Monday, January 12, 2015

CNBC: Euro Area - Wars, Greece, and "Whatever it takes QE's"

It looks like our plate of things to keep an eye on in 2015 is going to be plenty full. We already have the increasing "cold war" atmosphere between Russia and the US. We have continuing concerns about disinflation or outright deflation in Europe, Japan, and China. We have a full blown currency crisis in Russia. Now this new article on CNBC talks about a wide range of issues and problems facing the EU in 2015. Below are some quotes from this article (please click on the link above to read the full article) followed by some comments.

"The long-suffering European monetary union will be jolted this month by two events likely to set off a chain of unsettling political and economic crises."

1- "Several attempts are under way to establish a lasting cease-fire and a feasible peace process in Ukraine. That is supposed to prepare a summit meeting of leaders from Ukraine, Russia, Germany and France in Astana, the capital of Kazakhstan, on January 15."

2- "The next shock, with much more unsettling economic and political consequences, is likely to come from Greece after its parliamentary elections on January 25."

 . . . . . 

"By the time you read this, you will probably have read that the ECB was preparing sovereign bond buying programs popularly called "quantitative easing," or QE for short."
"This contemplated policy measure is ostensibly presented as a backstop to the slowing price inflation in the euro area."
"Don't believe it. With an interest rate of 0.05 percent, the ECB has already supplied plenty of cheap liquidity to its banking system. There is no need for more. The problem is that this liquidity is not finding its way to businesses and households. To fix that, the ECB must repair its policy transmission mechanism, not pour more liquidity into a banking system unwilling – or incapable – of performing its core functions."
"This is what I think: The ECB is preparing for "whatever it takes" emergency operations to manage existential crises of a euro area pursuing – under Germany's leadership – divisive policies, trade wars and austerity instead of economic growth and political cohesion."
My added comments:
The EU is just another key area we need to watch in 2015. This CNBC article mentions the word "crisis" several times. I only pasted in a small portion of the article above. The full article talks about problems all over the place in the EU from Greece to Italy to Spain to France. And how a revolt against Germany appears to be ramping up across the EU. 
Interestingly, Jim Rickards downplays the likelihood of a split up of the EU and points out that there was similar talk a few years ago when he predicted the EU would actually add more countries (instead of splitting up). This was another forecast he got right as the EU did not split up and new countries have been added.
I think the key for readers here is to just continue to stay alert because we have so many areas of the world where problems are increasing. The EU, Japan, Eastern Europe, the Middle East, and Russia are all under various forms of stress. In the US no one really knows what will happen if the Fed does start trying to raise interest rates in 2015. And if they don't raise rates, will the markets lose confidence in the US Fed if it becomes clear they are somewhat powerless to move due to ongoing economic weakness?
On top of all this we have the oil market plunging. Is this due to falling global demand and economic weakness?  If so, markets may get nervous about this even though lower oil prices helps consuming nations and energy users. 
All of this uncertainty can cause market volatility to go up in a variety of markets. If that happens, what kind of hidden derivatives are out there that could be triggered?
So, like we said, we have plenty on our plates to keep an eye on in 2015 all around the world. A world that is highly interconnected financially now. 

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