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Draghi’s Icing on the ECB’s New Infinite Cake…
Last Thursday, ECB president Mario Draghi announced the bank’s new bond-buying program, dubbed OMT — “Outright Monetary Transfers.” He was already swimming against market sentiment which, on the basis of leaked details, had labeled it “SMP 2.0,” a scathing reference to the failure of the ECB’s 2010 attempt to control the bond yields of peripheral countries. The markets certainly reacted to the OMT as if it were the hoped-for nuclear option.
To placate the citizens of creditor nations, the plan puts strict conditions on aid recipients; but will the citizens of Spain, and particularly Italy, find it politically palatable to accept the involvement of the IMF, and go on bended knee to seek its largesse? Guild Investment says, “Yes!” Cynics say Draghi promised unlimited intervention; but will this be palatable to the citizens of Germany when the day arrives that “unlimited” really means “unlimited”? (And he did leave a back door open — “unlimited” means “unlimited” only as long as the Troika’s targets are being met, which is not a phenomenon yet observed in nature.) Draghi promised no subordination — that is — when push comes to shove, the ECB will really not rank higher than any other bondholder. Is this credible, when in the event of a default, Brussels will be doing the math? Guild Investment says, “Probably!”
The most important indication of how much largesse the ECB is giving is the following: tucked away in the program is a reversal of the ECB’s collateral requirements. As long as banks are in a nation under an EU/IMF program, they will be able to use absolutely anything for collateral — no credit rating minimums. Let’s remember what “anything” means, in the context of, for example, a real estate bubble: any paper out there, however worthless if marked to market, will be accepted as collateral by the ECB at its nominal value. Who will own this worthless paper if the now-thinkable happens? The citizens of Germany, Holland, Finland and other solvent European nations, that’s who. Merkel is a shrewd politician, but in the absence of a deep political integration in Europe, she will surely still be struggling to convince her voters that Draghi is a European brother, rather than an Italian banker. Yet, she is successful because the Germans benefit so much export-wise, and economically, by being in the eurozone.
Just yesterday Merkel was given support by the German constitutional court…to read the full story, become a gold subscriber today .
Europe’s Banks — One Regulator to Rule Them All?…
Who did the European Commission propose to be the ultimate authority?
China Ramps Up Infrastructure Stimulus as Congress Approaches
Although the Chinese Communist Party has still not publicly announced the date, its 18th National Congress will be held in mid-October. Seven of nine members of the Politburo Standing Committee (PSC) are due to be replaced…
The stimulus announced thus far, according to analysts, amounts to almost 1 trillion RMB about $150 billion (compare to the 4 trillion RMB stimulus enacted in response to the global financial crisis in 2009 to 2010)… to read the full story and to get early list of projects to improve China’s infrastructure, become a gold subscriber today
Infrastructure Investment: A Macro Trend in the Emerging Markets…
Among infrastructure-deficient nations that plan to improve their situation, Brazil is a notable case in point. Brazil has underspent on infrastructure for decades, averaging only 2 percent of GDP. Today, as Brazil looks forward to hosting the World Cup in 2014 and the Summer Olympics in 2016, only 6 percent of its road system is paved. High commodity prices have been kind to the Brazilian economy; the country has exported much to China and elsewhere, but at home its nascent middle class has been faced with inadequate transportation systems for goods and passengers. Brazil well knows that businesses choke on high logistics costs…
Working Americans are not Earning Enough…
…to Keep Up With the Rising Cost of Living
The average hourly wage in America has gone up about 45 percent since January 1, 2000, a pace much slower than the over 84 percent increase in the cost of basic essential needs.
Each month, the U.S. government tells its citizens how much prices have risen or fallen during the previous month and for the past twelve months. The Consumer Price Index (CPI) that they use contains data collected from spending surveys given by the U.S. Bureau of Labor Statistics. The basket of goods contains prices of necessities and discretionary spending items. It is not a cost-of-living index, but a consumer spending index.
As we have been saying for some time, a key problem with using the CPI to track the rising cost of living is that the basket of goods is represented is periodically altered. The BLS adjusts the weighting of the components, and also smooths the data based on seasonal patterns. Such tinkering usually results in an understatement of the inflation rate. In our opinion, it creates an unreliable, misleading cost-of-living index.
For our newer readers, we have created a simpler index for tracking the price changes of basic, essential needs that tend to flow through the economy and touch everybody’s wallets. The Guild Basic Needs IndexTM
(GBNI) measures the changing prices of components in four essential living expenditures: food, clothing, shelter, and energy (used for cooking, heating, and transportation). The categories and components, and their values within the GBNI, are fixed. There is no seasonal adjusting, smoothing, or replacing of components.
The data will be published twice a month in this letter, and we offer the accompanying charts that compare the GBNI to the CPI data. As you can see, the prices of basic, essential needs are much higher (and more volatile) than the smoothed, manipulated CPI data since 2000.
The bottom line is that Americans’ standard of living is caught in a vice between rising prices and stagnant wages. It is incumbent on savers and investors to protect themselves from the squeeze play.
Track the price of basic needswww.gbni.info
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