Archive for the ‘Finance’ Category:
Advantages & Disadvantages of Foreign Currency Current Accounts
Most people need to open a bank account in order to handle their daily monetary transactions. Many employers now directly deposit paychecks into employee’s bank accounts. People who write checks or who use their debit card to make payments need to have a bank account. This is why young adults open a basic bank account as soon as they are able.
When people open a basic bank account it lets them easily conduct bank transactions and purchase daily goods. For most people a basic bank account is all that they will ever require. There are checking accounts as well as savings accounts that are adequate for most needs. There are certain circumstances that may require a little bit more flexibility and this is why foreign currency current accounts can be very helpful.
What are foreign currency current accounts?
These accounts are a convenient solution for people who regularly receive payments in a foreign currency. This type of accounts lets individuals manage their money without the need of converting the currency into dollars. Deposits into these accounts can be made by checks, international money transfers, or cash. Withdrawals can also be made by the same methods.
What are advantages of foreign currency accounts?
Whenever a payment is made into a bank account that comes from a foreign country, it must first be converted into the destination currency. There is usually a fee involved with this as well as the uncertainty of the daily currency fluctuations. If there is a large amount of money involved the fees and currency fluctuations can incur a sizeable loss in money. When an individual has a foreign currency current account there is no need to first convert the currency before depositing it into the bank account. This saves the conversion fee and it protects the bank account holder from currency fluctuations. The bank account holder can keep the money in this account until needed before converting. It is also possible to let the balance sit until a more favorably exchange rate arises.
What are the disadvantages of foreign currency accounts?
Holding money in a foreign currency account does incur certain fees. When the money is withdrawn there is a fee involved, since the currency has to be converted at that time, unless the bank account holder wishes to withdraw the money in the foreign currency. If the bank account holder uses the account to write checks there are quarterly fees payable for the use of checkbook facilities. Cash withdrawals and deposits are limited and can be subjected to fees. Each bank is different and bank account holders may withdraw money up to a certain set amount that is determined by the bank, before needing bank approval to withdraw the funds. There are no direct debits available for these types of accounts. Exchange rates can fluctuate wildly and this may mean a loss of money if the funds are withdrawn on a day of large currency fluctuations.
Annuities are Grabbing Attention of Retired Individuals
Every working individual is bound to make his/her retirement plans right from the time when he/she will be entering into the working sector. There are some retirees who start making retirement plans a couple of years before quitting work. However, those who are wiser and smarter would always prefer to start researching a bit earlier on such policies so that they don’t fall prey to financial turmoil during their retirement days. So, why don’t you welcome annuities in your life after retirement?
Currently, investors consider annuities to be the most lucrative plans that are designed to provide monetary strength to retirees. Well, there are many who are still unaware of the annuity plans as well as their benefits. So, here are some crucial facts about deferred annuities:
- If you are willing to take up a deferred annuity plan, make sure that you get in touch with an insurance agency and thereafter fix a meeting with an insurance agent. You need to draw a contract with an insurance agency for initiating an annuity policy. It’s better not to depend on financial advisors for such plans.
- There are several annuities that provide tax deferrals on your investment earnings. However, the after-tax funds can always be deposited into a deferred annuity. The money which the annuitant starts withdrawing is completely free of taxes.
- Deferred annuities have an accumulation phase. During this phase, the annuitant can keep depositing regular payments to one’s account. With a variable annuity on the other hand, one is allowed to expand investments in stocks as well as fixed interests. This can certainly help investors strengthen their finances.
- The distribution phase of deferred annuity allows the annuitant to make way to a stream of guaranteed income just like pension. In fact, an annuitant is given an opportunity to choose a lifetime income option where he can keep receiving payments till he dies. However, this option does not allow the annuitant to transfer his income to a beneficiary.
One of the greatest advantages of deferred annuities is that they give annuitants death benefits which are however not provided to investors for mutual funds, stocks and bonds. Even if there is an economic downturn in the market, the beneficiaries will keep enjoying the death benefits.
Well, the most important thing prior to signing the contract with an insurance company is to get annuity quotes. There are several websites available that provide annuity quote tables from where you can get the latest quotes offered to investors. Moreover, it’s better to compare annuity rates offered by different companies. This will help you form an idea regarding the current market conditions in respect to deferred annuity plans. If you wish, you can always talk to financial advisors online and accordingly proceed for a bright future.
Author’s bio:
The author here throws emphasis on annuity plans and explains how profitable they can be for retirees and investors. Those willing to go for deferred annuities must get in touch with an insurance agent.
Making Your Investments Work for You
Investing isn’t just a luxury of the rich anymore, but a necessity of the working class. The financial buffers that are there for our parents may not be there for us and investing money is the only way to naturally create a steady increase in existing money over time.
Stocks
When most people think of investing, they think about the stock market. You purchase shares and stock in various companies and as the company grows, the value of your stocks and shares grow as well. It can also decrease in value if the company doesn’t perform well.
The good news is that stocks and shares ISAs are individual savings accounts that allow you to put money into stocks and shares and any interest made is tax-free.
Stocks and shares provide for the greatest opportunity of growth and loss over time. Investment opportunities include unit trusts, open-ended investment companies (OEICs), exchange traded funds, investment trusts and individual shares and bonds. This is why a diverse portfolio is a necessity. It helps shore up your finances as certain stocks go up and others decrease.
There are two primary types of stocks. Common stocks are simply equity in the ownership of a company. Your return comes from dividend income and capital gains. Common bonds provide the best long-term return potential.
Preferred stocks are not a debt, but have characteristics of common stocks and bonds. They also carry the biggest risk. Types of preferred stock include blue chip, penny, income, growth and value stocks. Dividends are generally a fixed percentage of the face value and can be affected by interest rates changes. Also, dividends are not a contractual obligation and can be skipped if earnings are low.
Cash ISAs
Risk is negligible in a cash individual savings account compared to stocks and shares ISAs, but it also has a comparatively low interest rate. These act just like standard savings accounts, but the interest accrued is tax-free. There is a limit to the amount of money you can put into a cash ISA. You can only open one account per tax year.
There are two keys to making a cash ISA work for you. The first is you need to research the various banks to see which ones have the best interest rates. The other key is to start making payments into the accounts as soon as possible. The earlier you begin making regular payments into the savings account, the more time the interest has to accrue.
Bonds
A bond is a form of debt where you are providing a portion of the loan. There are many different types of bonds including business, municipal, state and federal, but their purpose is the same.
The agency taking out the bond agrees to pay you, the investor, the money back plus a set interest. The likelihood of a city, state or federal agency defaulting on a bond is negligible. A private company may end up going bankrupt or be unable to make its payments and is a greater risk. The caveat is that the bigger the risk, the bigger the return.
Once again, diversification is the best way to make sure your bond investments work for you. A good mix of stable bonds and more risky bonds help to guarantee a steadier stream of regular income. When it comes to bonds versus stocks, short-term investors will probably see a greater return on the bonds, but if you plan on investing for 15 years or more, stocks tend to provide the better return.
Secure your Retirement Life with Lifetime Annuities
What is keeping you so worried these days? Are you afraid that the savings you have accumulated after years of hard work would go in vain if you step in for a wrong pension plan? With lifetime annuity plans at your disposal there is little to worry. The pension schemes have arrived to justify all your efforts and help stabilize your financial flow. However, in most cases individuals find it quite challenging to secure a pension plan that would reap them a handsome pay annually or periodically. Mostly, the thought of outliving savings scare people looking forward to securing a post-retirement life. If you are thinking the same, then there is a way to combat financial fear just by picking a lifetime annuity plan.
Lifetime annuity schemes offer you an easy proposal where you begin with investing a lump sum in exchange of which you will be entitled to receive annual or a series of guaranteed payouts. If you are already married then you can choose to schedule the payments in joint way. It can also be reduced as per the anticipations made by the annuitant who is worried about his finances in the future.
As an annuitant if you are concerned about estate planning and want to transfer a percentage of it to your heirs then, you have the right to craft the annuity agreement in such a way that your offspring is benefited. The variations mostly in such cases mostly include returns on lifetime annuity based on the following:
- Returns derived from the original investment amount
- Returns derived from a certain percentage of the invested amount
- Returns derived from (subtraction of payouts from the original) amount invested
If you are looking forward to purchasing an annuity plan then you can look for the guidelines given below:
- It is important that you choose an annuity expert who will be able to inform you about the best plans available in the market. He will even inform you on single as well partnership policies. There are plans which provide both schemes. On the contrary a single policy offers you better amounts than a joint policy which offers lesser amounts.
- A lifetime annuity plan protects your finances from being affected by inflation. An inflation protected annuity plan offers you lesser amounts in the beginning; payment amount increases with each passing year. You can look for the best lifetime annuity plan over the internet.
- Looking for annuities offering cash refund facilities is good enough for your heirs who are entitled to receive interest for amounts you have invested but have failed to collect interest on the same.
- A licensed insurance expert should be consulted while you fill up the formalities involved in purchasing a lifetime annuity plan.
Author’s Bio: The author Jonathan James, having complete knowledge on financial schemes offers an insight to pension schemes like lifetime annuity plans for readers who are benefited from it. Her articles are informative and interesting.
Explaining Central Banking to the Publicly Educated
By Jeff Berwick, The Dollar Vigilante
Don’t understand economics? And the thought of even trying makes your eyes cross?
That’s what they want. Government, which is an artificial, unnecessary construct has made a concerted effort to make economics sound as difficult as possible for decades. The reason? They can use your programmed ignorance as the publicly “educated” to confuse you about how they manipulate the economy for their benefit.
Economics is simple. Nearly the full extent of it can be taught in a near pamphlet, as has been done in Henry Hazlitt’s “Economics in One Lesson“. That is the full extent that any individual needs and should know about economics.
Those four to eight years in college to get a bachelor or PhD in Economics? Pure mental masturbation – at best.
ECONOMICS ON AN ISLAND
Most everything can be broken down to its most basic components in order to simplify things. When faced with a large question always try to break it down. Let’s do that with economics to show how simple it is and why central banking is a central tenet of communism and is an abomination that makes no sense in a free market.
Let’s say that you and four other people live on an island. As far as you can tell there are no other humans on Earth. Each of the people on the island do things which help the collective although they have selfish reasons for doing so (ie. they want something in return).
Perhaps you fish. Another gathers coconuts. And another is good at building and repairing thatch huts and collecting rainwater for drinking. Amongst yourselves you trade. You offer some fish for coconuts, water and a nice maintained hut. The others offer their services in trade for your fish.
In comes the fourth person – a bearded man with no particular skills who thinks he is better than everyone else. He produces nothing but tells you that he has come up with a better system using “money” where you don’t have to wait until the man who gets coconuts wants fish before you can get coconuts. Instead you can trade money… perhaps a piece of paper that the fourth person has inscribed with pictures and denominations on it.
So far it doesn’t sound too bad. But here is where he becomes a “central banker”. First, he pulls out a spear and tells you that you must, under all circumstances use his money and no other money. Then, during times when the fishing is poor or there is a drought he tells you that he can help everyone out by “stimulating” the economy of the island by drawing up more money.
If things got really tough he could double or triple the amount of money on the island. At first, everyone thinks they are richer, so they buy more fish or water or housing than they otherwise could afford. This ends up using up more resources than would otherwise be prudent. Soon the money has circulated and now coconuts just cost twice or three times more than before in currency units. The same for fish… the same for water and housing.
How has this central banking scheme “helped”? It hasn’t. It actually ended up destroying scarce resources as it fooled the participants in the economy for a period of time into thinking they were more wealthy than they really were.
That is all there is to central banking. Of course, what then happens is the entire island gets corrupted and people begin to look to get favors from the central banker to get the newly created money first. And, then, if the printing of money begins to get out of control and the central banker stops printing money in order to salvage the “value” of the money before hyperinflating it into worthlessness, because of the fact he uses violence to enforce its use, all of a sudden there will not be enough money in the system to transact basic transactions and people will not be able to survive. There will be either war (over the resources) or starvation as the denizens of the island find themselves unable to acquire the currency they are forced to use to survive. Either that or the banker will take control of your future productivity in exchange for some easily printed cash today effectively putting you into slavery just to survive.
The only thing missing on the island at this point is someone to start a fascist media conglomerate who, in cahoots with the central bank, put out the following magazine cover showing the one non-productive member of the island as being the hero:
THE HERO?
“Ben Bernanke saved the economy, so why does everybody hate him?”
First of all, not enough people know enough about him to hate him. If they did, however, a public sodomization and lynching like Hillary did unto Khadaffi would be in order.
Here is the man who destroys economies. The man who funds and makes all wars possible. The man who puts senior citizens on treadmills and makes them run just to be able to eat cat food. And he does it all with a smug look on his face reminiscent of the last time this kind of nonsense was attempted:
Remember that one? Three of the smuggest looking conmen in the world posed as saviors just months before the collapse of the global economy – which they all brought about. That Slime cover story came out on February 15, 1999 proclaiming that the money changers had saved us all from the global economic meltdown.
How’d that all work out for everyone?
Are they pulling the same tricks again now to try to salvage a few more months of the fantasy economy? Probably.
The beautiful thing, however, is that all those anachronistic media organizations such as mainstream television and newspapers are dying a rapid death. I sat in the office of the President of USA Today, Tom Curley (now CEO of Associated Press), in 2000 and told him that inside of ten years he’d be irrelevant.
I declared victory when in 2008 Gannett (the parent of USA Today) hit $1 after being $60 in 2000… despite the dead cat bounce it has done since.
Today, The Dollar Vigilante and it’s parent company, TDV Media, is one of the fastest growing media organizations on the planet.
Why? Because we spread truth and help awaken the brainwashed. A revolution is going on whether you realize it or not. The internet has exposed the cockroaches. Government, nor central banks, have any right to exist. Only propaganda and subterfuge has enabled them to survive this long.
DO YOU UNDERSTAND?
If you understand what central banking is really about then you are preparing now for the final stages of the collapse of the western monetary system. This means investments in hard assets such as gold and silver bullion and speculative bets in a final inflationary bubble into precious metals stocks. If you understand central banking and the governments that are subjugated to them then you know by now to get a significant portion of your assets outside of the control of the government that purports to own and control you. You understand that getting a second or a third passport is now as common sense as saving a significant percentage of your income in the past. Or, if you want to stay and fight in the coming years, you understand the importance of becoming self sufficient in terms of food and energy and preparing to protect yourself via armaments.
And if you understand all of this then you have broken out of the brainwashing of your public education and are thinking for yourself. You are now enemy number one of governments in the western world. We’re happy you joined us.
Jeff Berwick, The Dollar Vigilante
Keynesians Jump the Gun on Inflation
Advocates of government stimulus are running victory laps on recent developments that appear to vindicate their strategy. In particular, Paul Krugman compares the sluggish growth in Europe to the somewhat-less-sluggish growth in the US to prove that stimulus was more effective than austerity. Other economists are using government inflation measures to defend Fed Chairman Bernanke’s easy-money policy. The only problem is, they’re calling the race before the finish line is even in sight.
As usual, Paul Krugman overlooks basic economics (which, despite his Nobel Prize, is a science about which Mr. Krugman really knows very little). The reason stimulus is so politically popular is that it appears to work in the short-term. However, appearances can often be deceiving, as they are right now in the US. Stimulus merely numbs the pain of economic contraction, as the underlying trauma gets worse. Austerity might slow an economy down, but at least the wounds are able to heal. America has chosen the former and Europe the latter, albeit not quite as large a dose as needed. The fact that in the short-run Europe is suffering more than the US does not vindicate Washington’s approach. On the contrary, this is exactly what is to be expected.
What we’re seeing is like a race where each runner has a broken ankle. One has a coach who tells him to pace himself and not worry so much about winning this one, while the other coach gives his runner a shot of painkillers and tells him to give it all he’s got. Of course, early in the race, the doped-up runner is going to be flying down the track like nothing’s wrong, while the other runner might be limping at half his normal speed. However, when the drugs wear off, the sprinter is liable to collapse from pain, leaving the better-coached runner to limp across the finish line.
The true test is not the immediate effects of stimulus or austerity, but the long-term results. For that reason, Krugman’s conclusions are meaningless. The apparent success of stimulus simply results from spending more borrowed money on government programs and consumption. But don’t we all agree now that this is exactly what caused the financial crisis in the first place?
As far as inflation is concerned, a vindication of Federal Reserve Chairman Ben Bernanke is equally premature. First of all, it’s not that Quantitative Easing will lead to inflation; it’s that QE is inflation. Secondly, there is a lag between QE and rising consumer prices, so the jury is still out as to how high consumer prices will ultimately rise as a result of current and past Fed policy mistakes.
But even more fundamentally, it is absurd to look solely at government price measures, which are built to understate inflation, and conclude that QE has not already produced an elevated cost-of-living. For example, the 2.4% rise in the Personal Consumption Expenditure (PCE) Index in 2011 is more of an indictment of the accuracy of the index than a vindication of Bernanke. In fact, of all the ways the government purports to measure inflation, the PCE is perhaps the most meaningless, as it relies on built-in mechanisms like goods substitution to hide a lower standard of living. As an example of how this works, imagine you are used to eating farm-fresh butter but have to switch to cheaper but also less-healthy margarine from a factory; the PCE would say you are no worse off. That’s exactly why the Fed chooses to use this uncommon metric.
Mark Gertler, an economics professor at New York University, argues that even the Consumer Price Index, which rose at a more vigorous 3.2% in 2011, proves Bernanke’s critics wrong. According to Gertler, the CPI has risen at an average annual rate of 2.4% thus far under Bernanke’s tenure, significantly less than the 3.1% average under Alan Greenspan, and the 6.3% under Paul Volcker. However, Gertler overlooks two key points. First, the methodology used to calculate the CPI was much different during the Volcker era. If we still calculated the CPI the way we did then, the numbers would be much higher for both Greenspan and Bernanke. Second, given the huge economic contraction that has taken place under Bernanke, consumer prices should have fallen – significantly. The fact that they rose anyway indicates tremendous inflation.
Of course, the Fed’s ability to stimulate the economy with inflation only works as long as bondholders remain ignorant of its plan. For now, the seemingly hopeful news reports are giving the Fed cover to keep stimulating. As long as the market remains convinced there is no inflation, the Fed can continue to create it. However, once the effects are so pronounced that even the PCE can no longer hide them, the Fed will be in a real bind.
Think of our two runners again. Even after the race is over, the fellow who chose to dope up likely injured himself even further. He might have even ended his career. So, the early dash and the cheer of the crowd in that one race was clearly not worth the many years of misery he would incur in the future.
Regardless of what the triumphant Keynesians would have you believe, my analysis continues to be that the current combination of monetary and fiscal stimulus is driving us toward disaster. Instead of a real recovery, the US will experience an inflationary depression. Europe, on the other hand, will suffer much less, precisely because it was not seduced by the short-term appeal of stimulus.
What Does the Bank of England Think It’s Doing?
Quantitative easing has not worked as advertised so far. Why push ahead with more…?
“YOU’VE lost control – Bank of England takes over,” says the Bank of England’s cute little game for school-kids if you let the hot-air balloon you control crash into the ground, rather than happily floating it around the 2.0% annual inflation target.
But if the Bank loses control in the real world? Are there grown-ups ready to take over? And what if the Bank purposefully drives its balloon up into the clouds, so far above its 2.0% inflation target – its primary mandate, set by Parliament, and over-riding the secondary aim of “support[ing] the Government’s objectives for growth and employment” – that wage-earners, savers and consumers alike start hurling themselves out of the basket?
We shall never know what would have happened without near-zero interest rates and the first £273.5 billion of quantitative easing. But as the Bank sticks at 0.5% for the 36th month in succession – and starts creating a further £50 billion in new money – we can say what has happened with them:
- For every £1 the Bank of England created from nowhere since March 2009, the total UK money supply grew by only 35p;
- For every £1 million the Bank has created, more than two people have become unemployed;
- Finance-sector salaries outpaced the average wage (rising 8.8% vs. 5.0%), but still lagged the cost of living (up more than 11% on the Consumer Price Index);
- The average house price rose almost 10%, while the FTSE All-Share index rose by nearly two-thirds. Both were beaten by gold (up 70%) and silver (130%).
Was this really the aim? Let’s ask the Old Lady herself.
“The purpose of the purchases [according to the Bank of England's own information] was to inject money directly into the economy in order to boost nominal demand.”
Two ideas there then – injecting money into the economy, and boosting demand. Neither are part of the Bank’s primary mandate, remember, but both ideas have stuck, albeit in the popular imagination more than reality. “Bank injects £50bn into economy,” announced the BBC last week, “to give a further boost to the UK.”
But while the Bank has already created and spent more than £273 billion on buying government bonds in the last three years, the UK money supply (using the broadest measure, known as M4, and covering all the money in banking deposits) has risen by only £97 billion. Gross domestic product has scarcely budged either, rising by only 1.7% (to the end of September) despite the 4.9% actual growth in M4 money.
So for all the good it has done, where did the Bank stick this injection?
Well, “The asset purchase programme is not about giving money to banks,” stresses the Bank in its version of Quantitative Easing Explained. “Rather, the policy is designed to circumvent the banking system.”
Not that the programme does side-step the banks. Instead, as the Bank of England admits elsewhere, it sees the Old Lady “electronically create new money” and then use it to buy UK government bonds directly from the banks, whether held on their own account or on behalf of their clients such as investment funds and insurance companies. Still, handed this new cash in return for the gilts that they sell, “These investors typically do not want to hold on to this money, because it yields a low return,” says the Bank. “So they tend to use it to purchase other assets, such as corporate bonds and shares. That lowers longer-term borrowing costs and encourages the issuance of new equities and bonds.”
Simple, right? The Old Lady wants to cut interest rates and boost the level of capital raised by businesses – private non-financial corporations as the Bank calls them, those companies outside finance and banking which everyone’s so sure had nothing to do with the bubble or bust. Indeed, “the objective of QE is to work around an impaired banking system by stimulating activity in the capital markets,” according to Charlie Bean, the Bank’s deputy governor for monetary policy. And yet PNFCs have shared little in the flood of money issued by the Old Lady’s computer-key strokes.
Since March 2009, total capital issuance by private non-financial firms has totaled £44.5bn – greater than the £34.0bn they raised over the preceding three years, but that was a time of boom, not bust, so the Bank’s stated purpose still begs the question. And the total raised is still nothing compared with the total £275bn “injection”.
Once again, then, where did the Bank’s “injection” go – and was that its aim?
“Money is not growing quickly enough to keep inflation close to the 2% target,” says the Bank of England in an educational briefing for schoolchildren. “The Bank is injecting money into the economy to boost spending to meet the inflation target.”
Okay, so here’s an outcome the Bank should happily claim for its own. But whether boosting inflation is a good thing or not, inflation has in fact been well above the Bank’s official 2.0% target since 2009. So far above, that governor Mervyn King keeps having to write open letters to the government – as he must under the policy framework established when the Bank gained full control of interest rates in 1997 – explaining why he’s repeatedly let inflation breach the upper 3.0% limit for the last 24 months in succession.
The risk of under-shooting inflation looks awfully thin, and the perils of under-shooting might seem academic as well. Because incomes have failed to keep up with inflation – the very opposite of those “second-round effects” so feared by the Bank under Sir Mervyn when it failed to raise interest rates in the face of the banking bubble that started a decade ago. Today, even indebted households have failed to benefit from the drop in what money will buy. Because inflation only eats into debt when a rising income lets you pay it back faster.
Maybe the Old Lady knows what she’s doing. Or maybe she thinks “two” now means “three-point-eight”. Or maybe she’s just losing sight of her 2.0% inflation target, fast becoming a speck in the distance from her hot air balloon. Or maybe – just maybe – now that the Bank holds so many billions of pounds in government debt, it daren’t let the total start falling, for fear of a train-wreck in the gilt market. Once you pop, you just can’t stop, and it did after all switch to buying fewer long-term gilts and more medium-term debt at this month’s £50bn announcement. Which would fit with fretting about a pile-up of maturing debt in the “medium term”, rather than trying to suppress interest rates on 30-year gilts.
Either way, quantitative easing has failed to work as advertised to date. Reviewing the evidence so far, we’re genuinely none-the-wiser about why in the hell the Bank is now pushing ahead with more.
Adrian Ash
Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy physical gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2012
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Credit Crisis: Are We Set Up for The Perfect Storm?
Robert Prechter discusses what’s backing your dollars
January 26, 2012
By Elliott Wave International
In this video clip, taken from Robert Prechter’s interview with The Mind of Money, Prechter and host Douglass Lodmell discuss “real” money vs the FIAT money system, and what is backing your dollars under our current system. Enjoy this 4-minute clip and then watch Prechter’s full 45-minute interview here >>
 | Watch the full 45-minute interview FREE Get even more valuable insights as Mind of Money host Douglass Lodmell interviews Elliott Wave International’s President, Robert Prechter, about how to keep your money safe, the deflation versus inflation debate, and many more topics that are critical to your financial future. |
What Happened in 2011 – What’s up for 2012?
By Euro Pacific Capital Research
2011 began as a year with much promise for investors. After losing nearly 40% in 2008, the S&P 500 gained nearly 20% in 2009 and 13% in 2010. These results convinced many that a long steady recovery from 2008 was ongoing. The first six weeks of 2011, which saw a healthy 6% gain in the S&P 500, seemed to confirm this expectation. Most attributed the stock gains to an overriding belief that the Great Recession was finally winding down. But then a new chapter set in. Click here to access full report >>
As the first quarter ended, major events such as the cascading Arab Spring and the magnitude 9.0 earthquake, tsunami, and nuclear disaster in Japan, initiated a round of major volatility. The Japanese stock market lost 19% in 5 business days. But these political and climactic events were not enough to shake confidence. Even the Japanese market recovered, rallying 13% by the end of March (Bloomberg, 2011). It took the lingering concern over unsustainable debt to turn the market on its ear.
In the first half of the year, investors still did not appreciate the magnitude of the sovereign debt problems in Europe and the United States. With fear taking a back seat, by May the S&P was up 8.4% on the year (Bloomberg, 2011), which turned out to be the high water mark of 2011. But the second half of the year saw both the slow motion train wreck of European sovereign debt negotiations and the comic charade in Washington over extension of the debt ceiling. The resulting uncertainty regarding the euro and a downgrade of US debt returned substantial amounts of fear into the marketplace. In September the Federal Reserve’s Open Market Committee sent markets lower still when it failed to explicitly extend quantitative easing. Since then, amid a general realization that the lackluster statistics were not a temporary blip, stock market performance has been sideways and highly volatile. Foreign markets finished down on the year, but it was the volatility that left investors shell shocked. Should we expect more of the same in 2012?
While the initial boost of the unprecedented monetary stimulus that was injected into markets in 2008, 2009, and 2010 had an unquestionably positive effect on stock prices, it did not engender sustainable real growth. In our view, the developed world simply can’t grow encumbered with such excess debt. Consumers and business are trying to lay the foundation for future growth by continuing to deleverage. Yet at the same time, governments are counteracting the deleveraging in the private sector with large fiscal deficits and printed money. Total leverage therefore is not decreasing and deflationary forces have not been allowed to take hold.
With the monetary skids so generously greased, we think it unlikely markets will crash as they did in 2008, at least in the short run. On the other hand, we don’t see any catalyst for a runaway rally either. In our view maintaining a large cash position, however tempting, is unwise given that negative real interest rates will consistently erode purchasing power. But until a solution is found for the European debt crisis, heightened volatility is likely. Aggressive corrections will likely be met by equally aggressive market rallies as monetary stimulus remains extremely accomodative. As long as governments are willing to coordinate world-wide liquidity injections, they will likely have the ability to kick the can down the road for the immediate future. There is much evidence to conclude that this level of coordination is increasing.
Our expected inflation in asset prices runs counter to the prevailing negative sentiment. Short interest on the New York Stock Exchange is near record levels not seen since 2009 (Bloomberg, 2011). Economists have almost cut their 2012 real GDP growth estimates for the G10 in half over the course of 2011 (Bloomberg, 2011).
The next round of quantitative easing won’t necessarily be triggered by lower asset prices or sustained high unemployment. It could come simply as a way of financing the 2012 US deficit. In 2011 the Fed bought approximately $720 billion of US Treasury securities (Bloomberg, 2011), in essence financing 59% of the US deficit with printed money. We should expect the same with this year’s similarly ugly projected deficit. More easing from the Fed should be a positive for commodities, stocks and foreign currencies.
While most pundits view the most recent summit of European leaders a failure, the measures they did introduce seem likely to put a lid on solvency risk for some time. The fundamentals aren’t fixed, but in our opinion policy makers in Europe have bought themselves some time. Hopes are high that the US is immune from the troubles the world faces, yet in our opinion it is part of the cause. We expect that analysts will likely reduce their American growth estimates to an equal level with their international peers. As a result we expect US stocks to underperform international stocks in 2012.
This all lends itself to a volatile, but nearly flat trend for stocks and bonds in 2012. Fundamentals don’t yet support a run-up, but easy money may put a floor underneath assets over the short run. Unless the situation were to change, we believe aggressive dips in stock markets represent buying opportunities. We tend to think bonds will underperform equities in 2012, given their dramatic outperforming in 2011.
Euro Pacific remains underweight the Euro, Yen, Pound and Dollar. We seek to invest in securities that have minimal exposure to these regions both in our equity and bond portfolios. We continue to believe that by focusing on countries with the strongest fundamentals, we will outperform our peers over the long run.
Merk Commentary: Perils of Celebrity Central Banking
Axel Merk, Portfolio Manager, Merk Funds
January 6, 2012
 Axel Merk |
Swiss National Bank (SNB) President Philipp Hildebrand finds himself in the hot seat. SNB rules prohibit his family from trading based on non-public monetary and foreign exchange intentions of the SNB (c.f. §4). His wife netted a 60,000 Swiss franc profit buying, then selling U.S. dollars, all within a month; her husband’s intervention in the currency market was mostly responsible for the gain. Arguably, she traded to make a profit, publicly explaining, “what motivated me to buy dollars was the fact that it was at a record low and was almost ridiculously cheap”. In instructing her account manager, however, she emailed that her motivation was to manage the share of US dollars in their asset mix as part of a long-term investment allocation (c.f. Hildebrand statement).
The court of public opinion might be more damaging than the legal process in a country with a tightly knit elite that favors consensus over controversy. Relevant for policy makers and investors alike is that this episode highlights the vulnerability of what we call celebrity central banking. That is, central banking that heavily relies on the persona rather than underlying policy. In Switzerland, the 2009 attempt to peg the Swiss franc to the Euro was mostly driven by Hildebrand; similarly, last year’s introduction of a ceiling for the Swiss franc versus the euro is again mostly attributed to Hildebrand. The 2009 peg was given up after it proved too expensive. The 2010 intervention has, so far, held. But it is entirely dependent on the market believing that the SNB will do “whatever it takes” to keep the Swiss franc from rising.
If the Swiss were asked whether they would like to adopt the euro, the popular vote would almost certainly be an overwhelming “NO”. Despite this, an unelected official seemingly single-handedly moves the currency at his whim. Arguments about deflation and competitiveness are given; with an unemployment rate of only 3.1%, the argument might have as many holes as Swiss cheese. Importantly, should the market doubt Hildebrand’s conviction, the peg-rate policy may turn out to be amazingly expensive – in 2010, the last time the SNB had aborted its intervention and all those euros purchased had fallen in value, the central bank reported tens of billions in losses. The Swiss public may sympathize with the buzzword “competitiveness”, but understands losses of that magnitude for tiny Switzerland is a lot of money.
In the U.S., we face similar challenges. Federal Reserve (Fed) policy appears all too dependent on Fed Chair Bernanke rather than what central banking should be about: the preservation of purchasing power. We hear the latest whim on what trick might work to boost the economy, disguised in the name of transparency.
What the Fed and the SNB have in common is that they are both run by celebrities. Bernanke has appeared on “60 Minutes”; Hildebrand is also learning what it means to be in the media limelight. Policy makers only have themselves to blame with the market’s obsession with their personas. If they pursued sound monetary policy rather than try to micro-manage their respective economies, market forces could play out. Instead, we may have capital chase the next perceived move of policy makers, leading to capital misallocation, greater volatility, and ultimately more intervention; a self-reinforcing cycle. The public has a high price to pay for modern celebrity central banking.
We would not be surprised to see the Swiss franc rise against the euro as Hildebrand’s position may be weakened. Similarly, in the U.S., should credibility in Bernanke’s policy erode, it may have negative implications for the U.S. dollar.
Axel Merk
President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds
