Posts Tagged ‘ECB’
BOE, ECB Put Pressure on Fed; Four Ways to Profit!
Mike Larson
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The list of opponents to the Federal Reserve’s “easy money forever” policy is growing longer.
In the U.K. … we learned that the Bank of England is tilting more to the hawkish side. Policymaker Spencer Dale joined colleague Martin Weale in actually voting for a 25 basis point hike in the BOE’s main policy rate, currently 0.5 percent. The more aggressive Andrew Sentance went even further, pushing for a 50 basis point hike.
While five members of the bank’s policy-setting committee voted for no change … carrying the day … the future direction of U.K. rates looks all but certain. And no wonder! U.K. consumer prices are rising at a 4 percent year-over-year rate.
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In continental Europe … the European Central Bank is positioning for a change in policy too! ECB member Yves Mersch warned that his colleagues will “have to rebalance our monetary policy stance” soon with the economy picking up and inflation topping the bank’s target.
President Jean-Claude Trichet also reiterated his resolve to combat inflation. And again, I’ll say “no wonder!” Inflation in the euro zone climbed to 2.4 percent in January, above the bank’s 2 percent target.
In other emerging and developed markets worldwide, the rate-hiking trend I first discussed months ago is accelerating. In just the past several days, Sweden raised its benchmark rate for the fifth time in seven months to 1.5 percent … Chile hiked rates again to 3.5 percent … Israel boosted up by 25 basis points to 2.5 percent … while Vietnam jacked rates up for the second time in a week to 12 percent.
As Fed Zigs While Foreign Bankers Zag,
Consequences and Opportunities Pile Up
Yet here in the U.S., it seems like nothing much has changed. The “doves” still have the upper hand, with Chicago Fed president Charles Evans signaling this week in an interview with the Financial Times that he’s in the Ben Bernanke camp. Specifically, he said “policy ought to remain accommodative for really quite a while, even a while after conditions start to improve.”
There’s a reason I keep harping on these interest rate trends. They have serious consequences for all kinds of investments, from commodities to currencies to bonds …
First, the shift toward tighter monetary policy that’s already underway in emerging markets — and about to get underway in the U.K. and Europe — will likely flatten the yield curve. Or in plain English, shorter-term rates should climb more quickly than long-term rates as investors price in the likelihood of central bank rate hikes. That’s why the iPath U.S. Treasury Flattener Exchange Traded Note (FLAT) I highlighted a while ago is perking up.
Second, the increasing divergence between the views of U.S. policymakers and foreign ones should hurt the value of the dollar. That makes foreign currencies and debt securities more attractive. So do the relatively more attractive interest rates available overseas. That’s why I prefer emerging market bonds and funds that own short-term overseas debt securities, like the Federated Prudent DollarBear Fund (FPGCX), over U.S. Treasuries.
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Third, monetary metals such as gold and silver should continue to perform well. I say that because even with rates rising overseas, they’re well below published rates of inflation. That means “real” rates, or those adjusted for inflation are negative — historically a bullish signal for commodities. Consider the U.K. example, where you have a real rate of MINUS 3.5 percent (the 0.5 percent policy rate minus the 4 percent YOY increase in consumer prices)!
Fourth, if you’re looking for more specific investment ideas and recommendations, consider subscribing to my Safe Money Report. What I’ve outlined here is just a few pages from my playbook … and I think 26 cents per day is a small price to pay for the rest!
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money, Interest Rates Profits and LEAPS Options Alert. He is often quoted by the New York Sun, Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
Euro; the Worst Is Yet To Come
By: Sol Palha, Tactical Investor
If the thunder is not loud, the peasant forgets to cross himself.
Russian proverb
I think it is a given that Greece will have to default, everyone knows this, but they are just playing cat and mouse for now. Most Greeks are dead set against the new Austerity measures and they will likely throw this government out of power for the new changes they have instilled. The next government will cater to the people’s needs for fear of receiving the same treatment. Change is not wanted in Greece. The only way to fix this problem is if the nation as a whole understands that they have to go through a painful period of cuts, but as evidenced from the past riots this is not the case. The story below further substantiates our claims.
Greek unions announced on Wednesday that they would stage a 24-hour nationwide strike on May 20, the second major protest against tough austerity measures pledged in exchange for billions of euros in aid. The main public and private sector led a 50,000-strong march a week ago in which hundreds of angry Greeks fought pitched battles with police in the streets of central Athens and three people were killed in a petrol bomb attack on a local bank.
They are due to march in the capital on Wednesday from 6 p.m. (1500 GMT), in a rally which will give indications about the public mood before the big walkout next week. Investors are closely watching public reaction to government wage and pension cuts amid concerns broader unrest could hit Prime Minister George Papandreou’s resolve in pushing them through. New figures published on Wednesday showed Greece’s economy contracted 0.8 percent in the first quarter compared to the last three months of 2009.
The austerity measures, pledged in return for 110 billion euros ($139.7 billion) in emergency aid from the European Union and International Monetary Fund, are expected to keep the economy in recession through 2011.”The IMF will not stop thirsting for workers’ blood,” said Yannis Panagopoulos, chairman of Greece’s main private sector labor union GSEE. “Its recipes are a disaster and the government must turn them down.”
The country’s socialist government on Monday unveiled a draft law to raise the average retirement age and cuts benefits, which further angered unions already opposed to previous steps including public wage cuts and tax hikes. Full story
Adding to the host of problems is the fact that Greece is now officially in a recession. Painful cuts have to be implemented and maintained or Greece will default. Sometimes markets should be allowed to settle matters, intervention only delays the inevitable. Our stance has been that the Euro is going to trade down to the 115 ranges and could possibly trade down to the 110 ranges. The massive 1 trillion Package had no lasting impact on the Euro, after mounting a brief rally, the Euro crumbled and is now on its way to putting in another series of new lows.
Spain’s new austerity measures, too little too late
Prime Minister Jose Luis Rodriguez Zapatero said Madrid would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector jobs in a drive to meet EU deficit targets. “We have to make a singular, exceptional and extraordinary effort to reduce our public deficit and we have to do it when the economy is starting to recover,” he told parliament. The announcement came two days after euro zone governments, the European Central Bank and the IMF agreed on a $1 trillion (674 billion pound) rescue package to stabilise the euro in exchange for pledges by highly indebted countries to pare down their deficits. Full story
We think this is action is a little late as Spain had ample time to address these difficult changes, but instead decided to sit on its fat rear and do nothing. The current recommendations are just too little to produce any meaningful change. Unofficially the employment rate is well past 20%, the housing sector has crashed, fiscal debt is roughly 112% of GDP and Rising and estimates put private debt between 160-180% of GDP. Thus unless they put forth some bone crushing changes, the odds are that Spain will be joining the Greeks sooner than later. Furthermore, this 1 trillion euro aid package is more of a band aid than a fix because the nations that are spending beyond their means are still doing so. Nothing has changed other than the day of reckoning.
Financial markets are showing they have their doubts, with markets in Europe and Asian drifting lower Wednesday after Monday’s initial euphoria over the initial 750 billion euro package announced by European Union officials over the weekend.”Is the package big enough?” asked Paul Lambert, the current director of currency and macro strategies at Polar Capital who’s also held roles at Deutsche Asset Management, UBS, Citibank and the Bank of England. “That depends on the success of the debt consolidation in the periphery [and] whether they’re ultimately able to have falling real wages so that they can come back in line with the core.”
Much criticism has been lobbed at places such as Greece for high public sector wages, which will now be brought down sharply by the government as part of the agreement for its bailout package. That’s also been one of the key reasons Greeks have taken to the streets over weeks that have turned violent at times. On Wednesday, Spain announced a plan to reduce public wages 5% this year and freeze them in 2011 while suspending a pension hike. The moves come as the government there fears being dragged into a situation similar to Greece’s.
“I’ve observed that if any country in the emerging markets had been offered a loan package like the Greeks were offered before they got the eventual loan package they got, people wouldn’t have been rioting on the streets, they would have been saying thank you,” said Lambert at a Morningstar Investment Conference in London.
“The fact they’re rioting on the streets means ultimately there may not be the ability of the Greeks to see a 20% fall in real wages,” he said. Full Story
Yeah we would like to see how long individuals are willing to keep quiet once the government starts to cut their salaries, increase taxes and cut benefits. People used to the good life do not take kindly to such measures, they are going to get rid of the existing government, (Greece is the lead candidate for such a move) and replace it with one that is more sympathetic to their cause. The only way to solve this is by the properly (instead of the miserably program called shock and awe, more like shock and shake) is for the Euro zone to set an example. They need to let one country default; this will send a strong message to the others that if they don’t wake up, a sledge hammer is going to fall right on their heads and snap them out of their coma.
In the short term this is a very painful strategy, but long term this would be very beneficial to the Euro, as it would give it credibility and make it a true front runner as a challenger to the US dollar. Investor will have more faith in a nation that is willing to take strong measures to protect its currency. While these brain surgeons run around trying to figure out what is the best approach, make sure you have some of your money parked in Bullion (Gold, Silver, Palladium and or Platinum). In troubled times the best hedge way to protect oneself is via precious metals.
The enemy of my enemy is my friend.
Arabian Proverb
