Finance Weekly Updates

What’s Next for the EUR/USD?

By Staff Editor | January 23, 2018

What’s Next for the EUR/USD?
For the past three years, Americans have watched in shock and horror as their currency fell increasingly far behind the Euro, an upstart currency that seemed destined to supplant the greenback as the prime world currency. Indeed, some Europeans had even been clamouring for a reexamination of the status of the US dollar as a global reference currency for the international finance community, as established under the Bretton Woods agreements signed by the G8 after the Second World War.

But now it appears as though the trend is reversing itself. A number of factors related to the current financial crisis appear to strengthen this reversal.

US investors, shaken by the subprime crisis and unable to borrow as liberally as in the past,
are pulling their money out of investments in Europe and developing countries and bringing them home, converting them back to dollars.

The US, as a federal government, is also expected to be able to address the crisis more coherently than the fragmented EU, which shares a currency but not a government or a policy-making apparatus. Add to this the global fear of risk, and investors from all over the world are running to US Treasury Bills as a source of shelter in bad times. In doing so, they also convert their local currencies to dollars.

The US economy recovered far faster than Europe from economic downturns in the previous half century, and many assume that will be the case this time around as well. This means that what little investment capital now exists is headed for the states, an additional source of upward pressure on the value of the dollar against the Euro.

It may seem unfair that a crisis which originated in the USA should strengthen the dollar against other world currencies, but for the foreseeable future, that does appear to be the outlook.
Currency traders and individuals with holdings in multiple currencies should factor in this projection when determining their positions for the coming years.

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Warren Buffet |US Stocks, US Equities | Investment Banks

By Staff Editor | January 20, 2018

Watching Warren
Omaha-based investment guru Warren Buffet recently made a rare public proclamation.
In a New York Times editorial, he encouraged others to follow his suit and buy up US equities,
in the belief that the current panic has depressed their values far beyond fundamentally justifiable levels.

He revealed that he himself now has nearly 100% of his personal fortune invested in US stocks.
He admonished his readers to remember to be ‘fearful when others are greedy, and greedy when others are fearful’.

This seems like sound counsel, and fairly intuitive to committed contrarian investors.
But what Buffet didn’t emphasize in his editorial is the specific identity of the stocks he has recently picked.
Notably, he recently invested in two major banking powerhouses, Goldman Sachs and Wells Fargo. On reflection this investment is easy to understand.

Even as the public is disturbed and distracted by news of the falls of such titans as Bear Stearns and Lehman Brothers,that news has a silver lining. The field of investment banking, even as it narrows, will not disappear.
The fall of irresponsible brokerage houses means more opportunity and profits for their more prudent competitors who have weathered the crisis.

To put it differently, America will always have to bank somewhere, and it now appears that the somewhere will be with Wells Fargo and Goldman Sachs.

If shares of these banks are now depressed, it is only a result of irrational panic and fear.
This creates a rare opportunity to buy up shares at an artificially discounted price.
In short, for those who can get a grip and suppress the instinct to flee for cover,
now is an excellent time to follow Buffet’s example and load up on shares those investment banks
that appear poised to swallow up the market share left on the table when others failed.

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Could A Run On The Banks Occur?

By Staff Editor | January 17, 2018

One of the most powerful images of the Great Depression is of the tragic run on the banks. When depositors became panicked that banks could not cover all of their obligations, they stampeded to withdraw their money. They were correct- the banks could not pay back all of the depositors, and as a result they went bankrupt, taking the depositors money with them.

In the wake of that crisis, the current FDIC insurance system was established. This system allocates a federal guarantee of $100,000 per account.

It is intended to ensure that depositors can have full confidence that their savings will not be lost, even in the unlikely event that their bank should fail.

Under this system, US banks have been considered among the most reliable in the world.
However, as we enter a period of unprecedented financial turmoil, many depositors are wondering whether they are adequately protected in the event of a systemic failure of the banking community.

In order to examine this concern, we need to understand some of the distinguishing features which differentiate the current banking climate from the one which existed in the time of the depression.
The most prominent feature of the current system is the extent of integration and interconnectedness,

both within the US and on a global level.

This creates a situation where the entire nation and indeed the entire world are one large and interdependent system, so that a failing in any one area has the potential to bring the rest down along with it.
Gone are the days when one could avoid a local recession by investing in an overseas boom.

Second, much of the investment capital circulating today is managed electronically, which means that transactions happen at much greater speed.

Thus, a downward trend which might have taken months to play out can now occur within hours.
Both of these factors mean that a panicked sell-off today can have calamitous repercussions that far exceed those of the great depression both in extent and in speed.

Given this background, some more cautious investors raise two alarming issues.
First, even if depositors individual accounts are guaranteed by the government, how would the government possibly administer the distribution of funds in the event that the entire banking industry were to implode, and records were lost or inaccessible?

In an era of electronic records, couldn’t critical data be lost or distorted to the point where a reimbursement of depositors would become infeasible?

Second, is the US government’s own financial house in adequate order to serve as guarantor for the deposits of its entire citizenry?

During the Bush years, unprecedented government spending led to the accumulation of over ten trillion (yes, with a ‘t’) dollars of national debt, a staggering and unprecedented sum.

Add to that the hundreds of billions the government is pledging for various bailout and stabilization packages, and a troubling picture emerges. It appears that consumers have overspent and then left the banks holding the bill, the banks have done the same to their investors, and now, the investors are doing the same to the federal government. Passing along responsibility to a higher echelon does nothing to resolve the underlying lack of wealth.

In light of all these factors, some are beginning to doubt the realism of implementing FDIC insurance, should it ever be needed. When asked what is the best position in which to weather  the current crisis, one clever analyst remarked, “either cash or fetal”. More Americans are beginning to wonder whether perhaps they will find themselves in the latter, wishing they had selected the former.

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Learning from Iceland

By Staff Editor | January 14, 2018

In the past couple months, the term Iceland has become synonymous with economic havoc. All of Iceland’s major banks, their currency, and their stock market, collapsed within a matter of weeks. The citizens of pastoral Nordic nation awoke one morning to find their savings evaporated, their salaries slashed, their homes and investments devalued. What led to this shocking calamity, and what can we learn from it?

1. Currency Bubble – Speculative investment in the Krona had reached bubble proportions. Having such a small currency so heavily over-invested invited an abrupt fall, as foreign investors, who held the vast majority of the currency, had no compunctions about unloading it at the first sign of trouble.

2. Outgrowing your Country – Banks in Iceland had outgrown themselves and their country. According to some estimates, they were endebted to foreign creditors and depositors at a level equivalent to €160,000 per individual Icelandic citizen! Clearly it was not realistic for the Icelandic government, whose budget derives from the collection of taxes, to provide meaningful insurance on these deposits.

3. Bad Fences Make Bad Neighbors – Icelandic banks operated branches in Europe that were not properly structured in order to be independent from their parent institutions. As a result, they were ineligible for insurance or assistance from the British or European banking authorities. A very acrimonious debate erupted between the British and the Icelandic governments when Iceland intimated that it would not guarantee the deposits of non-Icelanders, and Britain retaliated by seizing the assets of those branches which operated on English soil.

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Oil Prices Fall as Economy Falters

By Staff Editor | January 11, 2018

US consumers may be celebrating the recent fall of gas prices, but a number of disturbing fundamentals lie behind this seemingly positive development .

If we examine the underlying causes for the recent fall of oil from about $150 to under $70 a barrel, we will find some unsettling surprises.

First, we must understand that price is determined by the balance between supply and demand.
About a year ago, demand for oil exceeded supply for a number of reasons. First, the OPEC nations were limiting production to maintain high prices.

Second, a large amount of American capital was being invested in speculation on the continued rise of oil.
Investors were buying up ever more oil in the belief that its value would continue to appreciate.
This created bubble conditions in which the price escalated beyond an appropriate level, only to collapse at the first sign of trouble.

Third, US consumers were spending borrowed money freely, buying expensive gas and oil along with the large homes and vehicles that consume them. Once the US credit market tightened, the outlook was for consumer demand for oil to drop radically in the coming years.

All of this points to a disturbing conclusion: although the low price of oil may be convenient for the consumer in the short term, it reveals deep failings in the economy. Speculative investors have sustained massive losses on oil, and several hedge funds have lost all of their capital in this venture alone.

Consumers are curtailing their consumption of oil so abruptly that even substantial production cuts by OPEC cannot keep pace.

When investors are sustaining losses and consumers are unwilling or unable to spend, we are on the threshold of a major recession, if not a depression.

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