There’s a massive “Banker Brawl” underway — a Battle of the Acronyms, if you will. And the ramifications for your wealth are immense.
In one corner, you have the U.S. Federal Reserve and the Bank of England (BOE). They’re getting out of the easy money game because the U.S. economy and British economies are on the mend.
Growth in the U.S. is tracking toward 3.5 percent or higher in the third quarter after rising 4.2 percent in the second. Meanwhile, U.K. unemployment just sank to 6.2 percent in the three months ended in July. That was down from 6.4 percent in the previous quarter and the lowest level in six years.
The BOE is already cracking. Two of its nine members voted for an interest-rate hike at the early September meeting, the first time anyone had done so in more three years. The U.K.’s benchmark rate is currently pegged at 0.5 percent, a record low.
And the Fed made clear this week that it is beating a retreat from easy money here, as I chronicled on Wednesday afternoon.
On the other hand, the European Central Bank (ECB)just cut its benchmark refinancing rate to 0.05 percent from 0.15 percent, and lowered its deposit rate to negative 0.2 percent from 0.1 percent.
It also announced plans to buy everything from asset-backed securities to covered bonds, bundles of loans that are used to finance car loans, credit card loans, mortgages, and more. And ECB head Mario Draghi made clear he won’t stop if even those radical measures don’t boost inflation and growth.
|The Bank of Japan has been printing boatloads of money and buying every government bond in sight.|
Over in Asia, Bank of Japan (BOJ) Governor Haruhiko Kuroda has been printing insane amounts of money and buying every government bond in sight. It has “succeeded” in slashing the value of the Japanese yen by 27 percent, with the currency plunging to a six-year low just last week.
The Bank of Korea (BOK) just cut its interest rate by 25 basis points to 2.25 percent in August, and policymakers are close to lowering it to a record-low 2 percent.
Then earlier this week, the People’s Bank of China (PBOC) flooded the country’s five biggest banks with 100 billion Chinese yuan each. The roughly $81 billion injection of money is roughly equivalent to a 50-basis point cut in the reserve requirement for those banks. Or in other words, it frees up hundreds of billions of yuan for the banks to lend out.
Are you seeing a pattern here? Because I sure am. U.S. policymakers are laying the groundwork to escape from more than six years of record-low interest rates. They also just stuck a knife in the QE program, saying it would end by next month. That was something I predicted more than a year ago, when most of the Wall Street “experts” were forecasting it would take much longer.
Anticipation of those higher rates, and the stronger economic growth that are driving them, are attracting capital to our shores. We’re seeing increased direct investments in key domestic sectors, as well as large inflows into our currency and stock markets.
But other parts of the world are in worse shape than we are. They’re facing serious fallout — particularly in Europe — from geopolitical crises like the Ukraine-Russia conflict. So capital is fleeing those locations, those currencies, and those stock markets.
My advice? Follow the money! Focus on stocks whose earnings growth should benefit from strong domestic industries like energy, steel, chemicals, aerospace, and more. Avoid companies with too much exposure to weak economies in Europe and Asia.
I recommend you adopt strategies that benefit from rising U.S. interest rates, too. Please also realize that the dollar is likely to do fairly well simply because it’s the relative outperformer in a sea of loser currencies!
Any other thoughts about investment strategies? Are you benefitting from the relative strength here vis-à-vis Europe or Japan? What about economic growth — are you seeing it in YOUR town or neighborhood? I encourage you to share your thoughts and observations so your fellow investors can benefit alongside you at the Money and Markets website here.
Until next time,