Can the central bankers save us?
The Dow crosses 13,000 as the Federal Reserve and the ECB move closer to taking aggressive action.
For weeks, I've been writing that stocks and other risky assets were headed higher despite signs of economic stalling, confirmed by Friday's GDP report showing a pitiful 1.5% annual growth rate in the second quarter. That was because, as inflation has cooled, the Eurozone crisis has reignited, and China set about managing a once-in-a-decade leadership change, central bankers were poised to unleash a globally synchronized dose of cheap money.
Over the past few days, stocks and commodities, especially precious metals, have taken flight as both the Federal Reserve and the European Central Bank have indicated that more stimulus is coming -- potentially as soon as next week.
In the past 72 hours, we've seen a flurry of activity out of Europe. The big news came Thursday morning, courtesy of European Central Bank chief Mario Draghi, who said the widening spread between Germany and peripheral bond yields (in Spain and Italy) were damaging the ability to transmit monetary policy throughout the Eurozone.
This problem, he said, was within the ECB's mandate to act on and the bank is ready to do whatever is necessary to preserve the euro. In a throwback to classic central banking chest pounding, he closed by saying, "Believe me, it will be enough."
This was enough to strike fear in the hearts of speculative traders who had built extreme short-euro/long-dollar positions in the futures market. They were sent scurrying. And risk assets across the board took flight in response as 10-year Spanish yields dropped below the critical 7% level.
Traders were interpreting Draghi's comments as meaning that the ECB's bond-buying program, or some other method to cap Spanish and Italian borrowing costs, was forthcoming, possibly at the bank's Aug. 2 policy announcement, which comes just one day after the Federal Reserve's next announcement. Next week could be very exciting indeed.
In his comments at a global investment forum in the United Kingdom, Draghi added that the Eurozone had made remarkable progress on fiscal reforms over the past six months (something Draghi and the Germans have been waiting to see before taking additional pro-growth measures), that the euro was irreversible and that the interbank market was not functioning across countries (funding drying up for peripheral banks).
This also came after ECB policymaker Ewald Nowotny suggested on Wednesday that the ECB could support giving the Eurozone's new €500 billion bailout fund a banking license, which would greatly expand the fund's firepower. There is also chatter that the ECB could alleviate Greece's debt burden by taking a 30% "haircut" on its Greek bond holdings, pushing down Athens' debt-to-GDP ratio to a more tolerable 100% from 120% (for a total reduction of between €70 and €100 according to reports).
What's really exciting about all this is that the intransigent Germans finally appear to be shifting from their strict resistance to any pro-growth, crisis-quelling measures.
The catalyst appeared to have been triggered Tuesday when Spanish Economy Minister Luis de Guindos brought up the prospect of Spain's tapping Europe's existing bailout fund (which has only about €150 billion left in it) to the tune of €300 billion to German Finance Minister Wolfgang Schaeuble. This highlighted the fact that, aside from a disastrous breakout of the euro, Berlin had no choice but to acquiesce to more help from the ECB as a way to buy time until the new bailout fund is up and running.
Now German officials appear to be warming to the idea of allowing the new bailout fund to borrow directly from the ECB.
This is all music to my ears.
Other policymakers in the pro-growth camp -- which has been urging the ECB and Germany to do more to quell the crisis -- were similarly pleased. Officials at the International Monetary Fund said Draghi's comments were a welcome reiteration of the ECB's commitment. Spanish economic minister Guindos said Draghi's comments were well timed, by which he means they were able to catch out the short sellers preying on his government's bonds. And Japan's finance minister said he welcomed Draghi's stance if it meant more direct and aggressive measures to help Spain.
Analysts at Societe Generale believe the most likely outcome will be a restarting of the ECB's bond-purchase program as a way to take short-term pressure off of Spain -- as its offering of unlimited three-year liquidity late last year did for Italy -- and given Eurozone governments time to deploy their new bailout fund (awaiting approval by the German constitutional court), fund the recently approved Spanish bank bailout, and figure out what to do with Greece's August bond redemption.
For now, risky assets should continue higher, led by precious metals.
I continue to recommend my newsletter subscribers focus on gold, silver and the related mining stocks, as well as small, fast-moving energy services and semiconductor plays. I'm adding three new positions to my Edge Letter Sample Portfolio: Energy transporter Teekay (TK), Middle East oil play TransGlobe Energy (TGA), and semiconductor packaging service and test provider Amkor Technology (AMKR).
Disclosure: Anthony has recommended TGA to his newsletter subscribers.
Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at firstname.lastname@example.org and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
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More stimulus won't do much, nor will the effect last long. People have obviously long forgotten what got us into trouble last time things were bad around the time of the Great Depression. The problem then, as now, is overconcentration of wealth at the top. The ultra rich, with their ability to tip the odds in their favor by influencing legislation, keep gaining and hoarding more wealth while the middle class sees its income fall. It's time for measures like those that ended the Great Depression, and yes that means taxing the rich and taking other steps to get a lot more money to the middle class. Until the imbalance is corrected, our economy will go nowhere and could very likely get much worse
I don’t see real solutions here. I only see (so so) good money being thrown after bad money.
Get rid of the FED and return the power of making money to the U.S. Treasury department. The money is user and DEBT free......read the U.S. Constitution!
I think that big banks are a large part of our financial problem. The deregulation of the banks has allowed many abuses which continue to this day.
The Bailouts and printing money with nothing to back it up with are really troublesome to me. History shows that this is a recipe for disaster. I believe that we should have let the banks take the hit for their poor practices and started from scratch in 2009. We are being told that we are not in a recession/depression but that is only because food and fuel are not included in the equation. If they were, we'd see our country's real financial situation. Bailouts didn't help before - they just pushed the problem off a bit.
Says somebody buried in investments. What is fundamentally correct about today's markets? Are there any jobs? No. Don't people with jobs support stocks? Yes. The majority of publicly traded businesses are cardboard cut-outs... no personnel, no operations, no tangibles, no nothing, just paper pushers, financiers and directors. The nation is on the verge of revolt. All other nations who did before us have flushed out, arrested or condemned their shoddy executives. The pendulum that swings back this time, hacks the crap out of the bubble. There was approximately $50-60 Trillion in collective currencies worldwide just 15 years ago. Now the outstanding currency and instruments assumed to be currency exceed $1 quadrillion. There is no way to sustain that much in overhead. The old will die naturally, the grubbers will need to work it off for all the decades of their lives. Everyone else will be rebuilding or building new. It won't be fun easy or guaranteed.
"In your previious post, you made a bizarre argument that earnings are only coming from investments, which is ridiculous. You also said actual sales have "fallen off a cliff", which is just plain wrong. My only point was to give a few examples showing that the actual data proves that your trancendental rants are way off base."
This, and my "brag" are related. If you actually understood what was going on, you'd know that there are NO sales. Cars don't sell, they are leased or financed, so you have to look at the repossessions and early terms. Off the charts, my boy. So... sales numbers are bogus. The CEO at McKisson will earn a quarter of a billion this year but his business is financial wrangling while McKisson itself drop-ships just like any E-Bayer. Review "manufacturing"... pretty hard to do without raw materials. Most don't make it from scratch they buy components and assemble- which is not the same. Tool & Die professionals (no longer labor jobs) are high in demand because we sold that skill set 10 years ago to Asia. Only ONE textile company makes denim in America- White Oak. The machinery is more than 100 years old. So when 7 for all Mankind makes jeans, it's using "stan" denim grown near the Aegean Sea. When American businesses "sell" it's in bulk and typically to each other. I figured that out years ago and buy it like a commodity. 100% of retail floorplanning is failing. You can even tell how long it has sat in warehouses by the patina on the cellophane, the label decay & interior dust.
It isn't just Europe, it's the globe and some 40% of active participants in the various economies no longer are. YOU don't even own those stocks! Counter-cyclical commodities fuel the largest dark market (not black) on the globe. People can walk into businesses and walk out with goods priced well below what you pay for them, turn around and sell them to that business's customer. As long as that takes place, NO stock is priced correctly or aligned with fundamentals because the variables that matter aren't considered. You have no idea what you are talking about. I wasn't bragging, I was illuminating. When the DOW crashed and it will, there is no threshold where asset values hold it up because there are no assets. If the free fall is the whole value and super computers trade first... it makes sense to steer clear and let it happen.
READ: Andrew Dickson White: Fiat Money Inflation in France. All this has happened before. If you know history and grasp the lesson, you don't repeat it and become a new victim. Your choice.
"Does Starbucks get its earnings from investing? No! What about Coca Cola? Whole Foods Market? Netflix?"
I am quite familiar with all the data-driven research and I am also able to look out my window and not be fooled by foolie stuff. Starbucks lost all of it's sub-brands and is closing locations where there isn't negligible job recovery. Recovery, not creation. When your business is reliant on the trends and the trends are failing (expensive coffee mainly brand driven), you have a failure point. Once you hit it you lose collectively. If you read their growth strategy and saw it into reality, you realize that it cannot go back the same way it came. You keep owning that stock though... because if we airball for a while, it makes sense that people will flock to Starbucks after doing without for several months or a year or more (not). Coca Cola? I see their Desani (tap water) brand going out very soon. You just keep buying the same drink you can get for free and pay for the container that is building a huge island off the Pacific coast. I like Whole Foods but the cost to keep it operating is pretty high. When you have to tighten your budget a belt notch, you lose Whole Foods and just be more selective at Kroger or grow it yourself.
These are stocks owned by dumb society-reliant kids getting off spending money like big people, but they're not stocks that go the distance. Since you're smart enough to review data, try reading up on housing stockpiles and the 7 deadly aspects of vacancies and abandonment on any society in history. A fool and his money are easily parted. I'm up a LOT for the year... no publicly traded stocks, no bonds, heavy emphasis on cash flow in my community and commercial circuit because if where I live has a pulse, I do too.
"More stimulus won't do much, nor will the effect last long. People have obviously long forgotten what got us into trouble last time things were bad around the time of the Great Depression. The problem then, as now, is overconcentration of wealth at the top."
^If a news station ever put a mic to my face that would be my message
Solon of Greece had to demand the heads of financiers and merchants who threatened to usurp his throne power in 634 BC.
Henry the VIII of England fixed the lending rate at 12% or get Chopped for banks. Boardrooms had conspired and succeeded in strangling England using financial manipulation. Henry's edict made English banks great for the next 264 years.
The culprit is a moronic thinking process associated with Inflationism. People with older money believe that force-defaulting the economy and forcing the issue of additional currency lets them buy the Notes associated with stabilizing. Then, as the economy recovers, their own enterprises prosper PLUS they get yield off those Notes. Inflationism destroyed France's economy more than once in the 18th Century. Anthony... aren't you curious about how small backward nations are able to generate war beyond just sticks and stones? During the 20th Century, banks sent out instigators to fuel conflict between unstable bodies in developing nations. They extended to both sides and cried foul as soon as one side won. Then, they could press the winner for the cost to be so, press them to cover the cost of reconstruction AND whine to our government for bail-out monies to salvage shareholders from steep losses. NOTICE who the ultimate winner is? It happened hundreds of times! Validated, by the way, in the book: The Loan Pushers by Darity and Horn; with specific references!
Come on, Anthony... what the world needs now is to CLOSE THE BANKS and take bankers into custody while reconciling this debacle.
What earnings? We opened growth to global dynamics and actual sales have dropped off the face of the Earth. American platforms fired personnel, sold off all the assets, went to import reliance and operate the massive cash accumulation from leased office space in towers. any idiot can read that earnings are coming from the investing, not the producing side. PE's are distorted by all of the above. Ridiculously low interest rates have caused global economic imbalance that will require a massive correction. Don't you pay attention? By all accounts, the LIBOR was manipulated from 2005 to 2009. Since it would be impossible to go back and find all the controlled profits, the likely next course is eliminating the LIBOR and hiking ALL bank rates. The same debts are still outstanding to and from the same Too Big To Exist players. You just keep dreaming about your linear future my friend... the Earth is round and cycles are the norm. WHY do we see 200 points pump days without legitimacy? Because if the sales were allowed to occur at genuine speeds, you'd be broke already.
The DOW doesn't have 120 points worth of tangibility.
Stimulus has had it.
All it will do is increase inflation, decrease consumer buying power and increase unemployment. Actually the fed has been doing this to the American people for the passed 40 years. American real wages have been going down. The American people have been borrowing money to keep up their standard of living. What the fed needs to do is maintain an inflation rate of between a deflationary 1.5 to 1/2% and 0% inflation. When assets start falling in value banks will have to loan money to business to make money.
With stimulus unemployment will increase and Obama will be history!!!
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