The continued parade of stock market analysts who proclaim the equity market is rallying merely on Fed monetary policy instead of market fundamentals have spent far too much time doing case studies and not reading economic history. Interest rates as the variable signaling the cost of money are a very critical element and a key fundamental of the economy and especially the equity markets. U.S. multinational corporations are sitting on record piles of cash and also reporting strong profits. Much of the growth in profits can be attributed to two factors: Very low borrowing costs and continued pressure on wages. The FED has created the low interest rates and has hoped that the profitability resulting from low borrowing costs would bleed into higher wages and thus the need for increased hiring. The problem is many fold on the lack of success in aiding jobs creation. Globalization has kept pressure off wages and the deleveraging of the private balance sheets has meant that downward pressure remains on demand.
Posts Tagged ‘Francois Hollande’
Notes From Underground: The Fed’s Zero Rate, Quantitative Easing Policies Are Stock Market FundamentalsMarch 10, 2013
In the London Telegraph, it was reported that French President Hollande visited Greece in an effort to show solidarity with the Greek people in pledging to support growth over austerity. The French leader told the Greeks that the French would “help with privatizations, tourism and a public sector overhaul.” Hollande also urged French investment into devastated Greek businesses. In direct opposition to October’s visit by German Chancellor Merkel, the French President proclaimed, “The Greek people have has as much as they can take.” While I would not disagree about the Greek citizenry being pushed to the limit through austerity budgets and tax increases, be assured that Hollande’s public show of support is all about trying to gain as much support as possible in his coming battle with the Germans.
Tomorrow the Bank of England (BOE) and European Central Bank will grace us with their interest rate announcements. The BOE is expected to hold overnight rates at 0.5% and to keep the QE program at its present level of 375 billion pounds. The current weakness in the British pound will keep Governor Mervyn King from tampering with present policy, and, with a new Governor of the BOE in July, it makes no sense to expend any type of easing before the change of leadership unless some new crisis emerges. Current BOE policies and renewed weakness in the British economy have driven the EUR/GBP rate to 15-month highs, thus putting the pound in the middle of the “currency wars.”
Today, French President Francois Hollande called for a managed currency rate for the EURO. It seems that the French are now concerned that the euro is too strong for its fragile economy. The problem is that as long as ECB President Mario Draghi is happy with a stronger euro the French are in a difficult situation. I have argued that a “strong” euro placates the German hard money crowd. All of the ECB‘s monetary policies have stabilized the break-up risk of the EU while not subverting the currency’s value. Mario Draghi can tell the Germans that his policies are being supported by the market and thus keep Bundesbank President Weidmann at bay. While the BOJ, BOE and the FED have had to actively enact QUANTITATIVE EASING, the ECB has actually seen its intervention contract as money has been paid back and collateral returned. (See last week’s repayment of the LTRO funds.) While the YEN, POUND and DOLLAR have been sold by the market, the EURO has attained star status.