Federal Reserve Chairman Ben Bernanke may be getting ready to sail off into the sunset as his reign as the top banker in the world is likely coming to an end.
The speculation is that it is doubtful Bernanke will decide to extend his stay as head of the Federal Reserve for a third term at the time his current term finishes at the end of the year.
While Bernanke has helped to save the economy from a deeper recession, he has also created a climate of easy money and massive debt loads that pose their own risks.
What we know is that the economy has recovered under Bernanke’s easy monetary policy.
He has helped to save the big banks, and he will be rewarded by Wall Street, which I will discuss later.
The availability of record-low interest rates by the Federal Reserve has helped to drive up the demand for mortgages and loans. The result has been a marked recovery in the housing market and consumer spending.
Of course, the problem is that the personal debt loads have surged. Recall what happened when the 30-year mortgage rates edged higher in recent weeks on speculation that the Federal Reserve would cut its bond buying at its June meeting: the stock market took a beating as capital shifted into gold and cash.
Loans to companies have been surging. There were $1.53 trillion in commercial and industrial loans in the first quarter by U.S. banks, up 12% year-over-year. (Source: McLaughlin, T., “Surge in U.S. commercial lending raises bubble worries,” Reuters, June 10, 2013.) The amount of lending is a concern given the … Read More
As we all know, the stock market is in record-setting territory. One would think that this must mean the economic recovery engineered by the Federal Reserve is surely in place, but it’s not. I believe that the economic recovery is far from being assured.
The shocking thing to consider is how many trillions of dollars the Federal Reserve has pumped into the economy, and yet all we have to show for it is this very weak economic recovery. To me, this means that the underlying strength of the economic recovery without the Federal Reserve’s support would be much weaker.
While on the surface it appears that the economic recovery is taking place, I believe that without the support of the Federal Reserve, we would see a substantial drop in economic activity. Much like a balloon filled with air, the economic recovery needs a constant injection of stimulus otherwise it would deflate completely. That’s not what I would call a strong foundation to build upon.
There appear to be new signs of the fragility of the current economic recovery. One of the strongest sectors that have benefited from the Federal Reserve’s monetary policy is housing. Naturally, lower interest rates increase affordability for buyers, all else being equal.
There is a lot of news about strong year-over-year home price gains and activity among homebuilders in construction. Yet lumber prices are telling a contrary story.
Chart courtesy of www.StockCharts.com
The chart above shows lumber prices against the S&P 500. Lumber is one of the more volatile commodities, yet it has shown over the past few years that it does have a correlation with … Read More
There’s nothing a market hates more than uncertainty. Investors, both large and small, build a model from which they can then generate an investment strategy. The greater the uncertainty, the more difficult it is to come up with an investment thesis.
Over the past few years, the Federal Reserve, through its aggressive monetary policy stance, has tried to reduce uncertainty and bring confidence back to the stock market. But due to the long period in which there has been a lack of volatility, this has brought complacency into the market—a dangerous situation for investors.
Many believe that once the Federal Reserve begins to reverse its monetary policy stance, starting with tapering down its asset purchase program, it won’t have a deleterious effect on the market. But I disagree. Because much of the recent move up in the stock market has been built off expectations that the Federal Reserve will continue its monetary policy program for an extended period of time, I believe any shift in this initiative will cause a significant pullback in the market.
An example of the type of volatility that could hit our stock market is the recent volatility in the Japanese market. Japan has embarked on a journey similar to that of the Federal Reserve’s; by creating a very aggressive monetary policy program, Japan is trying to get out of its deflationary spiral and create some inflation.
The market has reacted positively to this news, with the Nikkei up approximately 60% just this year. However, last week saw a drop of more than 10%, as uncertainty increased substantially. There were a variety of reasons, one of … Read More
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
One of the most interesting debates regarding monetary policy is emanating from the Federal Reserve members themselves. The Federal Reserve’s current monetary policy program includes an $85.0-billion monthly asset-purchase program. Recent comments made by many of the Federal Reserve members indicate that they are as unsure about the current monetary policy program as the rest of us.
Increasingly, it appears that more Federal Reserve members are leaning toward reducing and even eliminating the current aggressive monetary policy program of bond buying, and doing so sooner rather than later.
Conversely, there are still several Federal Reserve members who currently vote on monetary policy and want to continue the asset-purchase program, as they don’t see an economic recovery coming anytime soon.
This divergence makes it extremely difficult to predict the future of monetary policy. This is important, because when the Federal Reserve indicates that it will begin reducing its bond-purchasing program, it will have large ramifications throughout various markets.
Personally, I have been of the opinion that the Federal Reserve will begin to reduce its aggressive monetary policy program, or at least indicate that it plans to do so, later this summer or early fall. This shift in monetary policy, I believe, will cause many assets to decrease in price, with bonds being sold off and stocks getting hit as well.
Economically, there are many mixed and conflicting data points. Both vehicle sales and housing are strong points in the economy; however, manufacturing still continues to lag. As well, the recent survey by the Federal Reserve Bank of Philadelphia indicated that current manufacturing conditions are weak, but that business owners are optimistic … Read More
One of the biggest worries for investors is the anemic economic growth globally. This has made it extremely difficult to generate corporate earnings going forward. As investors, we are constantly looking for signs that a firm has the ability to increase corporate earnings substantially for the near future.
Ultimately, for corporate earnings to move upward, revenues need to increase as well. With the lack of economic growth internationally, this is becoming a serious problem.
As an example of the extent of weak economic growth internationally, McDonalds Corporation (NYSE/MCD) posted a drop of 0.6% for comparable same-store sales in April. (Source: “McDonald’s global comparable sales decreased 0.6% in April,” McDonalds Corporation web site, May 8 2013, accessed May 13, 2013.)
The company saw its comparable same-store sales in Europe decrease by 2.4%, and the Asia-Pacific, Middle East, and African (APMEA) regions reported a 2.9% drop in same-store sales. Most analysts were expecting a drop of only one percent in Europe and a 1.4% drop for the APMEA region.
A positive note showing the disparity in economic growth was that same-store sales for the U.S. increased 0.7%, versus expectations of a slight decline. As weak as the U.S. is regarding economic growth, much of the rest of the world is in worse shape.
One worry for investors looking at the potential for corporate earnings growth is that much of the sales push by McDonalds has been in lower-priced items. This means that, while revenues might be running at a similar pace, margins will drop.
The chart for McDonalds is featured below:
Chart courtesy of www.StockCharts.com
McDonalds’ stock has performed quite well over … Read More
With the aggressive monetary policy plan implemented by the Federal Reserve in place, it’s not just retirees who are seeking yield and can’t find it; large institutional funds are in the same predicament.
I believe that one of the goals of the Federal Reserve in enacting its current monetary policy plan is to entice investors into assets other than cash. Simply having cash sitting idle cannot help the economy. However, yields are so low that many investors are hunting for income in dangerous places.
Just this past Tuesday, the yield on Barclays U.S. Corporate High Yield index (junk bonds) dropped below five percent. This represents a record low and is the first time in its history of 30 years that the junk bond index has seen rates fall to such low levels. (Source: Burne, K., “Yields on Junk Bonds Reach New Low,” Wall Street Journal, May 8, 2013, accessed May 9, 2013.)
In addition to this record-breaking threshold, this junk bond index yielded six percent only this past January, which shows the massive amount of capital being put to work. The monetary policy by the Federal Reserve is leaving institutions with so much demand for yield that they are piling into any marginal investment, which could end up costing investors.
Even more esoteric, investors are moving into emerging markets such as Cote d’Ivoire, which has seen yields on its eurobonds (bonds denominated in U.S. dollars outside of America) cut in half over the past year. (Source: “Africa’s bond markets: Kings of the wild frontier,” The Economist, March 2, 2013.)
Risks are substantial for investors hunting for yield in this environment … Read More
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
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
Economist Nouriel Roubini, also known as Dr. Doom, is finally on board with the stock market upswing; in fact, he believes the stock market can go even higher over the next two years.
Now, if you are familiar with the often bearish opinions of Roubini, you’ll know that his hawkish view of the stock market is somewhat bizarre, but you’ll also understand why he thinks this way.
The thinking behind Roubini’s view is similar to my own view on the stock market. Roubini believes that the concerted move by the world’s central banks to provide easy access to money via aggressive monetary policy is helping to drive the current buying in the stock market.
“In the short-term, it’s great for assets,” said Roubini about investors riding the bubble higher. (Source: Farrell, M., “Dr. Doom: Buy stocks while you still can,” CNNMoney.com, April 30, 2013.)
As many of you know, I have long been a critic of the Federal Reserve’s money-printing operations, along with the easy money flow from the world’s other banks.
Roubini predicts that the stock market will move higher over the next two years—as long as the Federal Reserve continues its aggressive stimulus strategy.
Of course, Roubini is aptly named Dr. Doom for a reason: he believes a period of reckoning is coming. And I’m on the same page.
As interest rates edge higher, investors will exit the stock market, and there will be a subsequent backlash.
I refer to this cause and effect as the impending economic Armageddon—it’s coming.
Interest rates will inevitably move higher. The low or near-zero interest rates are currently enticing investors to look … Read More
One of the common questions I get asked is: where are the long-term opportunities for growth? We all know that the American economy is growing extremely slowly, yet most people don’t realize how international many of the S&P 500 companies really are.
As an example, while we all think of Kentucky Fried Chicken (KFC) and Pizza Hut as American restaurants, the parent company, YUM! Brands, Inc. (NYSE/YUM), has a growth plan that is not based domestically and is instead focused on the Chinese economy.
Because S&P 500 companies are increasingly focusing on growth potential around the world, the one economy that has seen consistent increases in gross domestic product (GDP) has been the Chinese economy.
However, recent data are showing signs that the Chinese economy might be slowing down. According to the National Bureau of Statistics, industrial profits in March increased by 5.3% year-over-year, but it marks a drop from the 17.2% increase in industrial profits recorded during January and February. (Source: Orlik, T., et al., “Chinese Industrial Profit Growth Slows,” Wall Street Journal, April 28, 2013.)
Earlier this year, we received information that the Chinese economy did post a lower-than-expected GDP increase of 7.7%, down from 7.9% during the fourth quarter of 2012. The leadership in China is trying to engineer a slower Chinese economy to prevent bubbles.
So, what does this mean for S&P 500 companies?
Many S&P 500 stocks are looking toward the Chinese economy as the next great growth generator. YUM! Brands opened almost 2,000 restaurants in 2012, of which 889 were based in China. (Source: “YUM! Staying the Course: China and a Whole Lot More, … 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
With the financial reporting season underway, one of the most important considerations is not the most recent quarter’s earnings results, but the earnings outlook companies are giving for the remainder of the year.
One market sector that I like to watch is the retail area that sells to the average American, as this helps give a clear picture of the underlying fundamentals of the U.S. economy.
Family Dollar Stores, Inc. (NYSE/FDO) just released its earnings outlook for the remainder of the year, and it was far below what analysts had expected. In January of this year, Family Dollar offered an expected earnings outlook for fiscal 2013 of approximately $4.20 per share; this has now been reduced to $3.93 a share. (Source: Burritt, C., “Family Dollar Cuts Profit Forecast as Shoppers Cut Back,” Bloomberg, April 10, 2013.)
During the second quarter, Family Dollar reported that same-store sales increased by 2.9%, for stores open longer than 13 months, also coming in below estimates. This company is interesting, as the lower-income market sector is showing continued weakness.
The significant decline for the earnings outlook of each company tells me that all of this quantitative stimulus is doing little to help the average American, as this market sector is not showing any signs of improving.
The lack of job creation and the increase in the number of people pulling out of the jobs market are now having a direct impact on the market sector that caters to millions of people. With continued economic weakness, there is little hope that the earnings outlook will improve anytime soon.
It is actually quite shocking, considering the trillions … Read More
The world is going gangbusters, printing money to drive the economies and growth. Yet despite the bailouts in the eurozone and easy monetary policy in Europe, Asia, and the U.S., there’s a sense a financial crisis could surface down the road. China is facing a potential real estate crash that could implode, given the speculative buying and the rise in property values. The reality is that the world—not just America—is extremely busy printing money, especially due to record-low interest rates. The easy money is a pretty good short-term strategy, and it’s much needed—but what a potentially explosive national debt!
And there’s no guarantee all of this easy money will save the eurozone from a deeper recession. In America, the easy money has amounted to a massive national debt that will need to be increased and bankruptcy in many municipalities.
Japan just announced an extremely aggressive monetary policy last Thursday that could see the Bank of Japan pump up its money printing presses and double its government bond holdings within two years. (Source: Ranasinghe, D., “Bank of Japan Unveils Aggressive Monetary Policy,” CNBC, April 4, 2013.) This all sounds so familiar.
I hate to sound repetitive, but the easy money strategy could blow up as interest rates rise.
Japan is a great example of how low interest rates have done very little to help the economy. I’m not saying the United States is in a similar situation, but there’s an eerie resemblance.
The Japanese stock market may be the top-performing market in the world in 2013, but much of the upward push has been driven by government spending and the promise … Read More
The impact of the Federal Reserve’s low interest rates and easy monetary policy can be seen everywhere. The housing sector is seeing another boom thanks to the Federal Reserve. So is the retail sector and consumer spending, in spite of the fact that jobs growth is not at pre-recession levels. The Dow and the S&P 500 also achieved more records on Tuesday. Again, the stock market wealth and all of the 300,000 or so newly minted millionaires have the Federal Reserve to thank.
On Tuesday, the automobile sector joined in on the fun, as easy money and cheap financing rates for new vehicles helped to drive up sales to the highest levels since 2007.
At Ford Motor Company (NYSE/F), sales increased six percent to 236,160 vehicles sold in March, while at General Motors Company (NYSE/GM), sales jumped 6.4% to 245,950 in March.
You can get a 60-month financing term for a new vehicle for as little as 2.24% at the Bank of America Corporation (NYSE/BAC) and 2.69% at Capital One Financial Corporation (NYSE/COF). (Source: “Auto Loan Rates,” My Bank Tracker web site, last accessed April 2, 2013.) The average 60-month rate is around 4.12%, according to Bankrate.com, down from 4.52% a year ago.
You can also thank President Obama for helping to save the auto sector, as the move is apparently paying dividends.
While the renewed spending across America is good for the economic recovery, you kind of have to wonder about the ramifications down the road, when interest rates begin to ratchet higher.
Some members of the Federal Reserve are already beginning to voice their opinion to start reducing … Read More
One of the most dangerous situations is when an investor attains a false sense of confidence. With the Federal Reserve enacting such an aggressive monetary policy stance, this has led to reduced levels of volatility and an uncanny calm in the financial markets.
Because the Federal Reserve has stepped into the financial markets with such a large level of support through their monetary policy program, this has led to bond prices that remain elevated and yields that are at very low levels. Not much has occurred over the past few years in terms of shocks to the system.
The danger occurs when investors believe this situation will remain in place forever. Nothing lasts forever and one should always prepare for the future.
So far, the net result from the monetary policy action by the Federal Reserve has been higher home prices, an increase in car sales, higher asset prices in general, such as stocks, and a general calm in the financial system.
What happens when the Federal Reserve starts to reduce its monetary policy stance? I think it will hit many sectors, but it will especially affect the bond market.
The President of the Federal Reserve Bank of New York, William Dudley, recently stated that the accommodative monetary policy stance needs to remain for the time being, due to continued weakness in employment growth. However, he did add that the Federal Reserve should begin adjusting monetary policy as the economy improves. (Source: Zumbrun, J., “Dudley Sees ‘Very Accommodative’ Policy on Weak Job Market,” Bloomberg, March 25, 2013.)
The U.S. economy still has not employed all those who lost their jobs … Read More
Stocks are at their record highs, driven by a soaring stock market rally. The housing market is well off its lows, with sales and home prices edging higher.
The end result is that the overall wealth and optimism in America is higher.
According to the “CNBC All-America Economic Survey,” 33% of Americans felt the price of their homes will ratchet higher, up nine points since the previous survey in November 2012 and the high point since December 2007. The survey in March also suggested 48% of Americans believed it was a good time to invest, given the stock market rally; this number is up from 31% in November and it’s the highest since December 2009. (Source: Liesman, S.,“CNBC, American Dream Is Back; CNBC All-America Economic Survey,”CNBC, March 26, 2013.) So all is good, right?
As I previously commented, the stock market rally has made more people rich. A total of 300,000 newly minted millionaires werecreated from the current multiyear stock market rally, according to Spectrem Group. (Source: Frank, R., “CNBC, US (and Booming Market) Adds 300,000 New Millionaires,” CNBC, March 14, 2013.)
But hold on. The reality is that there continues to be a mass of Americans collecting food stamps, around 48 million, according to USDebtClock.org, and they don’t care about the stock market rally.
While the media’s headlines are commenting on how America is becoming richer, it’s a myth, of course—unless you don’t care about the other 95% of Americans who are just getting by and the bottom rung of this group who are considered America’s poor, making minimum wage.
In my view, the growing disparity between the rich … Read More
As the stock market in America continues to move upward into elevated territory, the Federal Reserve and its monetary policy program of creating an abundance of liquidity and cash in the financial system deserve much of the credit.
However, the average American has not participated in this giant creation of wealth over the last few years and they are extremely concerned about their future retirement plans.
The problem with the Federal Reserve’s monetary policy program is that it cannot solve inherent structural issues prevalent in America today. Monetary policy initiatives can help only a certain section of America, namely the financial markets.
Many Americans over the last few years have seen wages stagnate while costs continue rising. This has left the average American with far less money available to invest, if at all. The net result is that millions of Americans do not have any investment in the stock market, leaving them to sit on the sidelines of the recent boom created by the Federal Reserve through its monetary policy initiatives.
Additionally, many retirees have their money in bonds. Because of the Federal Reserve’s monetary policy program of keeping interest rates low and aggressively buying bonds, this has left real yields extremely low; in some cases, they’re essentially nothing.
This means that retirees who do have some cash available to invest in a relatively safe investment can’t generate any income, because the Federal Reserve is so aggressive in its monetary policy stance.
According to the Employee Benefit Research Institute (EBRI), a survey reported that 57% of American workers had less than $25,000 in total household investments and savings, not including … Read More
As the rebound in home prices continues, many people are trying to determine what the best investment strategy is at this point in time.
Let’s take a look at what has happened and what is most likely to occur in the future for home prices to help create a long-term investment strategy.
At the end of 2012, due to the increase in home prices across the nation, 1.7 million homeowners, who were underwater (meaning their mortgage was worth more than the value of their homes) a year ago, had positive equity, according to CoreLogic. (Source: Gopal, P., “U.S. ‘Underwater’ Homeowners Regain Equity as Prices Rise,” Bloomberg, March 19, 2013.)
The rise in home prices continues, as January saw a 9.7% increase over year-ago levels. According to CoreLogic, if home prices rise by five percent more, an additional 1.8 million homes will return to positive equity.
Clearly, there is no doubt that the proper investment strategy over the past year has been to gain exposure to the real estate market, as home prices have increased substantially.
Part of the rise in home prices is due to institutional investors who also have foreseen this investment strategy and have set out to purchase thousands of homes to convert into rental units. Because of the low yields on government bonds, many institutional investors are attracted to the high margins from renting units out as an investment strategy.
As I’ve mentioned in these pages several times before and when the stock was trading much lower, The Blackstone Group L.P. (NYSE/BX) is a great company that has aggressively bought in excess of 20,000 single-family homes and … Read More
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
The market appears to have another bull leg, with the Dow closing higher in 10 straight sessions, setting multiple record-highs in the process.
With the advance, there are now questions regarding the sustainability with arguments on both sides. Even former Federal Reserve Chairman Alan Greenspan went on CNBC and suggested the stock market did not show “irrational exuberance,” saying stocks were cheap. (Source: Belvedere, M.J., “Greenspan: No ‘Irrational Exuberance’ in Stocks Now,” CNBC, March 15, 2013.) There have been others also supporting the bull case, yet some pundits have also come out and suggested the market is set for a downfall.
While I’m encouraged by the recent rally to multiyear highs, I believe the rapid pace of the advance is not sustainable and stocks are priming for a setback, but I’m not sure when or by how much. I do believe 2013 will be positive for stocks, but at this time, you also need to be aware of the risk and vulnerability on the charts, especially with the S&P 500.
So while the global economy is improving, the catalyst for the upward move in stocks has largely been the easy monetary policy worldwide that has resulted in a low interest rate environment and the search for alternative investments to low-yielding bonds. Without the easy money, I highly doubt stocks could have risen at such a rapid pace.
At this time, you need to think about a viable investment strategy in case stocks falter.
One investment strategy would be to take some profits off the table, but then you may miss out on a potential stock market rally.
You can buy … Read More
The recent pullback in gold bullion has certainly hurt gold mining stocks. While one can develop a sound investment strategy, if the price of the stock continues moving downward, it makes it extremely difficult to step in and buy.
Gold mining stocks have seen a serious sell-off over the last few months. So what about gold mining stocks as a long-term investment strategy?
To begin with, looking at the commodity from an investment strategy point of view, gold has pulled back and has bounced off a key support level. Obviously, whatever direction the price of gold moves, the majority of gold mining stocks will move in tandem.
No one can predict the price of a commodity for certain. However, we do know that there remains strong demand for physical gold and that central banks around the world continue to have easy monetary policies.
While that is a sound investment strategy, it does not guarantee that gold will see an increase. The market could continue declining, as more sellers of paper gold emerge.
Assuming that gold prices will increase, gold mining stocks are beginning to look attractive, because they’ve declined to such a level that many are trading at a discount to book value. This means that if the company were to be bought and sold in pieces, the sum of the parts is worth more than the current stock price.
This type of investment strategy, looking for value, is one approach that an investor can take when trying to determine which gold mining stocks might be suitable for their portfolio. Momentum is not bullish for gold mining stocks at the … Read More
This won’t be the first time I’ve stated my opinion that the current Federal Reserve monetary policy is not only becoming greatly ineffective, but also dangerous to your investments.
And now, there are growing voices joining this cautious call. The surprising fact is that even the members of the Federal Reserve are now voicing concerns of the dangers inherent in the central bank’s current monetary policy program.
Charles Plosser, the current Federal Reserve Bank of Philadelphia President, stated in a speech that the Federal Reserve’s asset repurchase program needs to be reduced and eliminated by the end of 2013. His reasoning, like mine, is that the costs outweigh the benefits.
The most interesting statement by Fed President Plosser was, “…monetary policy is posing risks to the economy in terms of financial stability, market functioning and price stability.” (Source: Kearns, J. and Gage, C.S., “Plosser says Fed should taper QE as costs exceed benefits,” Bloomberg, March 6, 2013.)
When I think of the massive amount of money that the Federal Reserve has pumped into the U.S. economy, it is shocking that the Federal Reserve’s balance sheet is in excess of $3.0 trillion and yet the U.S. economy grew just 0.1% in the fourth quarter of 2012.
While cuts in the defense budget certainly explain a huge portion of the weak quarter, it is clear that the monetary policy program by the Federal Reserve has become ineffective. While there may be marginal improvements in certain sectors, the costs that I’ve been discussing previously, and which Plosser is now elucidating, will be very severe.
The scariest part of the Federal Reserve’s monetary policy … Read More
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
When it comes to long-term investing, many focus solely on revenues and earnings. While clearly these are extremely important fundamentals when conducting a stock analysis, one rarely mentioned but critical variable is pension liabilities.
Pension liabilities are, by definition, crucial to long-term investing, as costs are spread out over many years. Many investors conduct a stock analysis on a very short-term basis—quarter to quarter. Successful long-term investing means conducting a stock analysis on the next five, 10, even 15 years.
Pension liabilities are a huge issue for many companies. A pension liability is the difference between the amounts of funds the company has in reserves versus the expected payments to retirees. At the end of 2012, American businesses had an estimated combined pension deficit of $347 billion, according to JPMorgan Asset Management. (Source: Monga, V., “Why the corporate pension gap is soaring,” Wall Street Journal, February 25, 2013.)
JPMorgan estimates that, on average, companies have promised $100.00 to retirees, yet they only have $81.00 in reserves. That is a massive gap that needs to be taken into account when conducting a stock analysis for long-term investing.
This is an unintended side effect of the low interest rate environment created by the Federal Reserve. While companies can take advantage of low interest rates when borrowing, they can also end up having a shortfall in the long-term returns on their investments.
Companies are attempting to bridge the gap by adding funds to make up the shortfall. If interest rates stay low for a number of years, as expected, a stock analysis must take into account the increased provisions of cash used to … Read More
The current Federal Reserve monetary policy initiative is truly historic in proportion. Not only has the Federal Reserve held interest rates at extremely low levels for an extended period of time, it has also embarked on an asset-purchasing program in the amount of $85.0 billion per month.
Clearly, this type of monetary policy program is unsustainable. While many people have been warning of the dangers, an interesting paper that will be presented at the upcoming U.S. Monetary Policy Forum will state similar concerns; however, what’s fascinating is who the authors are.
Amongst the four economists, one is a former Federal Reserve governor, Fredric Mishkin; two are former Federal Reserve economists, David Greenlaw and Peter Hooper; and the fourth author is James Hamilton, an economics professor at the University of California whose work has been used by Federal Reserve Chairman Ben Bernanke to justify certain monetary policy initiatives. (Source: Zumbrun, J., “Economists Warn Fed Risks Losing Control Amid Budget Deficits,” Bloomberg, February 22, 2013.)
These economists certainly have the kind of background, knowledge, and experience that can’t be ignored. Their assertion is that the explosion in the Federal Reserve’s balance sheet, in addition to the unsustainable fiscal policies, could result in a loss of control over the monetary policy system.
With the Congressional Budget Office (CBO) estimating at current projections for revenues and expenses, the government will run budget deficits of approximately $700 billion for the next 10 years. This type of irresponsible management of fiscal policy by Washington is inexcusable.
While the Federal Reserve is attempting to reduce the unemployment rate through monetary policy, Washington’s inability to get its fiscal … Read More
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
The national debt ceiling debate was initially expected to be resolved by January 1; but when that date came around, it was extended to May 18, as the two sides continue to debate the budgetary cuts, the deficit, and the increase in the debt ceiling above the $16.4-trillion legal limit.
While something needs to be done, President Obama and Congress must also understand that major cuts in fiscal spending to lower the deficit, at this point, could hurt the current economic recovery, which has been showing encouraging signs over the past year. The housing market is hot, with rising construction and sales and home prices that are edging higher. The Federal Reserve’s buying of mortgage bonds and the existence of near-zero interest rates together were the catalyst.
The combination of fiscal and monetary policy is clearly helping the economy, so it would be a grave error to cut spending at this critical time. Taxes for those earning over $400,000 have jumped. Those earning less are also seeing some increases in taxes. The end result was a decline in the consumer confidence reading to 58.6 in January, well below the 61.0 estimate by briefing.com and the 66.7 reading in December. The numbers suggest that consumers may become more hesitant in wanting to spend, given the tax increases.
For the government, the current debt limit will be reached soon. Without the extension of the debt ceiling deadline, the government would have run out of money to pay its employees, support programs, and cover other key spending items.
Nobel Prize economist Paul Krugman is not in favor of cutting spending to curtail the … Read More
Many investors in gold bullion have become increasingly worried due to the lack of price appreciation lately. Even though there has been an aggressive monetary policy initiative by the Federal Reserve, gold bullion and mining stocks in the sector have declined.
Obviously, no one can predict the future; it’s impossible to know for sure where gold bullion, or mining stocks in general, will be in the future.
However, there are several things that individual investors can do to enhance their probability of success when it comes to investing in gold bullion mining stocks.
One metric that I watch is the debt level of a company. This doesn’t mean to avoid all mining stocks with high levels of debt; rather, one should only buy these companies at a discount, unless they are growing rapidly. Gold bullion mining stocks with high levels of debt are far more likely to be susceptible to negative shocks.
Because interest rates have been low for some time, gold bullion mining stocks with high debt have been able to get away with relatively low rates of financing. But over the next five years, we are certainly looking at a higher interest rate environment; this is one area of caution for investors.
One way to look at gold bullion mining stocks is in two general categories: low- or no-debt mining stocks and high-debt mining stocks. The companies with a high debt level should not trade at a premium when compared to gold bullion mining stocks with low levels of debt, unless their growth rate is above average.
Here are three stocks that are great examples.
One of the … Read More
One area that worries me most about the current Federal Reserve monetary policy action is the unintended, long-term consequences of the current program. Unintended consequences are the side effects that can sometimes be more harmful in the long run than the short-term benefit of the initial program.
Keeping monetary policy extremely easy in such an unprecedented manner for so long can have serious long-term ramifications.
The most obvious side effect is that, with the greater availability of easy money, funds are flowing into assets, driving up prices. The question is: will investors who are spending money on assets fueled by cheap money end up suffering significant losses down the road?
I am glad to see that some members of the Federal Reserve are beginning to voice their concerns regarding monetary policy. Recently, the Kansas City Federal Reserve President, Esther George, stated, “We must not ignore the possibility that the low-interest rate policy may be creating incentives that lead to future financial imbalances.” (Source: Torres, C., “Fed Concerned About Overheated Markets Amid Record Bond Buys,” Bloomberg, January 17, 2013.)
One potential worry is that the low interest rate environment resulting from this monetary policy action is causing investors to search for yield in increasingly riskier assets.
One area that has seen a strong increase in demand is speculative-grade bonds, or junk bonds. According to Credit Suisse, an index of over 1,500 junk bonds is now yielding a record-low 5.9%. (Source: Ibid.)
The problem is that when the Federal Reserve begins to tighten monetary policy, many if not all of the investments made over the past couple of years might suffer significant … Read More
As corporate earnings season continues for S&P 500 companies, it is becoming quite evident that revenue growth is lacking across many sectors of the economy. However, we are continuing to see growth in corporate earnings per share.
How is this possible? One method is through share buybacks. S&P 500 corporations, which are generating very high levels of cash, are buying back shares and reducing the number outstanding, which increases the corporate earnings-per-share level.
From April 2011 through October 2012, S&P 500 companies bought back and retired approximately eight billion shares, according to FactSet. This has been a significant driver for corporate earnings over the last two years. (Source: Cheng, J., “Investors See a Way Forward: Buybacks,” Wall Street Journal, January 21, 2013.)
If this level of share buybacks for S&P 500 corporations continues this year, we can expect to see corporate earnings increase by between five percent and 10%, without any organic growth in corporate earnings and flat revenues.
Another driver for S&P 500 share prices will be that the dividend yield will still remain very attractive when compared to U.S. Treasuries.
While revenue growth needs to begin to increase substantially at some point, I think 2013 will be another year in which the combination of a strong dividend yield and modest corporate earnings growth will result in the continuation of investment funds rotating out of the bonds and into equities.
Personally, I think a lot of buybacks are ill timed. While I like to see corporate earnings increase, the problem with many S&P 500 companies is that they tend to buy shares at the wrong time.
When the S&P … Read More
Japan, under newly elected Prime Minister Shinzo Abe, will aggressively try to get the country’s economy back on track after more than two decades of economic stalling, but it will not be easy. Armed with a new stimulus spending of $116 billion, the hope is that the stimulus spending will drive consumer spending and help revitalize an economy that has been in a comatose state. (Source: “Japanese government approves $116bn stimulus package,” BBC News, January 11, 2013.)
Abe is looking to add significant stimulus, including a whopping $2.4 trillion over the next 10 years to try to drive Japan’s gross domestic product (GDP) growth to spur its comatose economy. (Michael Schuman, “Will Japan’s New Prime Minister Start a Debt Crisis?,” Time, December 17, 2012, last accessed January 14, 2013.) But it will not be easy, as the past decades have shown.
Japan entered a technical recession in the third quarter of 2012, with its GDP growth contracting 0.9% and continuing to be impacted by decades of stagnant growth. In fact, from 1980 to 2010, Japan’s average GDP growth was a minuscule 0.6%.
The new stimulus sounds great, but there’s a problem, as the country’s debt levels represent some of the highest in the world and make the U.S. situation seem like a cakewalk.
Japan’s debt as a percentage of its GDP was a humongous 208% in 2011—the worst in the world, according to the International Monetary Fund. Greece, with its financial crisis, is comparatively better at 161%, and the U.S., with its crippling debt levels, is relatively strong at 103% in 2011. (Source: “List of Countries by Public Debt,” Wikipedia … Read More
At the end of 2008, the financial crisis in America was so severe that the Federal Reserve began a historically significant and unprecedented monetary policy program, which has continued to this day, dramatically altering the financial and economic landscape.
Considering the extent and breadth of this huge monetary policy program by the Federal Reserve, two questions linger: why hasn’t the economy recovered as many economists had expected, and what is the downside?
Monetary policy is an extremely complicated initiative, with the end result not easily quantified or predictable. One of the most common complaints has been the lack of income from savers due to the lowered interest rates.
There is some validity that a massive amount of income has been foregone from savers because of these lower rates, due to easy monetary policy by the Federal Reserve and other central banks around the world.
According to The Economist, personal interest income has declined at an annual rate of $432 billion since 2008, more than four percent disposable income. This was interest income that was not generated and, ultimately, not spent in the economy. (Source: “Savers’ Lament,” The Economist, December 1, 2012, last accessed January 7, 2013.)
However, the situation is far more complex, as there are two sides to every coin. The lowered interest rates due to easy monetary policy by the Federal Reserve have also decreased the costs of borrowing.
The Bank of England conducted a study showing that between 2008 and 2012, the lowered interest rates ended up costing savers 70 billion pounds in lost income, but households saved 100 billion pounds in interest expense. (Source: The Economist, … Read More
According to the minutes from the Federal Reserve meeting on December 11–12, it now appears highly likely that the aggressive quantitative easing policy might end sooner than most people had expected. This is a shock to many market participants who had expected an extended period of time under the current quantitative easing policy by the Federal Reserve.
The minutes of the Federal Reserve meeting show that several members stated they believe that the current quantitative easing policy will end, “well before the end of 2013.” Other Federal Reserve members expressed their opinion that this quantitative easing policy will need to be completed by the end of 2013. Many market participants expected this current quantitative easing policy to last well into 2014, perhaps even into 2015. (Source: “Minutes of the Federal Open Market Committee,” Federal Reserve, January 4, 2013.)
The reason this statement is so important is that multiple Federal Reserve members voiced concerns and were of the opinion that the current quantitative easing policy needs to be reduced or completed sooner rather than later. While there was one Federal Reserve member who stated at a meeting before that no further bond purchases are needed, one voice is not enough to alter the opinion of an entire committee. But now, there are many Federal Reserve voices raising concerns.
Because this is the first real evidence that a large number of Federal Reserve committee members are voicing the opinion that the current quantitative easing policy will need to end relatively soon, one must take note. This is a pivotal point for potential change in monetary policy.
With this in mind, if the … Read More
Japan just elected in Shinzo Abe of the Liberal Democratic Party as Prime Minister, and based on what we are hearing, Abe is looking to spend significant stimulus, including a whopping $2.4 trillion over the next 10 years to try to boost the country’s gross domestic product (GDP) growth and drive Japan out of its comatose economy. (Michael Schuman, “Will Japan’s New Prime Minister Start a Debt Crisis?,” Time, December 17, 2012.) While this all sounds great, there’s a problem. Japan’s debt levels are some of the highest in the world and make the U.S. situation seem like a cakewalk.
Japan’s debt as a percentage of its GDP was a humongous 208.2% in 2011, the worst in the world, according to the International Monetary Fund (IMF). Greece, with its financial crisis, was comparatively better at 160.8%, and the U.S., with its crippling debt levels, was relatively strong at 102.9% in 2011. (Source: “Country Comparison: Public Debt,” CIA World Factbook, last accessed December 17, 2012.)
The problem is that the newly elected Liberal Democratic Party appears to want to spend the country into a financial abyss in order to pump up the country’s GDP growth.
Japan continues to be in an economic abyss, void of any GDP growth.
Along with its minimal growth, the country is mired in a multi-decade-long comatose state that requires major resuscitation. Despite producing some of the top brands in the world in electronics and cars, along with an efficient workforce and technological innovation, Japan’s GDP growth contracted 0.9% in the third quarter, or 3.5% on an annualized basis; and it appears set for another recession, given … Read More
The Federal Reserve concluded its latest meeting on Wednesday by enacting additional monetary policy measures and a historic change in the way the central bank communicates its intentions.
With “Operation Twist” ending this December, the Federal Reserve decided to continue its monetary policy program of purchasing $45.0 billion of long-term treasuries each month. This is in addition to the ongoing monetary policy program of purchasing $40.0 billion of mortgage-backed bonds per month. (Source: Press release, Federal Reserve web site, last accessed December 12, 2012.)
This action by the Federal Reserve is not really a new monetary policy initiative, but a continuation of the existing plan, Operation Twist. The Federal Reserve still sees a weak American economy that it believes needs additional stimulus.
What is new for the Federal Reserve is that this $45.0 billion per month will not be financed by selling short-term debt, but will be outright purchases of long-term treasuries. Instead of sterilizing the bond purchases, this will now be outright money printing.
Another change for the Federal Reserve is that it no longer uses a calendar for an end date; it now looks for quantitative metrics based on which it will look to end its monetary policy programs. The guidelines they set out are for easy monetary policy “…at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s two percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” (Source: Press release, Federal Reserve web site, last accessed December 12, 2012.)
Since the … Read More
With the lack of economic growth around the world, more nations are looking at expanding their monetary policy strategies in an effort to kick-start their economies. The latest country showing a decrease in economic growth is Japan.
Reports out of Tokyo indicate that economic growth, as measured by the country’s gross domestic product (GDP), declined at an annual rate of 3.5% in the third quarter. This follows a revised second-quarter decline in economic growth by 0.1%, indicating the nation is in a recession. (Source: “Japan Sinks Into Recession as Abe Calls for More Stimulus,” Bloomberg, December 10, 2012.)
An important date for Japan is December 16, which is when the next election for that nation will be held. The leader of the main opposition party in Japan, Shinzo Abe, currently leading in the polls, has repeatedly stated that if elected, he will demand a massive increase in monetary policy to try to stimulate Japan’s economic growth. He has called for unlimited monetary policy easing, meaning endless money printing. (Source: “Japan Sinks Into Recession as Abe Calls for More Stimulus,” Bloomberg, December 10, 2012.)
Many companies in Japan have been hurt by the country’s strong currency, the yen; increasing monetary policy would be a step toward decreasing the value of the currency. This is yet another example of the race to the bottom in currency devaluations around the world.
Japan has been mired with decades of deflation. While many people fear inflation, deflation is extremely dangerous. Many are calling for the Bank of Japan’s inflation targets to be increased from one percent to the range of two to three percent. In … Read More
The historic and unprecedented action by the Federal Reserve in enacting extremely loose monetary policy is an attempt to stimulate the economy. I’ve always felt that a central bank should have one mandate: the stability of the currency. The Federal Reserve has a dual mandate; in addition to keeping inflation in check, the American central bank also is attempting to lower the unemployment rate through monetary policy, a task not easily achieved.
Over the last couple of years, we have clearly seen that, while the economy has started to improve, it is far below potential gross domestic product (GDP) growth levels. Even with the historic monetary policy initiatives, the Federal Reserve is limited in what it can and cannot do. While the Federal Reserve may have good intentions, there are serious consequences due to unintended outcomes.
Through monetary policy action the Federal Reserve is attempting to increase the wealth effect by increasing asset prices. The thinking is that the wealthier people become through the increase in their assets, the more likely it is that they’ll be willing to spend. This action is one reason why we’re seeing gold prices go up, as well as the stock market and home prices since 2009.
Recently published data show that at least this part of the plan by the Federal Reserve is working, as the net financial wealth for Americans increased by $1.7 trillion to $64.8 trillion for the third quarter 2012. According to the Federal Reserve, this is the highest level of net worth by U.S. households since 2007. (Source: “U.S. household wealth rises to near 2007 high,” Reuters, December 6, 2012.)… Read More
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
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
When it comes to commodities such as gold bullion, there are several criteria that ultimately determine the price level. Many times, I have discussed the impact that easy monetary supply, commonly known as money printing or quantitative easing, has on the economy. Quantitative easing is a well-known phenomenon these days, and the current environment is interesting in that numerous central bankers around the world are engaging in the same monetary policy, trying to print money to solve short-term problems, irrespective of the long-term side effects.
In my article “Gold Bullion Forecast for 2013,” I stated that, when considering the level of monetary policy stimulus worldwide, it is highly likely that gold bullion will exceed $1,800 shortly, with a strong possibility for gold prices reaching $2,000 an ounce in 2013.
However, new information makes this prediction even more probable. The demand side of the equation for gold prices is extremely important. India has long been a huge consumer of gold bullion. Recently, however, because of the weak rupee, India’s currency, gold prices in that nation have been at all-time highs. This has led to lower levels of gold bullion buying and, earlier in the year, a strike by gold bullion dealers to protest an import tax imposed by the government on gold bullion.
In spite of lower than normal gold bullion demand by Indian buyers, gold prices have remained extremely strong. A new report by the World Gold Council’s India office stated that they believe Indian demand for gold bullion in 2012 will end up reaching approximately 800 metric tons, a substantial increase from earlier estimates of 650–750 tons. (Source: “India … Read More
Gold bullion has had a fairly volatile year in 2012. At the end of 2011, gold bullion sold off sharply, ending December at a weak point. A lot of this, I believe, was a result of hedge funds being forced to liquidate their positions. Investors in gold bullion should be aware of the flow of funds from institutional investors. Because of the huge amount of capital that institutions have, they can certainly have an outsized impact on any market, not just gold bullion.
Once a fund has liquidated its position, the selling ends and the underlying fundamentals take over. For 2012, we’ve seen further price appreciation for gold bullion beginning in August on anticipation for accelerated monetary policy stimulus (more money printing) from the Federal Reserve.
That is exactly what we got from the Federal Reserve, a very aggressive monetary policy initiative that has no end date. This type of monetary policy action is unprecedented for the Federal Reserve. As is so often the case, investors bought on the rumor and sold on the fact. Following the September announcement for the new monetary policy initiative, a third round of quantitative easing (QE3), gold bullion sold off with the rest of the market.
To be honest, this is to be expected, considering the large move in gold bullion. Nothing moves up in a straight line. Once the markets tested the $1,800 level, considering gold bullion moved up from approximately $1,550, some profit-taking was to be expected. The key question for me was: at what point would investors step back into the gold bullion market?
Chart courtesy of www.StockCharts.com
This one-year chart … Read More
Japan continues to be in an economic abyss, void of any gross domestic product (GDP) growth. There’s minimal growth and the country is mired in a multi-decade-long comatose state; it requires major resuscitation. Despite producing some of the top brands in the world in electronics and cars, along with an efficient workforce and technological innovation, Japan’s GDP growth contracted 0.9% in the third quarter, or 3.5% on an annualized basis, and appears set for another recession since GDP growth is estimated to fall in the fourth quarter. (“Japan Economy Shrinks 0.9% in Third-Quarter, Points to Recession.” CNBC via Reuters, November 12, 2012.)
The problem is that Japan’s government has pushed expansive fiscal and monetary policy to try to re-ignite what used to be the pearl of the orient; but so far, it has probably helped to prevent a deep recession, rather than drive GDP growth.
The country’s interest rates are already at zero, so there’s little space to maneuver. Given that interest rates have been at zero percent since 2010, the failure of the country to rebound is puzzling. Consider that the high point for interest rates since 2005 was a rate of just over 0.5% in 2007. (Source: “What is the Japanese yen (JPY)?,” GoCurrency, last accessed October 22, 2102.) That’s seven years with extremely low interest rates and not much has improved with the country and GDP growth.
Some argue that Japanese banks could be looser in their lending policies, but this could lead to some potential credit issues down the road. Just think of what happened here.
The Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) came in … Read More
The crash in the housing market was a devastating hit to the U.S. economy, as millions of people were affected, wiping out massive amounts of wealth. This is why the recovery in the housing market is extremely important. The Federal Reserve has since stepped in and offered unprecedented monetary policy action to try and stem the decline.
While we can argue about whether or not this is an appropriate action, we can’t argue against the fact that the housing market has definitely begun its slow climb back up. A recent report by the S&P/Case-Shiller Home Prices index for 20 cities showed that home prices increased in August by two percent year-over-year, which represents the largest increase in two years. (Source: “Home Prices in 20 U.S. Cities Rise by Most in Two Years: Economy,” Businessweek, October 30, 2012.)
However, while the effort by the Federal Reserve has indeed created some upward momentum in the housing market, there are still many impediments to overcome before we see even more price appreciation.
In a recent report by a Federal Reserve survey, while mortgage applications are rising, 90% of banks stated that for prime or low-risk mortgages, they were maintaining their tight lending standards. (Source: “Banks See Mortgage Requests Rising,” The Wall Street Journal, October 31, 2012.)
According to the data, there is a significant rise in demand for home mortgages over the last several months. However, banks are maintaining extremely tight lending standards, which could be preventing even higher price levels for the housing market.
The banks that are very active in the housing market are leery of overexposing themselves. While I can … Read More
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
Questions are being asked following last week’s announcement of the Federal Reserve’s new monetary policy that will provide economic stimulus through monthly mortgage-backed securities totaling $40.0 billion per month. Central bankers are now voicing a concern similar to what I’ve stated numerous times; can this monetary policy be effective in lowering the unemployment rate?
Obviously, the Federal Reserve is doing what the majority of voting regional bank presidents feel is best for the American economy. I don’t doubt their sincerity at all; I just doubt the efficacy of the monetary policy stance. I’m not alone, as two loud voices continue to raise similar doubts: Richmond Federal Reserve President Jeffrey Lacker, who was the lone dissenting vote in an 11-to-1 approval for last week’s new monetary policy initiative, and Dallas Federal Reserve President Richard Fisher, who is not a voter in this current year. But Fisher did just announce that, had he voted, he also would not have approved of this new monetary policy stance.
Richmond Federal Reserve President Jeffrey Lacker has publicly stated that he believed additional quantitative easing through such a new monetary policy stance would do little to help the unemployment situation.
Dallas Federal Reserve President Fisher has been one of the most interesting central bank members to listen to; he presents an eloquent and thoughtful argument with a great combination of economic data and common sense. I do respect him for his congenial method of disagreeing with the majority. I wish that more public figures would take lessons on how to present a thoughtful argument without having to resort to a shouting match. This is part of … Read More
Last week it seemed that the financial crisis in the eurozone might be temporarily averted, as the European Central Bank (ECB) President Mario Draghi announced a plan to buy unlimited amounts of short-term government bonds for countries that are in trouble. The yield on some of these troubled nations was starting to skyrocket, creating the very real possibility of the financial crisis escalating within the eurozone.
This announcement by the ECB president temporarily drove down yields for nations such as Spain, where investors are having serious doubts about their ability to repay their debts.
The eurozone financial crisis is now at an inflection point. Greece was a small, tiny part of the eurozone, and the financial crisis there has done little to affect the eurozone, as seen with respect to the overall gross domestic product (GDP) of the European Union. However, Spain and Italy are huge parts of the eurozone and are integral to its structural base. While the ECB is stating that it’s too big to fail, real questions are arising that suggest it’s too big to save.
However, this past weekend, some cracks appeared in one of the plans for the eurozone that involves having one bank supervisor overseeing the rules and regulations for all of the continent’s banks. To help prevent a future financial crisis from spreading, the proposal to have a single supervisor and a banking union would be a positive step in unifying the rules and regulations between all of the eurozone countries.
With this initiative scheduled to begin on January 1, 2013, several eurozone countries are now voicing concerns that there’s not enough time … Read More
The latest monetary policy initiative by the Federal Reserve is an interesting adjustment to the way the central bank usually operates. The Federal Reserve Chairman Ben Bernanke announced a new initiative to buy $40.0 billion per month of agency mortgage-backed securities (MBS). This new monetary policy action is in addition to its existing “Operation Twist” program in which the Federal Reserve is buying longer-term treasuries and selling short-term notes until the end of the year.
A couple of interesting points that differentiate this monetary policy initiative from previous plans:
First, there is no set period of time or dollar limit for which the Federal Reserve will stop this new program. While Operation Twist is scheduled to end at the end of the year, at which time the Federal Reserve will reevaluate that monetary policy strategy, this new initiative has no end date.
Normally, the Federal Reserve has a set timetable and limit regarding a monetary policy initiative. This type of monetary policy strategy actually has the net result of giving the Federal Reserve more freedom to add or take away stimulus on a more flexible basis. I was always quite negative when a fixed dollar-amount was stated. To me, it seemed silly to announce a dollar amount over a set period of time when the economy is dynamic and fluid. While some people see this monetary policy initiative as “forever,” I see it as a possibility to end monetary policy sooner rather than later.
What do I mean? The economy is clearly moving slowly, but it’s not crashing. Most of the problems are structural and fiscal. These are issues that … Read More