A Greek Drama for the Mediterranean
Talks in Greece about restructuring their debt seem to have encouraged traders this week. Greece got into this mess by its lavish social welfare programs, poor government accounting, and inability to properly collect taxes. Austerity of recent years seems to have helped, but they are still burdened by too much debt. The austerity promoted by Germany and the rest of the European Union is getting pushback and some say could result in other “Mediterranean” EU countries (Italy, Spain, Portugal – the PIGS) pushing back and eventually even leaving the EU.
Barron’s mentioned this week a book by prescient writer George Friedman Flash Points: The Emerging Crisis in Europe, which I have not yet read. His book The Next 100 Years: A Forecast for the 21st Century is a great read. He suggests Germany has grown so large and taken advantage of Greece and others because of the free trade agreements and policies of the EU itself. Germany has a strong industry that exports more than 50% of their GDP, much to EU countries who failed to build their industries to strength. He suggests the Germans have some responsibility for financing the whole arrangement to begin with, with the money they earned exporting to those same countries, feeding the debt fire.
Potential Overvaluation of US Equities… but not all sectors
Various metrics, such as Robert Shiller’s CAPE index and Gavekal Dragonomics index on stock market value to US GDP show the stock market is potentially overvalued. This does not mean the market will crash – in fact it could continue to rise higher or remain with asset prices at these levels for some period of time until the fundamentals support these prices. The US economy is the best thing going in the world at the moment. Even though growth is slow, it is better here than most elsewhere.
Speaking of overvaluations, the NASDAQ, the index of technology companies, is almost to the 5,000 mark, the level it had right before it crashed in March of 2000. Don’t freak out just yet. Using the inflation adjusted levels; the NASDAQ would have to reach 7,000 in today’s dollars to meet that peak. In addition, many of the technology companies of today are actually producing things people buy and producing – of all things – income. That is a divergence from the heady late 1990’s tech sector. Some technology companies are even now mature companies. There does seem to be a bubble in start-up financing but that is a different story.
Jobs and Retail
US jobs growth is strong, with more jobs being created from November to January than at any period since 1997. In addition, wages are increasing, with Wal-Mart announcing an increase in their minimum wage to $10 next February, up from the current federally mandated minimum wage of $7.25. All this as retail numbers in December were down 0.2%, which confused some who thought spending would increase as gas prices plummeted. It appears most consumers paid down debt and put money into savings versus spending more. I can’t say I don’t agree with the consumers’ behavior, on a personal financial planning level.
The Great Interest Rate Debate
The Federal Reserve released minutes last week suggesting that the rate hike everyone is expecting in June might be pushed out further. This comes as growth is slow and deflation seems to be hitting the US. China, Europe and much of the rest of the world is also in slow-down mode, lowering their interest rates to increase their economic output through increased lending. To increase our rates now would be the opposite of what the rest of the world’s federal reserves are doing.
Speaking of China
Their currency, the Yuan (aka the Renminbi – the focus of my Senior Thesis in Economics) is now approaching 2.2% of the total global payments, up from 0.63% in 2013. This is much lower than the US Dollar with 45% and the Euro with 28.3%, the two largest global currencies. It is also lower than the Japanese Yen and the British Pound. It is important to note the large increase, however, as China has tried to increase the power their currency – and thus China, has in the world marketplace.
A note about the report:
I have, for as long as I remember, been fascinated by the economy and stock markets. Nearly my entire life I have been striving to interpret both. I have my Bachelor of Arts in Economics, but have found the cold, hard experience of working on a trading floor and in my personal accounts has been a far better teacher. In putting pen to paper I hope to inform others about where I see the economy and the market. Perhaps also some insight into where they are headed. This is not financial advice. Enjoy.
Our Source Material:
Barron’s Vol. XCV No. 8 – February 23, 2015
The Wall Street Journal Vol. CCLXV No. 42 – February 21-22, 2015
Bloomberg View – February 23, 2105