrial & Information Technology, the country’s industrial production is estimated to fade to 10% in 2012 versus 13.9% in 2011, which is an ideal level for monetary stimulus.
Copyright Lombardi Publishing 2012; data source: Central Intelligence Agency (CIA), The World Factbook.
The World Bank predicts China may see its economic growth expand by a mere 7.7% this year and rebound to an optimistic 8.6%. But these metrics may not be easily achievable, especially given the financial crisis in the eurozone, hence the need for monetary stimulus in China.
The country’s gross domestic product (GDP) has declined over the past six straight quarters. GDP growth came in at … Read More
You Know Inflation’s a Problem When the Cereal Box Gives Away Gas Cards
By John Whitefoot for Investment Contrarians | Oct 15, 2012
Elections are important, maybe even the cornerstone of a democracy; but sometimes voters are just too busy to listen to everything being said by the Obama or Romney camps. Thank heaven sound bites can sum up everything we think we need to know.
Here are some recent tidbits from Capitol Hill:
The U.S. Department of Labor recently said that unemployment plummeted in September to 7.8%—the first time the rate dropped below eight percent since February 2009. (Source: “Employment Situation Summary,” Bureau of Labor Statistics, October 5, 2012.)
Auto sales rose in September by 13% from a year earlier to nearly 1.2 million. (Source: “September 2012 Auto Sales,” Automobile Magazine, October 9, 2012.) U.S. home sales jumped to their highest level in two years, and builder confidence has reached its highest level in more than six years. (Source: WRAPUP 2-U.S. new home sales dip, but prices scale 5-year high,” Reuters, September 26, 2012.) Consumer confidence jumped in September. (Source: “Consumer Comfort in U.S. Stayed Near Three-Month High Last Week,” Bloomberg, October 11, 2012.)
Yup, everything is rosy. The U.S. economy is picking up steam, the housing market is turning around, and the U.S. is creating jobs. The economic turnaround is in full swing, and Americans are happy.
But if you believe the economy is getting better, you must truly be the world’s greatest contrarian, despite the overwhelming evidence to the contrary.
I think it’s all about perspective.
The so-called “encouraging” news reminds me of that scene near the end of Titanic, where a deckhand fires off a rescue flare into the night; people onboard the sinking ship or in the lifeboats … Read More
Inflation About to Become a Massive Headache for Central Bankers
By Sasha Cekerevac for Investment Contrarians | Oct 15, 2012
With the recent new monetary policy initiative by the Federal Reserve, one area that I’m becoming more worried about is the impact this will have on inflation. While inflation has declined from the highs in the 1970s, there is always the worry that monetary policy could ignite the flame of higher prices in the future.
The problem with inflation is that once it becomes imbedded within a society, it is extremely difficult to eradicate. While commodity inflation is troublesome, it’s not the biggest worry, as those prices can quickly adjust. It’s not difficult for the price of wheat to decline if there is a large crop, for example.
The problem with monetary policy actions that are too easy for too long is that inflation starts to creep into wages. Once you have wage inflation, it is extremely difficult to remove from the system. While the price of wheat can decline 10% quite easily, wages cannot move in such a manner.
So far, wages have not moved at all. This is due to the slack in the economy. The slack denotes the difference between current and potential gross domestic product (GDP) growth rates. Monetary policy action is used to help decrease this gap, to adjust it to prevent inflation from occurring. The problem is that this is not an easy task.
The other question is: what happens if inflation is rising but the economy does not increase its pace of growth? Should monetary policy action remain accommodative? This is the current dilemma for the Bank of England.
The Bank of England has an inflation target of two percent. They, too, have … Read More
