Market Tea Leaves - Presidents Day Special Edition

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President's Day - Special Edition

 


http://youtu.be/zLdZLRv_Co8

 

 


The other shows what happened on Friday:



http://youtu.be/YhN8N7bWGRA

 




European Contraction

Recently there has been much debate on what's going on in Europe.  To the unaware it would seem as though all of a sudden, Europe isn't doing so well.  The root cause of this problem stems back to 2008 when we experienced the financial meltdown.  At the time it seemed as though the world was falling off the side of cliff, markets were in free fall and investors didn't feel comfortable with the lack of liquidity they were experiencing.  Consequently the United States went thru a major recession and in fact is still trying to experience prosperity.  I'm not necessarily convinced that we are there yet but we're working on it.  In 2009 while the United States experienced a greater than 10% Unemployment Rate, the rest of the world economies didn't seem to be doing so bad.  The next region of the world to experience this phenomenon was Asia.  Why Asia?  Where does the United States import of it's goods from?  If people in the United States do not have spending capital, what will they do?  They won't be buying goods or products that are not necessary.    As the US economy improved, so did Asia.


Europe, on the other hand is a victim of it's own making.  This stems back to Maastricht Treaty of the early 1990's when it was determined that Europe would have one unified currency.  Great Britain however was absent from this as they decided to go it alone with the British Pound Sterling aka the Gable.  The thinking behind the Euro was that it would be easier to have one unified currency and additionally Europe, because of the closeness of borders wanted unified regulations in terms of transporting goods and services.  In theory, this makes perfect sense.  However what do you do when some nations aren't doing as well as others?

In 2010 with the first Greek Crisis, it appeared as though there are cracks in the foundation.  Let's examine this.  Greece as a nation doesn't have heavy industry to speak of, most of its raw materials have to be imported as they do not have huge natural resources to draw upon.  It's major industry is Tourism, which is a nice-to-have but not essential.  For those who are employed in government, they've enjoyed some of the youngest retirement ages on the planet.  Greece has had 3 such dilemmas since 2010 and each time the EU has had to bail them out, much to the chagrin of the more powerful European economies.

Over time it was discovered that other countries were experiencing similar situations.    Portugal, Ireland, Italy and Spain have all experienced economic downturns, some of which were economic and some related to Real Estate which had it's roots in the financial meltdown of 2008.  Now I ask you, we live in a global economy; does anyone think that any one region of a global economy can escape an economic downturn?  We used to able to do that.  For example, the Asian Flu of the late 1990's was virtually unnoticed in the United States.  But with all the trade the US does with Asia today, that is virtually impossible. 


Enter Mario Draghi.  Mario Draghi is the President of the European Central Bank (ECB) and is the equivalent of Ben Bernanke in the United States.  In other words when he speaks about something the world takes notice.  Europe is undergoing an economic recession with greater than 10% unemployment; at last count it was 10.7%.  Mario Draghi wants a devalued Euro.  Why?  If the Euro trades at a lower exchange rate from other currencies it will mean lower prices for European goods and services.  Lower prices means higher volume which leads to economic prosperity.  For those who trade currencies you need to be very mindful of this.  Look what happened less than two weeks ago when the ECB held a press conference.  The USD went sky high in minutes after the conference and still hasn't come down to where it was prior to it.



http://youtu.be/8lkhCZ5c7pE

 



There is a currency war going on as we speak.  Each economy wants a lower valued currency to attract more volume for goods and services.  Ultimately the consumer will decide who wins this war.  One thing is for certain.  Consumers will not buy junk, they will not buy low quality.


Today, Mario Draghi speak again.  We, of course have no idea what he will say as he due to speak at 9:30 AM EST.  But don't be surprised if later this week one of headlines read: Draghi Drags Down Markets.

 

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