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QE: Is The End In Sight?
Good News for the Economy, But Bonds Take a Beating
For six weeks, the Federal Reserve has been talking about tapering the QE program. Yesterday afternoon Chairman Bernanke stated that the tapering would be slow and gradual and that the Fed did not see the economy as strong enough to make big changes, nor did he see inflation as high enough to worry about. QE will continue at a gradually reduced rate as the economy slowly continues to regain momentum. Until then, we expect the dollar to gradually strengthen, putting modest pressure on commodity prices and bond prices. We continue to believe that money will be flowing out of long-term bonds for some time to come.
The world knows that the Fed’s extraordinary liquidity pumping of the past few years will eventually moderate. This does not mean that any of the liquidity that the Federal Reserve has supplied will be withdrawn from the banking system. It just means that the U.S. economy is beginning to show strength…
Where is the U.S. economy showing strength and what sectors are benefiting? If bonds are unattractive where can the income-oriented investor earn income?
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Not Ready for Higher Rates, European Central Banks Offer the Markets A Peek Into a Dovish Future
Last week, on the fourth of July, while the U.S. celebrated Independence Day, central bankers in Europe were lighting a few fireworks of their own. The European Central Bank (ECB) and Bank of England (BOE) both chose this day to telegraph some of their plans for interest rates. Perhaps in response to the U.S. Federal Reserve’s strategy of being more transparent (which has caused interest rates to rise in recent weeks), the ECB and BOE hinted that their extraordinarily low interest rate policies will be in place for some time.
The ECB announced that it “expects the key ECB interest rates to remain at present or lower levels for an extended period of time.” European Central Bank President Mario Draghi’s message was that the ECB would work to maintain lower rates, and he added that the decision to have lower interest rates for some time was unanimous by the ECB board. The question was not whether the ECB would hint towards raising rates — the market knows that was not an option. What was a surprise is the fact that the ECB broke from their previous policies of never giving ‘forward guidance.’…
We are monitoring the European situation, paying especially close attention to the health of their over-leveraged banking system and to German politics. Germany’s elections this autumn could set the table for large accommodations in European monetary and fiscal policies. Fortunately, both the U.S. and Europe are taking action to correct overleverage in their banking systems which is positive for investors although not for bank stocks. Stay tuned to these letters for more…
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Japanese Growth Steady
Japan has racked up impressive improvements under the seven-month tenure of Prime Minister Shinzo Abe:
- Annualized first quarter growth was 4.1 percent, the best of the developed economies
- The consumer price index was flat in May, rising from negative territory — and supporting the view of the Bank of Japan that progress has begun towards creating the 2 percent inflation rate it has targeted;
- Corporate profits are up, with 48 percent of businesses surveyed recently by Reuters expecting a moderate uptick in profits, and 12 percent expecting a sharp rise;
- Major manufacturers show similar positive sentiments, according to an influential annual survey by the Bank of Japan (BOJ);
- Consumer confidence and consumer spending are up;
- With further movement likely, the Yen has dropped into the 100-per-Dollar range, from the upper 70s before Abe’s election — giving a boost to exporters;
- Japanese companies are raising salaries and bonuses, which could lead to a “virtuous cycle” of spending and growth;
- Japanese savers and institutional investors may be starting a rebalancing of their portfolios to Japanese equities, helping boost the Nikkei still further, after its nearly 80 percent gains under the new Abe administration;
- Bank lending to Japanese companies is on the rise
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Guild Basic Needs IndexTM
Prices May Appear Subdued on the Surface… but Rising Costs Percolate Below
Each month, the U.S. Government tells the public what the inflation rate is when it announces the Consumer Price Index (CPI). In these letters, we have maintained that what U.S. consumers experience in their daily lives does not always match the low inflation numbers in the CPI data. Our Guild Basic Needs IndexTM tracks the rising costs of basic, essential needs: food, clothing, shelter, and energy (used for cooking, heating, and transportation). These are items whose changes in cost can dramatically affect the standard of living.
Even though the prices of the items tracked in our GBNI are significantly higher than the CPI, it has not been enough to cause an inflationary psychology to take hold. Our view is that at some point inflation will feature prominently in the public’s consciousness.
Some Prices Impact Consumers’ Behavior More than Others
The large research firm, Neilsen, has published the results of their survey where they asked Americans what has the greatest impact on how they shop. Based on their research, the two items that had the biggest impact on buying habits were: rising food prices and rising gas prices — items that they have to buy. We believe that rising prices of basic, essential needs will spur the next phase of uncomfortably high inflation. Therefore, we will continue to track and publish our analysis in these letters and at www.gbni.info.
In this week’s Premium Global Market Commentary available to Gold Subscribers, we feature:
- Executive Summary
- “Weapons of Mass Deception”
Derivatives Are Used By Governments, Banks, and Corporations to Hide Their Financial Woes from Taxpayers and/or Investors
New revelations about Italy’s finances in its run-up to Eurozone membership have highlighted the deceptive uses of financial derivatives. At the same time, new proposed accounting rules from U.S. and international regulatory agencies show that the same kinds of instruments are often used by banks and other corporate entities to make their books look better than they really are. Also, in the case of the investment banks, derivatives are very popular because selling them generates healthy fees...
- Supreme Court Charts a Cautious Course with Class-Action Suits
Beneath the high-profile cases that have dominated public attention, the Supreme Court has spent the prior session making a number of decisions deeply affecting U.S. businesses. Some construe the Court’s position as ‘pro-business’…but the issue is more complex…
- Guild’s Premium Global Market Summary
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