In the release from the most recent Federal Reserve Open Market Committee meeting on interest rates the Fed said, “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” A great deal has changed in the world from their release of April 28, 2010 that will, I believe, extend the extended period.
In less than four weeks the world has changed, we are no longer focusing on national health care, but questioning if the EURO will survive. The events of Thursday May 20, were driven by the release of the jobless claims data. The data showed that first time claims increased by 31,000 new people who filed for state unemployment benefits. The economists were actually looking for the number to decrease and when the government was asked about the change they said, “There are no special factors to explain the latest week's jump.” In other words they had no clue as to the reason for the increase in claims.
The European central bank is trying to stabilize the EURO but in many respects is trying to swim upstream. A great deal of focus is on Greece and the other PIIGS (Portugal, Ireland, Italy Greece and Spain) countries who are having problems with the level of debt and their inability to control government spending. What Europe is trying to do is cut budgets and reduce debt to get all the member nations to balance their checkbooks.
Several things are happening at the same time all over the world and it may be hard to follow all of them so let me try to give you some focus. Many American companies do a significant amount of their business in Europe. When the dollar was weak the translation of Euros into dollars inflated earnings of these companies because of the strength of the European currency. Over the next few quarters these companies may well report lower earnings because of the decline of the Euro. It will be hard for the stock markets to return to previous highs as long as earnings are under pressure. So watch earnings and look for comments from companies on the impact of currencies.
Other countries around the globe have significant economic relationships with Europe and those economies will suffer with reduced demand from Euroland. The second largest exporting country to Europe is China, so as demand shrinks from Europe look for global GDP to come down including China.
The European Central Bank and other governments are expected to spend almost $1 trillion dollars to fix the problems in Greece and other countries. With the Global central banks being accommodative for an extended period of time I just do not see how interest rates will rise. The Fed is looking at almost 10% unemployment in the United States and the jobs data this week could have an impact on the employment report on June 4.
My original thought was that the Fed would be on hold till November 2011. Given the problems in Europe that have the potential to spread around the world and possibly to the United States, I think the Fed will be on hold for an “Extended” “Extended Period” of time that could be for several more years.
The markets have been concerned about the resurgence of inflation with all the debt that has been issued around the world. I have serious concerns about the resurgence of deflation. For those investors who were looking for their money market mutual funds to start paying interest soon, I just do not see it happening. It is possible that if things do not change for the better by year-end, I think we will start seeing money market mutual funds closing and returning money to investors.
We have a new thrill ride for Great Adventure theme park, it is called, “The Global Economy.” This thrill ride will drop you, spin you, and turn you inside out. The Global Economy may well take money out of your pockets.