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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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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Ignoring the Cliff

The fiscal cliff beckons and, as previously predicted, a resolution is unlikely.  So let’s ignore the cliff this week and consider what’s happening elsewhere.

Viva Europe!

Last week was a good week for Europe – at least in comparison to most weeks.

The Eurozone is in a recession; unemployment continues to rise, and both industrial production and retail sales have dropped even further than had been predicted.

So where’s the good news?  Well, for starters, European leaders were given the Nobel Peace Prize.  While we’re not sure what the sovereign debt crisis has to do with war and peace, at least Europe is not the Middle East.  In what other continent do neighboring countries lend billions of dollars to each other when they have no hope of ever getting it back? 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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Even Germany’s Credit Is Slipping

Greece.  Italy.  Spain.  Ireland.  Even France has experienced a wavering credit rating.  But Germany?

Germany has been Europe’s voice of reason, a financial pillar among a creaky, malfunctioning continent with the financial foundation of a sand castle.

We previously asked whether Germany would have the stamina to lift up the rest of Europe or be dragged down by its bailout-addicted brethren.

One sign that Germany is being sucked into the European sinkhole is that Egan Jones just downgraded Germany’s credit rating from AA- to A+.  Granted, Greece is unlikely to see anything near an A+ rating in our lifetime, but for Germany, it’s a stumble, if not a fall from grace. read more

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Bad News Boosts the Market

In the strange world of investment management, bad news is often good news.

That was the case last week, as the S&P 500 gained a hefty 3.7%, more than reversing its 3% loss from the previous week.

The market rose 2.3% on Wednesday alone – its largest single-session percentage gain so far this year – amid signs that the already tepid economic recovery is slowing further.

So why did the market rally?  Because traders speculated that the Federal Reserve will react to the slowing economy with additional stimulus. read more

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