Paper Currency Giants and Gold Pigmies


Here’s a contrarian idea – buy euros.

No doubt investors were surprised at Port Phillip Publishing’s recent Strategy Session. That was when Wall Street banker and analyst Jim Rickards repeated his bullish call on the European currency.

It’s probably not possible to have worse press than Europe has had this year. It has dominated the financial news and almost all of it has been negative.

Greece is broke. Ireland is broke. Spain is on life support. Italy and France are about to have a cardiac arrest. And Finland wants out.

This is mainly due to the chronic budget deficits within the eurozone, especially the Mediterranean countries.

But for the moment, Europe is still running a trade surplus, mainly thanks to Germany, and the euro is a major currency in the swirling flow of global money.

And if Jim Rickards is right, the world is at the beginning of the third global currency war in the last hundred years or so. It could mean that not only is it time to buy the euro, but being aware of currencies is more important than ever.

The World of Currencies

One of Jim Rickards’ key points in Sydney was that capital flows dominate trade flows. What he means is money goes to where it feels safest, rather than moving in regard for the underlying economy.

The recent rise in the Swiss franc wasn’t because investors thought the world was going to pig out on more Nestle chocolate. Investors bought the franc because they were worried about other currencies, mainly the euro, losing value.

Smaller currencies like the Swiss franc and Australian dollar rose as money fled Europe in the wake of the banking crisis. The flip side is the euro has fallen against these currencies.

But there is a limit to how much money small economies like Switzerland and Australia can absorb.

The major currencies of the world are the US dollar, the euro, the Japanese yen and the British pound.

The joker in the pack is the Chinese renminbi. China has the second largest economy in the world but the renminbi is a closed currency. It doesn’t trade on the international exchange in the same way – yet. And it’s loosely pegged to the US dollar to hold down its value.

Other than Europe, only the US, British and Japanese economies are big enough to absorb large amounts of money without being destabilised.

But are any of these currencies any better than the euro?

Let’s start with the US dollar. The US has an enormous budget and trade deficit. Not only that, the Federal Reserve is deliberately trying to devalue the dollar to increase American exports.

But despite those efforts, the US dollar has been relatively strong lately, as it benefits from the same ‘safety’ trade as the Aussie dollar. Rickards points out that this is exactly what the Fed doesn’t want and so he reckons they’ll launch the next round of money-printing (QE3) sooner rather than later.

Because of that possibility, investors would do well to remember the old Wall Street saying, ‘don’t fight the Fed’. This could make investors wary of holding US dollars.

So the question facing investors is, if not the dollar, where else?

Japan has a debt to GDP ratio of over 200% and in 2011 ran an annual trade deficit for the first time in thirty years.

Considering the huge burden of government debt, many traders figure the Japanese Central Bank will print huge amounts of yen to hold down interest rates to keep the government from going broke.

What about the British pound then?

The Bank of England, known as the ‘Old Lady of Threadneedle Street’, has printed an enormous £375 billion since the financial crisis in 2008.In percentage terms, this is the most of any central bank in the world. That’s hardly better form than the US or Japan.

So where do large investors turn? The pound? The yen? The dollar?

Jim Rickards says none of those. He’s backing the euro…

Where You’ll Find the World’s Gold

Jim Rickards sees the world of money as mostly flowing to and from China, Europe and America.

If America cheapens the dollar further, his position is that China won’t allow the renminbi to appreciate. It will cheapen the renminbi to match the falling dollar.

And if those two currencies fall, the euro should rise. Relative to each other, for one currency to fall, another must rise. Of course, they can all fall when valued against gold.

And so Rickards thinks one way China will try to hedge its enormous exposure to the US dollar via its foreign exchange reserves is to invest in European assets.

But the Chinese don’t want Europe’s toxic government debt. They’ve got plenty of America’s already.

But if Europe can stabilise its bond markets, Chinese capital could be one factor that drives the euro (and European economy) higher over the next five years.

But there’s another reason Rickards believes China will invest in Europe.

When you put the 17 regional central banks of the eurozone together, they hold more gold than the United States, the largest individual gold holding country in the world. This makes Europe the strongest financial power in terms of gold.

This could provide a solid foundation for the eurozone to bounce back.

China’s gold reserves are about an eighth of Europe’s, which makes it, in Rickards nice way of putting it, ‘a paper giant and a gold pigmy’. That’s why China has accumulated gold and should continue to do so. This is another bullish sign for gold.

For Aussie investors looking for value on the cheap, a nice contrarian play is to back Europe while the Aussie is high and the euro is weak.

Callum Newman
Editor, MoneyWeekend

The Most Important Story This Week

There’s been a lot of talk lately about the poor performance of gold mining stocks over the last few years. One reason is that investors who want to get exposure to gold can buy the physical metal or ETF’s that store it for them, meaning less demand for gold stocks.

Since hitting its high last year, the gold price has also been trading in a range. This has kept a lid on gold stocks as they appear less lucrative. With gold stocks at a low, now might be the time to back the sector. If the gold price can break out of its range and head higher, gold and gold stocks should follow. But why be bullish on gold? Peter Krauth explains why in Is Gold Still ‘The Next Greatest Trade Ever’?

Other Recent Highlights…

Kris Sayce on Why Green Energy Will Struggle Against a 790,000 Year Habit: “Once politicians and vested interest stick their noses in somewhere, it’s darn hard to get them to buzz off. In the July issue of Australian Small-Cap Investigator, we wrote that the best thing to happen to the green energy sector was the 2008 global financial meltdown.”

Nick Hubble on Find Out if You’re a Speculator, Value Investor or Stock Trader: “Each of them uses a carefully thought out strategy to make their buying and selling decisions. So that you can see all three of them in action, we’ve thrown in a mystery stock for them to analyse…”

Martin Hutchinson on Why Platinum is a Screaming Buy: “You won’t read about it in the mainstream news, but the South African mining industry is in the fight of its life…You see, violent strikes have paralyzed several South African mines this year, including most recently the giant Lonmin platinum mine…Let me explain.”

Jeffrey Tucker on Smartphone, Dumb Patents: “An industry that became thrilling and gigantic, and has brought unprecedented progress, is now entering a dangerous period… where one company’s win is another’s loss, and where the welfare of the consumer has to be put on hold for the battle of the titans. The problem comes down to one word: patent.”

Paper Currency Giants and Gold Pigmies

Is Zimbabwe the Next Emerging Market Dynamo?


This week we learnt that China is about to overtake Japan and become the world’s second biggest economy.

Who’d have expected that 20 years ago? Not many people, from my memory.

China is a classic case of what can happen when an emerging economy really takes off. And it has spurred investors everywhere to try and unearth the next big thing amid the ranks of ‘frontier’ markets.

And you can’t get much more frontier than Zimbabwe. It’s had the most horrific economic problems. Yet one of the UK’s top fund managers is starting to invest in the country.

So is this the real deal? Or will Zimbabwe still be a basket case come 2030? Let’s take a look…

Zimbabwe: a World Leader in Hyperinflation

Mention Zimbabwe to almost all investors and you’ll probably get a very negative reaction. And that would be no surprise at all. It’s an African state that’s gone horribly wrong – and then some.

Now I’m not going to attempt even a potted political history here. That’s not what Money Morning is about. But this quote from the independent Zimbabwean economist Vince Musewe just about sums it up.

After Zimbabwe got its independence in 1980, ‘in our naiveté we assumed we’d witness the rise and rise of a liberal and democratic social economy’, he says. ‘With an educated populace, our expectations were that we’d inevitably become the “intellectual” capital of Southern Africa, if not Africa. How wrong we were!’

To cut a long story short, the economy became a total disaster area. The government mismanaged things badly. The ‘land grab’ from white farmers ten years ago led to a collapse in food production.

GDP and exports slumped, while unemployment hit a staggering 80%. The country got involved in the war in the Congo, which proved terribly expensive. And the whole place has been riddled with corruption.

Indeed the only area where Zimbabwe actually became a world leader was in its inflation rate. Or to be more precise, its hyperinflation rate.

The country had long had a nasty inflation problem. But when the government started minting money by the ton to pay its bills, the rate really took off. It reached over 100% a year in 2001.

Yet the printing presses were simply cranked up even more. Arrears owed to the IMF, salary payments for public workers and soldiers – they were all paid for by simply producing more and more banknotes.

Of course, this doesn’t create any more wealth. It just pushes up prices. By December 2008, the cost of living was rising at “6.5 quindecillion novemdecillion %” a year, according to Wikipedia. I’ll take their word for it – but in practice, it means prices were doubling every 1.3 days.

Why Would Anyone Invest in Zimbabwe?

In fact, Zimbabwe seems like it’s been on a completely different planet. So why on earth, you’re probably asking, would anyone want to invest good money in a country like this? Surely there’s no point in even thinking about such a place?

Well, here’s the surprising bit. The outlook for the country is gradually picking up. Just over a year ago, the government stopped printing the Zimbabwean dollar. Zimbabwe now allows trade in the USD and the euro, sterling, South African rand and Botswana’s pula. Inflation actually fell below zero within weeks of the move.

Sure, the inflation danger hasn’t gone away. And there are still “smart” economic sanctions in place. Without getting into the politics, President Mugabe doesn’t have a good reputation on the human rights front.

But the economy is starting to recover. Civil servants are being paid again, which has meant schools and hospitals could re-open. There are plans for a privatisation programme. And the economy is backed by significant mineral wealth that’s yet to be exploited. It could yet realise those hopes of 30 years ago.

Now we’ve heard this sort of thing before about Zimbabwe. At the end of last year it was described as the “ultimate recovery story” by Ambrose Evans-Pritchard in The Telegraph. Yet the economy is still hugely dependent on imports to survive.

But this month, another reason for eyeing Zimbabwe has just appeared. Top fund manager Neil Woodford has just used over £15m of the money he manages for Invesco Perpetual, to buy a near-30% stake in a Zimbabwean firm called Masawara (LN: MASA).

The group invests in the country’s agro-chemical, insurance and property sectors. It’s also planning to move into oil, mining and agriculture, as well as buy privatised assets.

Should You Invest in Zimbabwe?

So what should private investors make of all this? And should they follow Woodford by buying into Zimbabwe?

Of course, the Invesco Perpetual star player doesn’t get it right all the time. He’s backed a few wrong horses, and clearly Zimbabwe is a high risk and controversial bet that could yet go very awry.

But Woodford is no short-term punter. He’s a long-run income fund investor who can sniff out a real bargain, and is prepared to give it enough time to be recognised by the rest of the market. So when he put that amount of money into somewhere as offbeat as Zimbabwe, it’s enough to make me think it’s worth doing likewise.

To repeat, this would be a high risk, long-term investment. It would be sensible to keep it as a relatively small part of your portfolio. But over several years it could pay off incredibly well. Remember China.

David Stevenson
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

Read This Gold Price Warning Before You Buy Another Stock
24-08-2012 – Kris Sayce

Stocks Are Up – Is it a Good Time to Buy?
23-08-2012 – Kris Sayce

It’s About Freedom of Speech: What if We Couldn’t Write to You Anymore?
22-08-2012 – Kris Sayce

Things Are Looking Up for Gold
21-08-2012 – Bengt Saelensminde

The Good News About Europe’s Missing Pre-nup
20-08-2012 – Nick Hubble

Is Zimbabwe the Next Emerging Market Dynamo?

The Recovery is Beginning

Article by Investment U

Ever since the financial system was on the brink of complete collapse four years ago, it’s been a tough slog.  But that shouldn’t be unexpected.  This was no ordinary recession.

When someone recovers from the flu, it takes a week or two before they’re feeling 100%.  On the other hand if someone was in intensive care with double pneumonia, it’s going to be quite a while before they’re feeling back to themselves.

Well, in 2008 and early 2009, not only was the U.S. economy in intensive care with double pneumonia, but Presidents Bush and Obama, along with Hank Paulson had to break out the defibrillator a few times to revive the patient.  The recuperation process was going to be long.

But now the patient is home, up and moving around again and on the road to recovery.  There’s still a long way to go, but make no mistake about it – things are improving:

  • In August, building permits were up 6.8% from last year.
  • Employers added 163,000 jobs in July, higher than the 73,000 average from April – June.
  • Timber company Wyerhauser (NYSE: WY), whose revenue is 84% tied to housing, saw second quarter revenue higher than it has been in several years.
  • More employees are going on strike. According to Barron’s, RBC Global Asset Management noted that there have been 17 incidences of walkouts with 1,000 or more employees – the highest since 2004-2005. That’s a sign of confidence on the part of labor.

Following the Smart Money

In South Florida, one of the hardest hit areas by the popping of the real estate bubble, there are so many new construction projects in my small town, it’s hard to keep track.

Brand new buildings are going up to house restaurants including McDonald’s (NYSE: MCD) and YUM! Brands’ (NYSE: YUM) Taco Bell.  Toys R Us is expanding its store. New strip malls are being constructed when just two years ago, existing ones were vacant.

Housing prices in South Florida rose 2.8% in July, the eight consecutive monthly increase. This is a market where a year ago, you couldn’t give a house away.

And in some parts of Northern California, housing is back to the fervor experienced during the dot come days.  A realtor told me of a friend who bid on a house only to be one of 25 people making an offer.  Another worked with a client on a condo that received seven offers and went for 9% above the asking price.  She now has a client bidding more than 12% above what the seller is asking for.

Last week, I talked about following the smart money. If anyone qualifies as smart money, it’s the management of companies like McDonald’s, YUM! Brands and Wyerhauser.

Intel (Nasdaq: INTC), the world’s largest semiconductor maker is investing $300 million into a new facility in Chandler, AZ.  General Motors (NYSE: GM) will spend $220 million at two factories in Ohio.  In October, Tanger Factory Outlet (NYSE: SKT) and Simon Property Group (NYSE: SPG) will jointly open a 350,000 square foot retail center in Texas.

Surprise! Stocks are Up 20% This Year…

Things obviously aren’t all lollipops and rainbows. There are still way too many people who need work and are struggling. We continue to have real problems that need to be tackled. But economies are cyclical and do bounce back, even after the extreme conditions of a few years ago – and that’s what we’re starting to experience now.

The markets know this. The stock market is a forward looking indicator.  It’s likely why stocks have gained over 12% year to date and 20% in the past year.

If the 20% gains of the market over the past year were for a full calendar year, it would be the 22nd best performance in the past 84 years. The good news is 20% gains in the market has been a good indication of future economic growth.  Let’s take a look at the five markets closest to the past year’s performance.

  • In 1967, the stock market rose 20.02%. The following year, GDP rose by 4.8%.
  • In 2009 and 1963, the market climbed 19.67% each year. GDP grew 3.2% in 2010 and 5.2% in 1964.
  • In 1999, the market grew by 19.64% resulting in a 2.9% increase in GDP.
  • And in 1996, when the market rose by 19.33%, GDP was higher by 4.4% just 12 months later.

After so many years of suffering, it may be difficult to picture brighter days ahead, but rest assured, they’re coming.  That’s not me being my usual cheerful self.  That’s the numbers and executives of some of America’s top companies talking.

After a near death experience, the patient is about to go back to work. Before you know it, he’ll be back at the gym and on the golf course. Let’s stop treating him as an invalid and start recognizing that things will return to normal.

Good Investing


Article by Investment U

Emerging Market Small Caps: The Best Stocks For a Slowing Global Economy

Article by Investment U

In this age of endless information and media exposure, we get overwhelmed by reports and studies from all types of organizations and statistics referred to only by some crazy acronym –the IMF, ECB, PMI… The list goes on.

Believe it or not though, some of these reports and organizations actually give us good stuff. And acting on the right information can help build wealth. One such came report came out about two weeks ago and what it said could weigh in on your portfolio choices for some period of time.

You may have seen news referring to the OECD acronym sometime around the second week of August. The Organization for Economic Co-operation and Development (OECD) is a global economic organization of 34 countries founded in the early 1960s with a stated mission “to stimulate economic progress and world trade.”

The OECD over the last decade has been attempting to define and separate itself from all those other international acronyms. They seem less concerned with the theories of international macroeconomics or lending money to debt ridden countries. They try to get down to the “nitty gritty” and talk about agricultural and/or educational reform. As one former Secretary General stated, they would rather be “a steering group for the world economy.”

What does this mean for you? In a nutshell, the OECD has some great international economic stats. More importantly, they have been pretty reliable in predicting economic trends.

The OECD Sees a Slowdown Ahead

According to the OECD’s composite leading indicators (CLIs) of economic activity, most of the developed economies are probably going to slow. These indicators are set up to give early signals of turning points between times of boom and bust. Here are how they’re made up:

• You have “early stage” indicators which look at what’s going on in the initial stages of production like construction approvals

• Then you have “rapidly responsive” indicators which respond in a timely manner to changes in the economic landscape. An example would be stock market indices.

• “Expectation-sensitive” indicators would reflect qualitative reports and measures like consumer confidence.

• Finally, “prime movers” indicators are related to monetary policy and foreign trade

The OECD reported August 8 that its leading indicator fell to 100.3 in June from 100.4 in May. This leads us to believe that there will be “an easing of economic activity.”

oecd indicator chart

What Does it Mean to Me?

The OECD’s findings haven’t put the world on its head because we’ve pretty much known this information for quite some time. What it does, however, is give more credibility to what we thought we knew.

In response, there has been a move lately for investors and some fund managers to take a longer look at emerging-market stocks. They are looking more specifically at stocks that are tied to their own domestic consumer growth. The object of this strategy is to take advantage of emerging market growth that isn’t too highly dependent upon demand from Europe and other developed declining economies.

According to Roger Edgley, lead manager of Wasatch Emerging Markets Small Cap Fund (WAEMX), Small-caps in emerging markets “are less risky than large caps and have less exposure to the developed markets… Developed markets have actually gotten riskier, if you look at debt to GDP, bank stress, and fiscal stress.”

Edgley likes companies with consistent growth over time and here are five of his favorites in WAEMX:

Colgate-Palmolive India Ltd. (BOM:500830) is a separately traded unit of well recognized Colgate-Palmolive and it is taking advantage of a blossoming domestic consumer market in India.

LIC Housing Finance Ltd. (BOM:500253) is a part of India’s largest insurer. It provides loans for purchase, construction, repairs and renovation of houses to individuals, corporations, builders and co-operative housing societies.

Cleanaway Co. Ltd. (TPE: TW:8422) would fall into Warren Buffett’s “Moat Strategy”. It’s a Taiwanese hazardous waste treatment and management company and this industry has high barriers to entry.

Discovery Holdings Ltd. (ZA:DSY) is a leading insurer in South Africa which provides insurance products and financial services to employer groups and individuals. They have a range from South Africa to Great Britain China, and the U.S…

Dah Chong Hong Holdings Ltd. (HKG: HK:1828) is a is a Hong Kong-based conglomerate that deals in motor vehicle sales and repair, air cargo equipment distribution, cosmetic, airport ground support equipment maintenance, food, logistics and warehouse services. Edgely believes that the company can grow even under the threat of a further global meltdown.

If you don’t want to invest individually or can’t invest in foreign stocks with your broker, the Wasatch Emerging Markets Small Cap as of about a week ago is up nearly 15% for 2012. Morningstar also puts it in its top 2% of its Diversified Emerging Markets class. If you look at the annualized return for the last three years, WAEMX is up about 21%.

But this is just one way to hedge against economic slowdowns in the “developed” world. Stay tuned for more quality emerging market plays from our experts in the weeks ahead.

Good Investing,

Jason Jenkins

Article by Investment U

The Doomsday “Preppers” Portfolio

Article by Investment U

Is It Too Late for a Doomsday Portfolio?

For many, an apocalypse seems to be breathing down upon us in multiple forms: economic, societal, environmental, or prophesized.

There’s plenty to be tense about. People go home at night, watch the news and are understandably afraid. One time bomb after another has gone off.

So, it’s no surprise that over the last several years, a new trend emerged: Preparing for the worst. These are the “Survivalists”… The “Doomsday Preppers.”

Just look how many more movies and shows are on television these days about survival tactics. I even watched a cooking competition show the other night where the challenge was creating a tasty meal under post-apocalyptic conditions…

You can go online to find old bunkers and military silos for sale (reasonably priced, I might add). And there’s even a real estate company that specializes in this.

So, this week, I thought I’d create a “doomsday portfolio.” It’s a portfolio made of good companies that should post impressive returns as people continue to prepare for disaster…

doomsday chart

The Post-Apocalypse and Your Portfolio

One of the first items on most people’s lists when preparing for the end of the world is protection… And that typically means firearms.

There’s a duality that exists for gun manufacturers that will make many investors uncomfortable: Recent violence seen on the news results in a public political gun policy debate which results in higher gun sales.

That’s one of the reasons Sturm, Ruger & Company (NYSE: RGR) is up nearly 30% this year. Of the bestselling handguns in the United States, Ruger normally tops the list.

In the second quarter, Ruger’s gun sales increased 50% over last year. The company actually had to stop taking orders because it simply couldn’t keep up with demand.

And so far this year, the FBI is reporting a 20% increase in gun sales in the United States, again thanks in large part to increased public debate over gun policy.

From an investment perspective, Ruger is a lot more attractive than competitor Smith & Wesson (Nasdaq: SWHC). Ruger has had 11 straight quarters of positive earnings surprises, including seven straight topline beats.

And shares are still trading at a discount to their peak on May 2… Ruger was hit hard during the May sell-off, falling an astounding 39% between May 2 and June 7!

Teach a Man to Fish…

The next item of disaster preparedness is obtaining food.

There are a lot of canned food manufacturers, but as they say, “Give a man a fish, he won’t starve for a day. Teach a man to fish, he won’t starve for his entire life.”

So it’s no surprise that Cabela’s (NYSE: CAB) has been on a tear this year, up a little less than 90%. But don’t think you’ve missed the boat…

The company sells outdoor equipment, guns, ammunition and camping gear. In the most recent quarter, revenue increased 11.6% and retail sales increased 16.9%.

For die-hard doomsday preppers, Cabela’s is one of those great resources – a one-stop shop so to speak. And on any doomsday prepper website, you’ll see ads for Cabela’s, with a lot of them buying goods from the company’s outlets or stores.

Here’s the big bit: Cabela’s growth has been driven by strong sales in ammunition, firearms and fishing equipment.

The company is so in-tune with the apocalyptic trends that concern Americans, it even offers a doomsday prepper-focused catalogue… And more importantly, the preppers themselves have been sharing the catalogue with each other on their forums and networks.

Let There Be Light!

When we were recently hit by a severe storm here in Maryland, where hundreds of thousands of people were without power for weeks (in the midst of our nasty heat wave), Generac (NYSE: GNRC) was everywhere.

The radio was dotted with ads for Generac’s products.

It’s also another one of those “prepper” staples. The company’s generators are listed as must-haves on almost every single doomsday prepper forum and website.

And like it or not, Generac also gets boosts from catastrophes – for example, the tornadoes in the Midwest and South in the early part of 2012. In the most recent quarter, it beat estimates on revenue and earnings per share as sales increased 48%.

Shares of the company are down so far this year… But with the expectations that the hurricane season is going to be more serious than originally expected, and the winter on the East Coast possibly a nasty one, expect Generac’s sales to jump.

Up and Atom!

And if you’re worried about nuclear war, fallout or a possible earthquake damaging reactors, then Landauer (NYSE: LDR) is the company you’re looking for.

It’s involved in the radiation detection industry, from the healthcare and science level, to national security. And governments are some of its biggest clients. Currently, the U.S. military has more than $20 million in orders for Landauer’s systems. Plus, the company has shipments in line to FEMA first responders in the coming quarters.

Landauer’s a strong, growing company with consolidated revenue increasing 34.5% this year. That’s in part because of rising sales on the radiation detection side, and also because it added a medical products segment. It now sees a potential $1.5-billion global market for its services.

Everyone should have their own emergency preparedness kits. Hurricane Katrina taught us that, as well as the terrorist attacks of September 11th. Plus any other large-scale disasters continue to drive home the notion that we should all be as prepared as possible. But you can also look as these moves as opportunities for you portfolio.

Of course, if there really is a doomsday, it doesn’t matter what companies you own, does it?

Good Investing,


Editor’s Note: You may have noticed Matt hasn’t written much for Investment U in the past few months. That’s because he’s been hard at work on a new project with Investment U and Oxford Club experts Steve McDonald and Marc Lichtenfeld called Wealthy Retirement.

This will be a completely new free e-letter under Oxford Financial Publishing focused on income investing – along with other strategies aimed at helping readers of all ages “Retire Rich… Retire Early.” For more information on this new publication, click here.

Article by Investment U

Three European Stocks to Avoid

By The Sizemore Letter

Long-time readers are familiar with my shtick on European stocks: many of the best plays on the rise of the emerging market consumer are to be found in boring, prosaic European blue chips.  Switzerland’s Nestle ($NSRGY), the British-Dutch Unilever ($UL), and Spanish communications juggernaut Telefonica ($TEF) are all companies I’ve highlighted for their large exposure to fast-growing emerging markets.  Each gets over 40% of its revenues from the developing world, and this number only continues to grow.

Emerging market growth at cut-rate European prices; what’s not to like?

Alas, not all European stocks are so globally diversified.  Some are dangerously exposed to their rather weak domestic markets.

Let’s start with Italian automaker Fiat SpA ($FIATY).  Fiat is not purely a European company anymore; after all, they do own the formerly All-American Chrysler.  But as much as I might love the new Dodge Challenger (the Hemi engines in those are a thing of beauty), owning Chrysler is hardly something I would consider a strong positive these days and certainly nothing to counter European weakness.

The bearish case on European auto stocks is straightforward.  Unless you are selling your wares to wealthy foreigners—as is the case with Germany’s Daimler ($DDAIF)—business is bleak at the moment.  When the economy is in a rut and unemployment is high, families postpone the purchase of a new car for as long as they can.  Not surprisingly, virtually all of Europe’s automakers that sell to the domestic market have had a horrible year.

European auto stocks have gotten battered to the point that some value investors might be looking to scoop up a few shares.  There will be a time and place to do this, but I think it is more likely to be 3-6 months from now at the earliest and distinctly not today.  For now, I’d consider Fiat a company to avoid.

Another company best eschewed is Swiss-Swedish infrastructure and industrial behemoth ABB Ltd. ($ABB).  ABB has been a great growth story over the past decade, owing in large part to its success in China and other emerging markets.  The developing world needed its electrical grid updated, and ABB was more than happy to oblige.

Unfortunately, China is slowing and restructuring its economy away from investment and into domestic consumption.  And in any event, nearly 40% of the company’s orders come from Europe and Russia.

Given that ABB’s core customers are either slowing infrastructure spending or, in the case of Europe, flat-out broke, it’s hard to see where ABB can expect to find growth in the years ahead.  ABB is one that I would avoid for now.

This last stock is a bit of a trick because it is not technically a European stock; in fact, it’s about as American as the tobacco it grows and sells.  Yet Europe is its biggest source of profits.  I’m talking, of course, about Philip Morris International ($PM).

Philip Morris International has been a phenomenal success story since its spinoff from its former parent Altria ($MO).  Benefitting from a low-interest-rate environment that has benefitted dividend-paying stocks in general, PM has nearly tripled in value since hitting its early 2009 lows.  Few stocks of PM’s size can boast of such a run.

Alas, Philip Morris International is now a little on the expensive side for a tobacco company.  It yields only 3.4% at current prices and trades for 18 times earnings.    Remember, this is a company that sells a product in terminal decline, not a growth stock with a bright future.

I love sin stocks in general and tobacco stocks in particular, but I don’t like them at any price.  They have to be cheap enough and pay a high enough dividend to compensate for the lack of top-line growth.  PM no longer does this; in fact, it yields less in dividends than Johnson & Johnson ($JNJ) or Procter & Gamble ($PG).

And of course, there is the Europe factor.  PM gets more than a third of its operating income from the European Union and roughly another quarter from Eastern Europe (the Middle East and Africa get lumped in with Eastern Europe).  Add PM to the list of European stocks best avoided.

Sizemore Capital is long JNJ, PG, NSRGY, UL, and TEF

Related posts:

Comparing the Fed’s two recent policy statements

By Central Bank News

    Following are two recent statements regarding future monetary policy by the U.S. Federal Reserve.
    While the statements largely mirror each other, the statement by Federal Reserve Chairman Ben Bernanke acknowledges the limitations of monetary policy.
    The first paragraph is from Bernanke speech at the 2012 Jackson Hole symposium. The second paragraph comes from the press release issued by the Federal Open Market Committee, the Federal Reserve’s policy-making body, following its last meeting on July 31/Aug. 1:
   From Bernanke’s speech Aug. 31, 2012:
    “Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
    Statement from the Federal Open Market Committee on Aug. 1, 2012:
    “The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Bernanke: "Monetary Policy since the Onset of the Crises"

By Central Bank News
    Following is Federal Reserve Chairman Ben Bernanke’s much-anticipated speech at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming:

Monetary Policy since the Onset of the Crisis

“When we convened in Jackson Hole in August 2007, the Federal Open Market Committee’s (FOMC) target for the federal funds rate was 5-1/4 percent. Sixteen months later, with the financial crisis in full swing, the FOMC had lowered the target for the federal funds rate to nearly zero, thereby entering the unfamiliar territory of having to conduct monetary policy with the policy interest rate at its effective lower bound. The unusual severity of the recession and ongoing strains in financial markets made the challenges facing monetary policymakers all the greater.
Today I will review the evolution of U.S. monetary policy since late 2007. My focus will be the Federal Reserve’s experience with nontraditional policy tools, notably those based on the management of the Federal Reserve’s balance sheet and on its public communications. I’ll discuss what we have learned about the efficacy and drawbacks of these less familiar forms of monetary policy, and I’ll talk about the implications for the Federal Reserve’s ongoing efforts to promote a return to maximum employment in a context of price stability.

Monetary Policy in 2007 and 2008
When significant financial stresses first emerged, in August 2007, the FOMC responded quickly, first through liquidity actions–cutting the discount rate and extending term loans to banks–and then, in September, by lowering the target for the federal funds rate by 50 basis points. 1 As further indications of economic weakness appeared over subsequent months, the Committee reduced its target for the federal funds rate by a cumulative 325 basis points, leaving the target at 2 percent by the spring of 2008.
The Committee held rates constant over the summer as it monitored economic and financial conditions. When the crisis intensified markedly in the fall, the Committee responded by cutting the target for the federal funds rate by 100 basis points in October, with half of this easing coming as part of an unprecedented coordinated interest rate cut by six major central banks. Then, in December 2008, as evidence of a dramatic slowdown mounted, the Committee reduced its target to a range of 0 to 25 basis points, effectively its lower bound. That target range remains in place today.
Despite the easing of monetary policy, dysfunction in credit markets continued to worsen. As you know, in the latter part of 2008 and early 2009, the Federal Reserve took extraordinary steps to provide liquidity and support credit market functioning, including the establishment of a number of emergency lending facilities and the creation or extension of currency swap agreements with 14 central banks around the world.2 In its role as banking regulator, the Federal Reserve also led stress tests of the largest U.S. bank holding companies, setting the stage for the companies to raise capital. These actions–along with a host of interventions by other policymakers in the United States and throughout the world–helped stabilize global financial markets, which in turn served to check the deterioration in the real economy and the emergence of deflationary pressures.
Unfortunately, although it is likely that even worse outcomes had been averted, the damage to the economy was severe. The unemployment rate in the United States rose from about 6 percent in September 2008 to nearly 9 percent by April 2009–it would peak at 10 percent in October–while inflation declined sharply. As the crisis crested, and with the federal funds rate at its effective lower bound, the FOMC turned to nontraditional policy approaches to support the recovery.
As the Committee embarked on this path, we were guided by some general principles and some insightful academic work but–with the important exception of the Japanese case–limited historical experience. As a result, central bankers in the United States, and those in other advanced economies facing similar problems, have been in the process of learning by doing. I will discuss some of what we have learned, beginning with our experience conducting policy using the Federal Reserve’s balance sheet, then turn to our use of communications tools.
Balance Sheet Tools
In using the Federal Reserve’s balance sheet as a tool for achieving its mandated objectives of maximum employment and price stability, the FOMC has focused on the acquisition of longer-term securities–specifically, Treasury and agency securities, which are the principal types of securities that the Federal Reserve is permitted to buy under the Federal Reserve Act.3 One mechanism through which such purchases are believed to affect the economy is the so-called portfolio balance channel, which is based on the ideas of a number of well-known monetary economists, including James Tobin, Milton Friedman, Franco Modigliani, Karl Brunner, and Allan Meltzer. The key premise underlying this channel is that, for a variety of reasons, different classes of financial assets are not perfect substitutes in investors’ portfolios.4 For example, some institutional investors face regulatory restrictions on the types of securities they can hold, retail investors may be reluctant to hold certain types of assets because of high transactions or information costs, and some assets have risk characteristics that are difficult or costly to hedge.
Imperfect substitutability of assets implies that changes in the supplies of various assets available to private investors may affect the prices and yields of those assets. Thus, Federal Reserve purchases of mortgage-backed securities (MBS), for example, should raise the prices and lower the yields of those securities; moreover, as investors rebalance their portfolios by replacing the MBS sold to the Federal Reserve with other assets, the prices of the assets they buy should rise and their yields decline as well. Declining yields and rising asset prices ease overall financial conditions and stimulate economic activity through channels similar to those for conventional monetary policy. Following this logic, Tobin suggested that purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero, and Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan’s deflationary trap.5 
Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors’ expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about “tail” risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.
With the space for further cuts in the target for the federal funds rate increasingly limited, in late 2008 the Federal Reserve initiated a series of large-scale asset purchases (LSAPs). In November, the FOMC announced a program to purchase a total of $600 billion in agency MBS and agency debt.6 In March 2009, the FOMC expanded this purchase program substantially, announcing that it would purchase up to $1.25 trillion of agency MBS, up to $200 billion of agency debt, and up to $300 billion of longer-term Treasury debt.7 These purchases were completed, with minor adjustments, in early 2010.8 In November 2010, the FOMC announced that it would further expand the Federal Reserve’s security holdings by purchasing an additional $600 billion of longer-term Treasury securities over a period ending in mid-2011.9 
About a year ago, the FOMC introduced a variation on its earlier purchase programs, known as the maturity extension program (MEP), under which the Federal Reserve would purchase $400 billion of long-term Treasury securities and sell an equivalent amount of shorter-term Treasury securities over the period ending in June 2012.10 The FOMC subsequently extended the MEP through the end of this year.11 By reducing the average maturity of the securities held by the public, the MEP puts additional downward pressure on longer-term interest rates and further eases overall financial conditions.
How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful.
Importantly, the effects of LSAPs do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS.14 The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.
While there is substantial evidence that the Federal Reserve’s asset purchases have lowered longer-term yields and eased broader financial conditions, obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult, as the counterfactual–how the economy would have performed in the absence of the Federal Reserve’s actions–cannot be directly observed. If we are willing to take as a working assumption that the effects of easier financial conditions on the economy are similar to those observed historically, then econometric models can be used to estimate the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.15 The Bank of England has used LSAPs in a manner similar to that of the Federal Reserve, so it is of interest that researchers have found the financial and macroeconomic effects of the British programs to be qualitatively similar to those in the United States.16 
To be sure, these estimates of the macroeconomic effects of LSAPs should be treated with caution. It is likely that the crisis and the recession have attenuated some of the normal transmission channels of monetary policy relative to what is assumed in the models; for example, restrictive mortgage underwriting standards have reduced the effects of lower mortgage rates. Further, the estimated macroeconomic effects depend on uncertain estimates of the persistence of the effects of LSAPs on financial conditions.17 Overall, however, a balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks.
Now I will turn to our use of communications tools.
Communication Tools
Clear communication is always important in central banking, but it can be especially important when economic conditions call for further policy stimulus but the policy rate is already at its effective lower bound. In particular, forward guidance that lowers private-sector expectations regarding future short-term rates should cause longer-term interest rates to decline, leading to more accommodative financial conditions.18 
The Federal Reserve has made considerable use of forward guidance as a policy tool.19From March 2009 through June 2011, the FOMC’s postmeeting statement noted that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”20 At the August 2011 meeting, the Committee made its guidance more precise by stating that economic conditions would likely warrant that the federal funds rate remain exceptionally low “at least through mid-2013.”21 At the beginning of this year, the FOMC extended the anticipated period of exceptionally low rates further, to “at least through late 2014,” guidance that has been reaffirmed at subsequent meetings.22 As the language indicates, this guidance is not an unconditional promise; rather, it is a statement about the FOMC’s collective judgment regarding the path of policy that is likely to prove appropriate, given the Committee’s objectives and its outlook for the economy.
The views of Committee members regarding the likely timing of policy firming represent a balance of many factors, but the current forward guidance is broadly consistent with prescriptions coming from a range of standard benchmarks, including simple policy rules and optimal control methods.23 Some of the policy rules informing the forward guidance relate policy interest rates to familiar determinants, such as inflation and the output gap. But a number of considerations also argue for planning to keep rates low for a longer time than implied by policy rules developed during more normal periods. These considerations include the need to take out insurance against the realization of downside risks, which are particularly difficult to manage when rates are close to their effective lower bound; the possibility that, because of various unusual headwinds slowing the recovery, the economy needs more policy support than usual at this stage of the cycle; and the need to compensate for limits to policy accommodation resulting from the lower bound on rates.24 
Has the forward guidance been effective? It is certainly true that, over time, both investors and private forecasters have pushed out considerably the date at which they expect the federal funds rate to begin to rise; moreover, current policy expectations appear to align well with the FOMC’s forward guidance. To be sure, the changes over time in when the private sector expects the federal funds rate to begin firming resulted in part from the same deterioration of the economic outlook that led the FOMC to introduce and then extend its forward guidance. But the private sector’s revised outlook for the policy rate also appears to reflect a growing appreciation of how forceful the FOMC intends to be in supporting a sustainable recovery. For example, since 2009, forecasters participating in the Blue Chip survey have repeatedly marked down their projections of the unemployment rate they expect to prevail at the time that the FOMC begins to lift the target for the federal funds rate away from zero. Thus, the Committee’s forward guidance may have conveyed a greater willingness to maintain accommodation than private forecasters had previously believed.25 The behavior of financial market prices in periods around changes in the forward guidance is also consistent with the view that the guidance has affected policy expectations.26 
Making Policy with Nontraditional Tools: A Cost-Benefit Framework
Making monetary policy with nontraditional tools is challenging. In particular, our experience with these tools remains limited. In this context, the FOMC carefully compares the expected benefits and costs of proposed policy actions.
The potential benefit of policy action, of course, is the possibility of better economic outcomes–outcomes more consistent with the FOMC’s dual mandate. In light of the evidence I discussed, it appears reasonable to conclude that nontraditional policy tools have been and can continue to be effective in providing financial accommodation, though we are less certain about the magnitude and persistence of these effects than we are about those of more-traditional policies.
The possible benefits of an action, however, must be considered alongside its potential costs. I will focus now on the potential costs of LSAPs.
One possible cost of conducting additional LSAPs is that these operations could impair the functioning of securities markets. As I noted, the Federal Reserve is limited by law mainly to the purchase of Treasury and agency securities; the supply of those securities is large but finite, and not all of the supply is actively traded. Conceivably, if the Federal Reserve became too dominant a buyer in certain segments of these markets, trading among private agents could dry up, degrading liquidity and price discovery. As the global financial system depends on deep and liquid markets for U.S. Treasury securities, significant impairment of those markets would be costly, and, in particular, could impede the transmission of monetary policy. For example, market disruptions could lead to higher liquidity premiums on Treasury securities, which would run counter to the policy goal of reducing Treasury yields. However, although market capacity could ultimately become an issue, to this point we have seen few if any problems in the markets for Treasury or agency securities, private-sector holdings of securities remain large, and trading among private market participants remains robust.
A second potential cost of additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to exit smoothly from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability. It is noteworthy, however, that the expansion of the balance sheet to date has not materially affected inflation expectations, likely in part because of the great emphasis the Federal Reserve has placed on developing tools to ensure that we can normalize monetary policy when appropriate, even if our securities holdings remain large. In particular, the FOMC will be able to put upward pressure on short-term interest rates by raising the interest rate it pays banks for reserves they hold at the Fed. Upward pressure on rates can also be achieved by using reserve-draining tools or by selling securities from the Federal Reserve’s portfolio, thus reversing the effects achieved by LSAPs. The FOMC has spent considerable effort planning and testing our exit strategy and will act decisively to execute it at the appropriate time.
A third cost to be weighed is that of risks to financial stability. For example, some observers have raised concerns that, by driving longer-term yields lower, nontraditional policies could induce an imprudent reach for yield by some investors and thereby threaten financial stability. Of course, one objective of both traditional and nontraditional policy during recoveries is to promote a return to productive risk-taking; as always, the goal is to strike the appropriate balance. Moreover, a stronger recovery is itself clearly helpful for financial stability. In assessing this risk, it is important to note that the Federal Reserve, both on its own and in collaboration with other members of the Financial Stability Oversight Council, has substantially expanded its monitoring of the financial system and modified its supervisory approach to take a more systemic perspective. We have seen little evidence thus far of unsafe buildups of risk or leverage, but we will continue both our careful oversight and the implementation of financial regulatory reforms aimed at reducing systemic risk.
A fourth potential cost of balance sheet policies is the possibility that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent. Extensive analyses suggest that, from a purely fiscal perspective, the odds are strong that the Fed’s asset purchases will make money for the taxpayers, reducing the federal deficit and debt.27 And, of course, to the extent that monetary policy helps strengthen the economy and raise incomes, the benefits for the U.S. fiscal position would be substantial. In any case, this purely fiscal perspective is too narrow: Because Americans are workers and consumers as well as taxpayers, monetary policy can achieve the most for the country by focusing generally on improving economic performance rather than narrowly on possible gains or losses on the Federal Reserve’s balance sheet.
In sum, both the benefits and costs of nontraditional monetary policies are uncertain; in all likelihood, they will also vary over time, depending on factors such as the state of the economy and financial markets and the extent of prior Federal Reserve asset purchases. Moreover, nontraditional policies have potential costs that may be less relevant for traditional policies. For these reasons, the hurdle for using nontraditional policies should be higher than for traditional policies. At the same time, the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.
Economic Prospects
The accommodative monetary policies I have reviewed today, both traditional and nontraditional, have provided important support to the economic recovery while helping to maintain price stability. As of July, the unemployment rate had fallen to 8.3 percent from its cyclical peak of 10 percent and payrolls had risen by 4 million jobs from their low point. And despite periodic concerns about deflation risks, on the one hand, and repeated warnings that excessive policy accommodation would ignite inflation, on the other hand, inflation (except for temporary deviations caused primarily by swings in commodity prices) has remained near the Committee’s 2 percent objective and inflation expectations have remained stable. Key sectors such as manufacturing, housing, and international trade have strengthened, firms’ investment in equipment and software has rebounded, and conditions in financial and credit markets have improved.
Notwithstanding these positive signs, the economic situation is obviously far from satisfactory. The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value, and other indicators–such as the labor force participation rate and the number of people working part time for economic reasons–confirm that labor force utilization remains at very low levels. Further, the rate of improvement in the labor market has been painfully slow. I have noted on other occasions that the declines in unemployment we have seen would likely continue only if economic growth picked up to a rate above its longer-term trend.28 In fact, growth in recent quarters has been tepid, and so, not surprisingly, we have seen no net improvement in the unemployment rate since January. Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.
In light of the policy actions the FOMC has taken to date, as well as the economy’s natural recovery mechanisms, we might have hoped for greater progress by now in returning to maximum employment. Some have taken the lack of progress as evidence that the financial crisis caused structural damage to the economy, rendering the current levels of unemployment impervious to additional monetary accommodation. The literature on this issue is extensive, and I cannot fully review it today.29 However, following every previous U.S. recession since World War II, the unemployment rate has returned close to its pre-recession level, and, although the recent recession was unusually deep, I see little evidence of substantial structural change in recent years.
Rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds. First, although the housing sector has shown signs of improvement, housing activity remains at low levels and is contributing much less to the recovery than would normally be expected at this stage of the cycle.
Second, fiscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth. Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level. Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge.30 It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.
Third, stresses in credit and financial markets continue to restrain the economy. Earlier in the recovery, limited credit availability was an important factor holding back growth, and tight borrowing conditions for some potential homebuyers and small businesses remain a problem today. More recently, however, a major source of financial strains has been uncertainty about developments in Europe. These strains are most problematic for the Europeans, of course, but through global trade and financial linkages, the effects of the European situation on the U.S. economy are significant as well. Some recent policy proposals in Europe have been quite constructive, in my view, and I urge our European colleagues to press ahead with policy initiatives to resolve the crisis.
Early in my tenure as a member of the Board of Governors, I gave a speech that considered options for monetary policy when the short-term policy interest rate is close to its effective lower bound.31 I was reacting to common assertions at the time that monetary policymakers would be “out of ammunition” as the federal funds rate came closer to zero. I argued that, to the contrary, policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.
As I have discussed today, it is also true that nontraditional policies are relatively more difficult to apply, at least given the present state of our knowledge. Estimates of the effects of nontraditional policies on economic activity and inflation are uncertain, and the use of nontraditional policies involves costs beyond those generally associated with more-standard policies. Consequently, the bar for the use of nontraditional policies is higher than for traditional policies. In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally: Monetary policy cannot achieve by itself what a broader and more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces. It certainly cannot fine-tune economic outcomes.
As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Jackson Hole 2012 Link List

By Central Bank News
    The 2012 Jackson Hole Symposium, hosted by the Federal Reserve Bank of Kansas City, features presentations by leading central bankers and academics. The topic of this year’s conference, which runs from Aug. 30 to Sept. 1,  is “The Changing Policy Landscape.”
    Following are links to stories and speeches from the conference: The link list will be updated during the conference as speeches and stories become available.


Central Bank News Link List – Aug 31, 2012

By Central Bank News

     Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.