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
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
Central banks around the world have opened the floodgates with massive levels of quantitative easing in an effort to try to stimulate their respective economies. Turning on the quantitative easing tap is easy; putting the genie back in the bottle will be extremely difficult for central banks globally.
I am not alone in sharing this opinion, as the governor of Denmark’s central bank, Lars Rohde, has voiced similar concerns. In a recent interview, Rohde stated, “The risk is we stay in this climate too long and that the carpet bombing of liquidity spurs inflation… How do we exit this without killing whatever nascent recovery there might be at that time?” (Source: Levring, P. and Schwartzkopff, F., “Liquidity Carpet Bombs Fueling Asset Bubbles, Rohde Says,” Bloomberg, April 8, 2013.)
While central banks around the world are using quantitative easing in an effort to revive the global economy, the long-term consequences, as I’ve mentioned before, could prove to be extremely costly. I certainly welcome the honesty that Denmark’s central bank’s governor is displaying in voicing his concerns about how all of this quantitative easing might have serious long-term risks.
With Japan just now unveiling a massive new quantitative easing program in addition to the Federal Reserve’s asset purchase program, the floodgates continue to be wide open. However, central banks around the world have embarked on an aggressive quantitative easing policy since the great recession began, yet little has changed in terms of global unemployment.
Many nations around the world still suffer from extremely high levels of unemployment. It appears that quantitative easing did have an impact in certain asset prices, namely stocks … Read More
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
Following the global recession, many countries still lack resurgence in their economic growth levels. Many central banks around the world have used their primary tool, aggressive quantitative easing, to try and revive economic growth.
One issue with quantitative easing is that it can drive a currency downward in value. This can have some positive effects in improving economic growth by making that nation’s goods cheaper and driving exports; although it can hurt economic growth, as the price of imports rise, driving up inflation.
This is a tough goal to achieve, in trying to increase economic growth through a very blunt tool, that of quantitative easing. Whereas some initiatives have laser-like precision, quantitative easing is not one of them.
One nation that has recently embarked on a very aggressive quantitative easing program, and will continue to do so, is Japan. In November, Japan elected a new Prime Minister, Shinzo Abe, who called for a very large quantitative easing program to jump-start economic growth. Since the election of Abe in Japan, the yen has fallen by approximately 15% against the U.S. dollar.
This has certainly helped Japanese car makers. Recently, the CEO of Ford Motor Company (NYSE/F), Alan Mulally, voiced his concerns that the Japanese yen’s decrease is increasing the level of competitiveness for Japanese car makers. According to the American Automotive Policy Council, Japanese car makers have a currency advantage worth approximately $5,700 per vehicle. (Source: Philip, S., “Ford CEO Says He’s Concerned About Effect of Weaker Yen,” Bloomberg Businessweek, March 26, 2013.)
The natural question is: if quantitative easing does help economic growth, why doesn’t every nation just do this? … Read More
The Federal Reserve may be responsible for the biggest financial meltdown yet to come. In fact, this meltdown could be even bigger than the subprime mortgage crisis in 2008.
Let me explain. We all know the Federal Reserve has created an artificial economy that has been built on the availability of easy access to cheap money due to near-zero interest rates. There is no argument here. Via its aggressive quantitative easing programs, the Federal Reserve has produced an economy that is dependent on cheap capital.
Some would argue the Federal Reserve didn’t have a choice; if they didn’t introduce monetary policy, the housing market and banking system may have collapsed. I agree to that extent, but with the economy now in recovery, you kind of wonder why the Federal Reserve continues to allow the flow of easy money.
Recently at its January Federal Open Market Committee (FOMC) meeting, the Federal Reserve suggested that it would have to review the possible stoppage or slowing of its $85.0 billion in monthly bond purchases. The market reacted by selling stocks. Federal Reserve Chairman Ben Bernanke then came out and said that the central bank was committed to its monthly bond buying as long as the economy and employment remain fragile. So which is it? The Federal Reserve needs to really think about reining in its easy monetary policy and reducing the amount of the M2 (all money in circulation, plus savings deposits, time-related deposits, and market-money funds) money supply in the system.
Here’s the dilemma:
The climate of historically low interest rates has driven a false sense of comfort. Consumers are buying more … 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
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
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.)
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
In his recent speech at the Jackson Hole economic symposium, Federal Reserve Chairman Ben Bernanke made some interesting comments in regards to monetary policy. Following these remarks, gold moved up strongly, indicating that the market’s interpretation was that the Federal Reserve was indeed going to enact further stimulative monetary policy, also known as quantitative easing #3 (QE3). However, I don’t think it’s clear from the speech or recent events as to why now is the best time to use this monetary policy tool.
On the one hand, the Federal Reserve chairman did outline several reasons not to enact further monetary stimulus. This includes, the text reads, “the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies.”
The costs associated with additional nontraditional monetary policy actions by the Federal Reserve are rising and the benefits are diminishing, this we all know. As the Federal Reserve chairman then stated, the bar for using said policies is set higher. So what this could mean is that it takes more stress, such as another financial crisis, to enact further monetary policy action. As of today, we are certainly not in a financial crisis as we were several years ago. At that time, there was a massive liquidity crunch and the Federal Reserve appropriately acted by allowing monetary policy to ease and reduce the stress level. Currently there is no liquidity crunch. In fact, it is the exact opposite: there is more than enough money in the system. Adding $500 billion won’t help increase the velocity … Read More