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Tags: US | euro | growth | rate

Can America Grow in Isolation? Interest Rates Suggest Otherwise

By    |   Wednesday, 28 January 2015 08:02 AM

The historic European Central Bank (ECB) quantitative easing (QE) program certainly did not disappoint the markets. The ECB announced its well-choreographed QE program as advertised, in fact better than advertised. Instead of a 600 billion euro program, it announced a 1.3 trillion euro program where it would print euros and buy bonds across Europe.

As expected, the euro tanked a little further before beginning to stabilize at about $1.13, which is an 11-year low. Bonds of many bankrupt nations such as Italy, Spain and other are rallying as they now have a long-term sustained buyer. Yields are plunging not just in Europe but in the U.S. too.

Now let's examine the claim by the United States that its economy is growing at a high rate. It is common knowledge that the world is a global village when it comes to trade. There are very few if any countries that can sustain itself in isolation. If we look across the world, Europe is struggling with deflation, lack of growth and no real opportunities to turn things around. The Middle East is struggling due to the sharp decline in oil and has no surplus to spend on anything. Russia is a real mess, and we all know about the brink or the precept that they are teetering on.

Over in Asia, Japan continues to be a basket case, with deflation and lack of growth still ruling the roost. The illogical and ill-planned policies of Prime Minister Abe are nothing short of Hara-kiri for the economy. China has finally conceded that its growth will be significantly slower for a long time. Mind you, it is still growing, but at around 7 percent rather than the breakneck speed of 10 percent. Australia is shell shocked with slower China growth and lower commodity prices. New Zealand suffers as well. The one bright star in the region is India, but we will see how long it continues to shine.

Latin America was always a hard one to figure out to begin with. Now with Brazil being in deep-rooted inflation and a president who just does not know how to launch business-friendly policies, we have seen stalled growth there. Mexico suffers the same ailment of low oil prices as in Canada — growth prospects held down.

So if we listen to the rhetoric that the U.S. will see high growth and continued acceleration of its GDP growth, I wonder who will it be selling its products to? The strong dollar is already crushing the results of large corporations such as McDonald's, Caterpillar and Proctor and Gamble, just to name a few. There is more pain to come as more companies struggle to make profits since the world is not buying U.S. dollar-based expensive products.

How do the stock pundits continue to squawk about the continuing growth in America?

Here is another aspect of the whole puzzle. The global interest rates are telling us a story no one wants to hear. Here is a list of yields on various 10-year bonds, and I want to you to tell me what it means:

United States 1.8 percent
Germany 0.36 percent
France 0.54 percent
Italy 1.56 percent
United Kingdom 1.48 percent
Canada 1.365 percent
Australia 2.63 percent
Japan 0.22 percent

The list does appear to tell us what interest rates the market is willing to take in order to hold money in a particular country's currency for 10 years. It may or may not tell us about the creditworthiness of a country, but it does tell us something about the expectations that investors have about potential returns on other possible investments.

Having tracked this for some time, I did notice that French bonds have dropped from 2.38 percent exactly one year ago to today's rather astonishing low of 0.54 percent. Likewise, Germany has seen its 10-year Bund rates drop from 1.66 percent to a shockingly low 0.36 percent.

What this is telling us is that the whole world is sliding back into a global recession. Commodities prices are sinking, with oil taking the latest massive hit.

And yet the politicians are not speaking about the massive U.S. deficit, which is well above $18 trillion now. The dollar soars despite all these warning signs.

I would step out of the stock market now if I had not done so already. Gold hovers at $1,300 per ounce, but I expect it to launch to $1,400 in the next month or two.

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The historic European Central Bank (ECB) quantitative easing (QE) program certainly did not disappoint the markets. The ECB announced its well-choreographed QE program as advertised, in fact better than advertised.
US, euro, growth, rate
Wednesday, 28 January 2015 08:02 AM
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