ECB: Cheap Oil Is the Problem, Not Iran’s Nukes

If the European Central Bank (ECB) is to be believed, the biggest threat from the Middle East is not Iran getting nukes, it’s Saudi oil.

What’s the big deal?  Saudis have had a cushy lifestyle for decades, thanks to their oil production, but U.S. fracking is making the U.S. practically oil independent and that’s cramping the Saudis’ lifestyle, so the country has turned on the tap, producing more oil, which lowers prices, which makes it less profitable for American companies to use fracking techniques to drill for oil.

Unfortunately, lower oil prices have made it difficult for central bankers to increase the rate of inflation, which has this goal-oriented group in a snit.  OMG!!!

Not to worry.  Oil prices jumped a whopping 27% last week, in spite of Saudi vows to continue current production levels, in part based on the announcement that Russian President Vladimir Putin would meet this week with Venezuelan President Nicolas Maduro to discuss “possible mutual steps” to stabilize oil prices.

Apparently, central bankers missed that news, because when the ECB met last week, inflation was the focus. 

Low Inflation Is the Problem

How many people do you know who are worried that the rate of inflation is too low?

If you know anyone who thinks the most important step forward for today’s tepid economy is to raise the inflation rate to 2%, there’s about a 100% chance that person is a central banker.

Central bankers are the folks who have been running the economy in recent years and, based on their logic (or, more accurately, illogic), it’s a wonder there still is an economy.

Everything wrong with the U.S. economy today is even worse in Europe.  Unemployment has been so high, it’s as if every month is August.  For the Eurozone as a whole, the Read more

Alexis the Not-So-Great

A lot can happen in 2,500 years.

Back in its day, Greece ruled the world – albeit, it was a much smaller world.  But that was a long, long time ago.  So long ago, we routinely refer to the Greece of those days as “ancient Greece;” the only thing it has in common with the Greece of today is its geography.

Greece has gone from Alexander the Great to Alexis the Not-So-Great.  That would be Alexis Tsipras, leader of the Coalition of the Radical Left, who was elected prime minister in January.  Tsipras’ plan for bringing his country back to solvency is to pretend its debts don’t exist and to keep on spending.  After all, that worked so well for Argentina.Greek debt

After being bailed out twice by Eurozone leaders, Greece is no closer to solving its economic problems.  The only difference now is that it has more debt.  If Greece were a person, you’d cross the street if you saw him approaching, because you know he’d bum money off of you and use it to bet on the ponies.

The Eurozone’s bailouts were contingent upon Greece following an austerity program.  But Greeks have had enough of austerity and elected Tsipras as the anti-austerity candidate.  So after two bailouts, Greece is still an economic failure – and it’s all Germany’s fault, since Germany actually wants Greece to stick to its austerity program and pay back its loans.

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Talking the Talk

When’s the last time you’ve heard anything about the sovereign debt crisis?

We’ve seen more activity in a tortoise than we’ve seen in Europe of late.  Maybe Vladimir Putin needs to invade Europe just to see if the cultured continent is still functioning.

Europe, though, has been quietly going about its business in much the same way as the U.S.  Bond yields have been at record lows and stock prices have been near record highs across the continent.  But, as in the U.S., just because the market is performing well, it doesn’t mean the economy is performing well.

The jobless rate in Greece is 26.7% and Spain is not far behind at 25.3%.  Overall, unemployment is at 11.8%.  In comparison, the U.S. rate is 6.3% … although the U-6 rate remains at 12.3%.Europe

Forward Guidance in Europe

Seemingly, the difference between Europe’s approach and the U.S. approach has been Europe’s reliance on forward guidance, which to date has propped up Europe’s markets.

There was talk about relying on forward guidance in the U.S. last year, but instead the Federal Reserve Board continued to buy bonds.  Talk about forward guidance is ironic, given that forward guidance is simply the act of talking … saying what you expect to do without actually doing much of anything.

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The Age of Low Expectations

Observing today’s global economy is like watching Adam Sandler’s best movie.  It’s horrible, but it could be worse.

Consider what passes for improvement today:

Europe is no longer in a recession.  Under the headline, “Eurozone’s longest-ever recession comes to an end,” the Associated Press quoted Eurostat, the European Union’s statistics office, announcing that the 17 EU countries that use the euro saw their economic output increase by 0.3% in the second quarter of 2013.  Over a year, the Eurozone’s growth rate would be 1.1%.

That’s the first quarterly growth for the Eurozone since 2011, but it requires some perspective.  China’s growth slowed to just 7% this year and it’s widely regarded as a calamity, signaling that the world’s second largest economy is on the brink of failure.  Europe’s economy is growing at a rate of 1.1 % and the party hats are out because some believe that the Eurocrisis is finally over and we’ll never have to hear the term “sovereign debt” again.

Don’t count on it though.  The Eurocrisis is far from over.  Consider just a few unresolved issues outlined by Fidelity’s Michael Collins:

  • Greece is ever closer to collapse, an event that would trigger bank and bond runs in other troubled countries.
  • Mediobanca, Italy’s second-biggest bank, warned in June that the country might need an EU rescue within six months because the recession and the credit crisis for large companies are deepening,

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Two Banks With a Country Attached

Cyprus?  Really?  The population of Cyprus is just north of 1 million people.

In comparison, the Boston area has a population of 4.6 million.  Greece has a population of about 10.8 million.  Central Massachusetts has a population exceeding 800,000.  Would a financial crisis involving two banks in Worcester shake the financial system the way the financial crisis in Cyprus has?

Of course not.  Then again, Worcester is not a tax haven for Russian billionaires, who use Cyprus as their Cayman Islands.  Russia has kept many Cypriots gainfully employed through the country’s two largest banks, Bank of Cyprus PCL and Laiki Bank.

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Europe – The Weakest Link

With the election, sequestration showdown and other pressing domestic news, we’ve hardly had time to think about Europe.  Yet the continent is as troubled as ever and is crying out for attention again.

Keep in mind that, in this era of a global economy, our fates are intertwined.  Europe and America are heavy trading partners and our multinational businesses are located throughout each other’s continent.  Our banks own European bonds.  So when Europe is in trouble, so is the U.S.

Well, Europe is in trouble.  We’d say “in trouble again,” but it’s never really gotten out of trouble; at least not since Greece triggered the sovereign debt crisis.  The popular British game show, “The Weakest Link,” could serve as a metaphor for the whole continent, except that what’s happening in Europe is not nearly as entertaining.

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The Good News: No More Election Ads

In the wake of Tuesday’s re-election of President Obama, the Dow Jones Industrial Average fell 434 points in two days, a drop of 3.3%.

That’s better than when he was first elected.  After a 305-point rally on Election Day 2008, the DJIA fell 486 points, or more than 5%, on the day after, which was the largest post-election drop ever.

In 2008, the housing bubble had burst and we were dealing with the biggest financial crisis since The Great Depression.  Today, we still have not recovered from the financial crisis, but face a “fiscal cliff” and continuing troubles in Europe. read more

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The Other QE

It’s not QE3, the Fed’s highly anticipated and much discussed quantitative easing program, but the European Central Bank’s (ECB) bond buying program is having a similar impact.

Stock markets worldwide rose announced its bond-buying program yesterday.

Bond buying is Wall Street’s version of crack … it costs money and has a negative long-term impact, but it creates a temporary euphoria and makes everything seem just find for the those who want to live in the moment.

As The Wall Street Journal put it, “we suppose the good news is that it isn’t as sweeping as it might have been.” read more

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Dancing With A Cow

While Europe’s sovereign debt crisis has beaten down the U.S. stock market, it has helped the bond market.

Because the European bond market is in such poor shape, U.S. bonds are a relatively healthy investment.  Investors have been buying U.S. bonds, because they look good relative to European debt.  But that’s like dancing with a cow because your only other option is a pig.

U.S. yields are at record lows, even though U.S. debt has now reached $15.9 trillion, up from $9 trillion in 2007.  The 10-year Treasury yield, which has averaged 4.88% over the past two decades, hit a record low of 1.44% on June 1, down from its high for the year of 2.4% percent on March 20. read more

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Finally – U.S. Drags Down European Market … Japan Falls, Too

We’ve been writing about Europe dragging down the U.S. stock market for more than a year now.  We, of course, take no satisfaction in it, but it’s kind of a “man bites dog” story to report that U.S. jobs data moved European markets lower at the end of last week.

Germany was down 1.9%, Spain was down 1.5% and the UK market was flat.

Meanwhile, while bailouts all the rage in Europe and the U.S., debt-laden, over-spending Japan is intent on joining in the fun.  Japan’s Finance Minister suggested the government could run out of money as soon as October if a bond bill is not passed.  Japanese stocks fell in response. read more

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