Be careful not to assume the jump in stock prices in recent days is fueled by any renewed confidence about the economy or corporate profits. The genesis of the late-summer uptick in stock prices largely is due to central banks that are adopting easy-money policies to keep interest rates low and to promote economic growth.
Central bank action to spur borrowing at low interest rates typically gives a short-term boost to the stock market. The same central bankers also can fuel the markets by talking about taking action, if warranted, to aid economic growth. Such a situation occurred in the past week when European Central Bank President Mario Draghi announced his plans to support a new round of sovereign bond buying for economically struggling euro-zone countries such as Spain and Italy.
But Draghi’s vision is not shared by everyone, since it encompasses financial risk for the counties that participate in the proposed plan. Jens Weidmann, chief of Germany’s central bank, the Bundesbank, favors letting loose-spending euro-zone countries adopt fiscally responsible plans that allow them to lift themselves out of their financial distress. If the ECB does not have support to implement its plan to help struggling euro-zone countries to reduce their borrowing costs, the boost given to the stock market during the past week could be fleeting.
Keep in mind that Weidman took the top job at the Bundesbank last year, after his predecessor, Alex Weber, balked at ECB bond buying initiatives. The Germans have the strongest economy in Europe but they are growing weary of taking on additional financial burdens. Greece and several other countries in the region continue to spend well beyond their means to sustain standards of living that they simply cannot afford. Despite all of the optimism that investors read into Draghi’s comments last week, tread carefully.
In the United States, the Federal Reserve Bank likewise plays a key role in influencing the markets. The prospect of intervention by the Fed often is enough to send the market upward. The Federal Open Market Committee (FOMC) statement last Wednesday, Aug. 1, indicated that it is continuing its zero interest rate (ZERP) policies at least through late 2014. Since the FOMC sets the Federal Reserve’s monetary policies, its influence is huge.
As the FOMC minutes released on Aug. 1 explained, the panel is seeking to support a U.S. recovery and to keep inflation under control. Key objectives of the Fed are to support monetary policies to maximize employment, to maintain stable prices and to ensure moderate long-term interest rates. The committee last week expressed interest in sustaining its “highly accommodative stance for monetary policy.” In particular, it decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions are likely to warrant exceptionally low levels for the federal funds rate — at least through late 2014.
The committee also decided to continue — through the end of the year — its program to extend the average maturity of its holdings of securities. However, there are a limited number of steps that the Fed can take and none of them will cut the runaway U.S. government deficits. With the U.S. debt now topping a staggering $17 trillion, the clout of the central bank to use its monetary policy to address fiscal ills is limited.
If you want specific advice about what to buy and to sell to protect your savings and produce a return on your investments, you may want to consider subscribing to my monthly Forecasts & Strategies investment newsletter. Since I have a Ph.D. in economics, I consider monetary policy, fiscal policy and money supply in the recommendations that I make. In times like these, I am very glad to have that kind of training, along with more than 30 years of experience in providing investment advice, to help guide my subscribers through treacherous territory.
You Blew It: Losing on Purpose Has No Place in the Olympics
The shocking video of a number of badminton players deliberately missing shots in an attempt to lose their matches and face weaker opponents in the next round in the London Olympics seemed like a parody to me. I never envisioned top-flight Olympic players performing worse than people playing badminton recreationally in their backyards.
Olympic participants represent their countries, as well as the young people of the world, to showcase their capabilities in sports. The honor should not be turned into a mockery. Olympic officials share part of the blame for adopting a round-robin format in badminton for the first time this year, rather than the traditional approach of using a single elimination tournament to determine the medalists. With single elimination, one defeat sends the losers home. There is no room for participants to decide whether or not to play their best, in hopes of drawing a less accomplished opponent in the next round.
Eight doubles players from China, South Korea and Indonesia were found by the Badminton World Federation to have conducted themselves “in a manner that is clearly abusive or detrimental to the sport. The players were disqualified from further Olympic competition. It was a just penalty for an inexcusable offense.
Yours for peace, prosperity, and liberty, AEIOU,
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