Month: July 2012

By MoneyMorning.com.au

Did ex-Barclay’s CEO Bob Diamond really know more about the LIBOR scandal?

Does his decision to give up a 20 million pound bonus signal guilt?

And should you even care about it?

As we indicated on Monday, we find it hard to get angry about the LIBOR scandal when the real crooks (central bankers) manipulate interest rates all the time.

As we see it, it’s like giving a life sentence to a petty vandal while at the same time handing matches to a mass arsonist.

But this isn’t about whether a bank told a few porkies four years ago. It’s about the manipulation of interest rates and the damage it does to the economy and the wealth of savers.

But there is one line of business that has resisted the urge to fiddle with interest rates. And not surprisingly, in a world where credit and debt have become dirty words, this line of business is doing very nicely indeed…

We say this line of business is doing nicely, but it’s not without effort. And it’s not without bullying from lawmakers and lobby groups who insist on rewriting the rules on interest rates and risk.

Take these headlines as examples:

‘Revised payday lending bill puts profits before people’ – debttrap.org.au

‘Payday lenders charge up to 60 times more than true cost of loan’ – The Guardian

‘City should regulate lenders because state won’t’ – San Antonio Express

In the June issue of Australian Small-Cap Investigator we explained how many don’t understand the role of payday lending and how these lenders price risk.

In fact, we devoted two pages of the issue to knocking down a few of the myths about the payday loans industry. One of the biggest myths is that payday lenders charge rip-off interest rates.

Payday Loans Need to Cover The Risk of Default

In the June issue we wrote:

‘I mentioned that XXXXX has a customer default rate of 6%. That means – in simple terms – 6% of all the money it lends isn’t repaid.

‘So let’s say XXXXX loaned $1 million to a range of customers and charged a low interest rate of say, 6%. But if 6% of borrowers don’t repay the loan, the interest earned is offset by the bad debts…meaning the company won’t make a profit. That would be a bad business model.

‘That’s why payday lenders charge higher interest rates. It helps ensure they cover any bad debts, plus it leaves them with a worthwhile profit to account for taking the higher risk.’

It’s because of the higher risk of default that payday lenders charge higher interest rates. The high interest rate simply reflects the fact that the borrower is high risk.

But that’s not good enough for the lobby groups. They assume high interest rates are screwing the customer.

So, what’s the alternative?

The alternative is that the lobby groups will get their way and lobby for payday lending regulation.

The Importance of Having a Real Lender of Last Resort

Of course, what they don’t appear to get is that this will cut off the last chance many people have to stay out of poverty. Banks have a central bank as a lender of last resort. For many a payday lender is their lender of last resort.

In 2010 the UK government boasted a grand new plan to beat the payday lenders. It worked with the Royal Bank of Scotland (three-quarters government owned) and the National Housing Federation to set up a business called ‘My Home Finance’.

The plan was for ‘My Home Finance’ to offer payday loans at a much lower interest rate (69.9%), compared to private payday lenders (over 4,000%). They would offer this through 10 street-front outlets.

The venture had a target of making 150,000 loans over 10 years – 15,000 loans per year. With the difference in interest rates, meeting that target should be child’s play, right?

Not quite…

Two years later, ‘My Home Finance’ has made just 8,000 loans (4,000 per year), and has closed four of its 10 shops.

But how can that be right? According to a Guardian report in 2010:

‘Around 2.5 million people borrow from doorstep lenders at rates often in the region of 272% for new customers. A further 200,000 are estimated to borrow from loan sharks. A majority of those financially excluded are social housing tenants.’

Something is amiss. If we include all payday lending operations (including doorstep and loan shark lenders), we’ll guess that 3-4 million people in the UK use these services.

And yet, ‘My Home Finance’ has dished out just 8,000 loans in two years…That’s just 0.2% of the potential market.

Why is this? The reason is simple…

Payday Lender Regulation –
Why it Excludes Those Who Need it Most

When interest rates are artificially lowered for high risk loans – either the lender raises their lending criteria to exclude high risk borrowers (therefore excluding those who most need the cash) or they offer much smaller loans (which means the borrower has to go elsewhere).

A third option, as seen in the US subprime mortgage market, is that lending standards drop. More on that in a moment.

But you shouldn’t forget that payday lenders don’t charge high interest rates just so they can force people into more debt. Payday lenders charge high interest rates to cover the risk of lending to high risk lenders.

But ultimately, whatever the popular press says, payday lenders provide loans in the full belief that people will repay the loan.

Because if they don’t repay it, that’s bad news for the lender, because they’ll soon go out of business…and bad news for the customer who won’t get access to the payday lending service.

The Real Price of Interest Rate Control

In effect, by restricting the interest rate charged by payday lenders, governments are creating price controls. In this case it’s the price of money.

And price controls always have an unintended outcome. As Henry Hazlitt wrote in Man vs. The Welfare State:

‘What governments never realize is that, so far as any individual commodity is concerned, the cure for high prices is high prices. High prices lead to economy in consumption and stimulate and increase production. Both of these results increase supply and tend to bring prices down again.’

The fiddling of interest rates in the United States is a perfect example of low prices causing increased consumption. In that case it was the subprime housing market.

Banks couldn’t discriminate against people based on their ability to repay a loan, so high risk borrowers borrowed the same amount of money and paid the same interest rate as low risk borrowers.

And because the banks didn’t have the buffer of high interest rates to cover the cost of high defaults, many banks went bust, the US housing market collapsed, and the entire US economy went into a recession that it’s still suffering from.

Add to that the knowledge that banks would get bailed out if they got into trouble; it was a disaster waiting to happen.

Payday lenders don’t have the guarantee of a government or central bank bailout. That’s why they price risk according to the market.

The fault of people going into debt and poverty isn’t payday lenders. The payday lender provides a valuable service to those who need it.

The fault is with the pen-pushers in government and the central banks. It’s their fiddling with the economy (minimum wages, red-tape, taxes, import and export restrictions, etc.) and interest rates that mean many have no choice but to rely on a lender of last resort.

Cheers,
Kris.

P.S. You can check out which interest-rate savvy stock we tipped in the latest issue of Australian Small-Cap Investigator, including a no-obligation 30-day trial by clicking here…

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Payday Loans: Why This Lender of Last Resort Isn’t the Bad Guy

By MoneyMorning.com.au

That didn’t last long.

The traditional burst of market euphoria that normally follows eurozone summits has worn off already.

The European Union might have thought it had seen off disaster. Spain was meant to be having its banks bailed out directly. And there was the prospect of the European bail-out fund buying sovereign debt too.

And yet Spanish bond yields soon ran back up to around the 7% mark. So there’s been another emergency discussion session.

So here’s the big question: is another eurozone disaster looming?

The answer might surprise you…

The Spanish Economy Doesn’t Look Pretty

Spain’s economy is a mess. It costs the country around 7% a year to borrow over ten years. It costs more than 5% to borrow over two years. It has rampant unemployment, and the fallout from its property bubble has left its banking sector with huge potential bad debts.

Spain’s big problem is not public spending as such. It’s that the government can’t afford to prop up its banking sector. They might be ‘too big to fail’, but they’re also ‘too big to save’ – for Spain alone at least.

The big breakthrough at the EU summit was the idea that the eurozone bail-out fund would recapitalise Spain’s banks directly. By bypassing the Spanish government, Spain’s sovereign debt burden would remain manageable.

It would also avoid the problem of eurozone bail-out loans taking precedence over any other lenders. So lenders to Spain needn’t fear being stiffed in the same way that lenders to Greece were.

Of course, it’s one thing to say that the bail-out fund would recapitalise banks directly. Making it happen is quite another thing. And after the initial summit, it all started to get a bit blurry.

For a start, the Finns and the Dutch weren’t keen. They argued that ‘Madrid would still in some form be liable for the €100bn of loans on offer for Spain’s banks’, as the FT notes.

Over and above that, this direct recapitalisation can’t happen until there’s a pan-European banking supervisor. In other words, there needs to be one regulator to rule them all.

Why’s that? Mainly because if the crisis has taught us one thing, it’s that national regulators tend to be a bit soft on their banking sectors. (That lesson extends beyond the eurozone, clearly). If the whole eurozone is agreeing to take on liability for a national banking sector, they want to be sure that it’s a tough Europe-wide regulator who’s setting the rules, not a compromised national one.

So they’ve had another meeting to try to iron some of this stuff out.

They’ve now agreed that Spain’s economy will get an emergency €30bn by the end of this month (assuming that the various governments agree).

While the Spanish government will be liable in the first instance, eventually – once the Europe-wide supervisor exists – the loans will be converted into direct cash injections into the banks.

Of course, given how long things take in Europe, and the hostility of various parts of the eurozone to the idea of shared liabilities, a single banking supervisor could be a long time coming.

Meanwhile, Spain has also been given more time to get its debt-to-GDP ratio down. In other words, it won’t have to be as ambitious with its austerity measures.

Where Does This Leave Spain in the Meantime?

The European project rolls on. Will this be yet another short-lived sticking plaster bail-out for the Spanish economy? Probably.

But the key is, there’ll be another sticking plaster after that, and then another after that. For all the talk of Spanish bond yields breaching 7%, it’s important to understand that Spain is not Greece. Greece hit the point where it was in danger of genuinely running out of money, and having trouble paying for public services.

As the FT points out, Spain can ‘in theory, keep refinancing its debt at current prices for some time, particularly if it mainly sells more short-term bills and bonds, yields on which are still substantially lower than they were during last autumn’s turmoil’.

And most Spanish mortgages are pegged to the Euribor (the European version of Libor – yes, it was fiddled too, in case you’re wondering). In other words, rising Spanish bond yields don’t really impact on borrowing costs for households.

Hans Lorenzen of Citigroup tells the FT that rising borrowing costs would likely make Spanish banks crack down harder on lending. But I suspect that credit is already so tight – and demand so low – that it makes little difference.

The point is, Europe has shown that it’s not willing to let Spain go. That suggests that it will continue to do what it takes to save it. And there’s enough breathing space available to let the slow-but-sure process continue to roll on.

Yes, Greece may well throw another spanner in the works in the future. But the more time the eurozone buys to circle the wagons, the less important Greece becomes.

In short, while I’m not convinced the euro has a long-term future, I think it’ll stagger on for a while longer. Of course, it’ll probably be weaker. That’s what you’d expect if the whole zone agrees to share liabilities. But this could also be good news, certainly for Germany, which is ultimately the backbone of the region.

This is one reason why we’re becoming increasingly interested in battered-down European stocks. The other reason is that they’re cheap. And the best way to make money in the long run, is to buy stuff when it’s cheap.

John Stepek
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

The Australian Housing Shortage That Never Existed
06-07-2012 – Kris Sayce

Did the European Summit Change the Market Trend?
05-07-2012 – Murray Dawes

Why Government Intervention Hinders Progress and Innovation
04-07-2012 – Kris Sayce

The Big Opportunities in the Oil Market That Will Lead to Profit
03-07-2012 – Dr. Alex Cowie

LIBOR – The Banking Scandal That Could Cause A Riot
02-07-2012 – Dr. Alex Cowie

The Sticky Plaster Fix For the Spanish Economy

By MoneyMorning.com.au

Since the dawn of the Internet, millions of users have dreamed of getting true high-speed connections.

Well, fasten your seat belts folks…

A new breakthrough promises to provide Web and other computer networks links that are 85,000 times faster than what we have today.

No, that’s not a misprint. But it is so fast it’s hard to get your mind around-especially for those of you who remember using phone lines to surf the web.

Back then it seemed you could take a break, paint your house, cut the grass and clean the kitchen – and still get back to your computer before it finished downloading a photo.

Forget video. That sounded like a sci-fi fantasy.

Admittedly, it’s gotten quite a bit faster since then. Over the past decade millions of users around the U.S. have joined the broadband revolution. It’s now becoming standard to link to the Web at speeds of at least 10 megabits per second, or about 175 times faster than dial up.

But even at those speeds, the magnitude of the change I’m describing is hard to fathom. But I’ll try.

Think of it this way: If dial up was a one-story home, then today’s broadband would stand almost twice as tall as the Empire State Building.

Yet, to equal what I’m calling Ultimate Broadband – or 85,000 times faster than what we have now – you’d have to string Empire State Buildings 1.3 times around the entire surface of the Earth!

Internet Speeds Beyond Belief

It works using twisted beams of infrared light.

Now you know why this innovation will be so crucial for the future of broadband communication and entertainment.

Having just upgraded my home theatre, I can speak from personal experience. Super-fast connections are what’s driving the next wave of home entertainment and data services.

And here’s the thing: you won’t need wires to take advantage of these incredible speeds.

In fact, a global team lead by the University of Southern California used wireless gear to prove the system works. They achieved speeds of 2.5 terabits (2.5 trillion) per second.

They beamed data over open space in a lab. The idea was to simulate the type of link that might occur between satellites in space.

Team members manipulated eight beams of light. They twisted each one into a spiral shape. Turns out twisted light beams are very powerful because they can encode huge amounts of data.

This, by far, exceeds anything we can get today with radio frequencies used for WiFi and cellular networks.

Next up: adapting the system for fibre optics like those often used to transmit data over the Web.

I believe we are still several years away from making light-based data links standard. But I do predict this breakthrough will help lead us to the Holy Grail of computers – harnessing the speed of light.

To me the question isn’t if we’ll have optical networks – but when.

Blazing Fast Computers

Here’s the thing. The USC news came out the exact same day that a second research team reported a breakthrough using light to create super-fast computer chips.

This one deals with an arcane field known as quantum computing. It’s complicated so I’ll simplify it for you.

Today’s chips depend on the use of electricity to move or store data.

Quantum systems go much deeper – they rely on basic atomic-scale elements like photons. Think of these as tiny pieces of light that have neither mass nor electric charge.

But they do have speed. Lots of it, in fact.

Just ask the team from the University of California at Berkeley and the City College of New York who did the study. To encode data, they used light to control the spin of an atom’s nucleus.

The result: chips several times faster than anything we can produce today.

Not only that, what they call “spintronics” would yield a huge increase in processing power – it would allow you to have multiple data streams running at the same time.

It gets better. The research team said chips would no longer remain fixed after they’re etched in the factory. Spintronics would allow us to rewrite them on the fly.

Need a faster computer? Just zap your chip with a beam of light and you’re good to go.

So you can see that light-based computers and networks represent a radical new approach to the way we obtain and share a wide range of data.

It’s one of the reasons why I say the future will be like nothing we’ve seen before.

Michael A. Robinson
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Money Morning (USA)

From the Archives…

The Australian Housing Shortage That Never Existed
06-07-2012 – Kris Sayce

Did the European Summit Change the Market Trend?
05-07-2012 – Murray Dawes

Why Government Intervention Hinders Progress and Innovation
04-07-2012 – Kris Sayce

The Big Opportunities in the Oil Market That Will Lead to Profit
03-07-2012 – Dr. Alex Cowie

LIBOR – The Banking Scandal That Could Cause A Riot
02-07-2012 – Dr. Alex Cowie

How Light Will Make the Web 85,000 Times Faster

EURUSD continues its downward movement from 1.2692, and the fall extends to as low as 1.2235. Resistance is now at 1.2335, as long as this level holds, downtrend could be expected continue, and further decline towards 1.2000 is still possible. On the upside, a break above 1.2335 will indicate that lengthier consolidation of the downtrend is underway, then range trading between 1.2200 and 1.2400 could be seen.

Forex Signals

By The Sizemore Letter

Crack open a cold one, and watch Charles Sizemore give his thoughts on international beer stocks on Bloomberg TV.

If you cannot view the video, please follow this link to Bloomberg’s site: Playing the World of Beer Stocks

Stocks mentioned: Boston Beer ($SAM), Anheuser-Busch InBev ($BUD), Heineken ($HINKY), Molson-Coors ($TAP)

If you liked this article, consider getting Sizemore Insights via E-mail. 

Related posts:

• Whiskey and Beer Better Long-Term Bets than Wine
• Harley-Davidson Sputters and German Beer Goes Flat
• Charles Sizemore Discusses Actively-Managed ETFs

By The Sizemore Letter

It’s not often that a stock with a $5 billion market cap soars by over 20% in a single trading day, but such is the case for Constellation Brands ($STZ), the largest publically-traded wine merchant, and now the sole distributor in the United States of Corona and Grupo Modelo’s other Mexican beer brands.

Constellation was the unexpected winner in the Anheuser-Busch InBev ($BUD) – Grupo Modelo merger, as Constellation was able to buy out Bud’s 50% share of the companies’ Crown Imports joint venture for $1.8 billion.  Under the new deal, Constellation will have complete control of the distribution, marketing and pricing for all of Modelo’s brands in the United States, while AB InBev will act as supplier.

The deal is a major coup for Constellation—kudos to management for pulling it off—but the company remains one of my least favorite stocks in the alcohol and vice sphere for a one critical reason:

Wine is much harder to brand than beer or spirits.  Think about it; when you go to a bar, you can instantly recognize your favorite beer or whiskey on tap or behind the bar.  Outside of, say, Coca-Cola ($KO), beer and spirits are probably the most recognizable and valuable brand names in existence.  Not surprisingly, premium beer and spirits businesses tend to enjoy high margins and high returns on equity relative to their peers.

Wine is a different story.  The attractiveness of a given vineyard varies from year to year, and few have national or international brand awareness.  Wine connoisseurs know their favorite vintages, but there is little brand loyalty at the mass-market level.  For a company of Constellation’s size, wine is a much harder business to operate.

This is not to say that I dislike Constellation or would never consider owning it.  “Sin Stocks” are some of my favorite long-term holdings due to their defensive nature and due to their tendency to pay high dividends (Constellation currently pays no dividend), and an argument can be made for making room for Constellation in a diversified vice portfolio.  But I would definitely give a higher weighting to premium spirits groups such as Diageo ($DEO), Jim Beam ($BEAM) and Brown-Forman ($BF-B).

One last thing to note: the Crown Imports deal allows Constellation to get a significant chunk of its revenues and profits from the premium beer segment rather than wine.  This is good news.  But it’s also a source of concern due to a certain provision in the deal.  AB InBev has a “call option” of sorts to buy the Modelo brands back in 10 years at 13 times earnings before interest and taxes.  This price does not at all appear unreasonable, but if exercised Constellation will find itself as purely a wine merchant again.

Disclosures: DEO and BEAM are held in Sizemore Capital accounts.

If you liked this article, consider getting Sizemore Insights via E-mail. 

Related posts:

• Harley-Davidson Sputters and German Beer Goes Flat
• Diageo: The Ultimate 12- to 18-Year Play
• The Cult of Equity Is Dead. Long Live Equities.

By Central Bank News

By The Sizemore Letter

“Gimme what I need, uh, MasterCard or Vi-suh.”

From Wyclef Jean’s “Perfect Gentleman”

The U.S. consumer is in a bit of a pickle.  Jobs are not particularly easy to come by—the June jobs report showed unemployment sticking at 8.2% and only 80,000 new jobs created for the month—and the economy remains sluggish. 

True, the average American family carries less debt than they did a few year years ago, but their net worth hasn’t exactly grown much either. 

In short, the prognosis for the consumer is bleak. 

Retail stocks have held up relatively well, all things considered, though higher-end luxury retail has taken a beating.  Long-time Sizemore Investment Letter recommendation Coach ($COH) is down nearly 30% from its 2012 highs, and competitor Michael Kors ($KORS) is down by over 16%.  Investors fret that a slowing economy—and in particular slowing Chinese and emerging market economies—will lead to a disappointing string of quarters for purveyors of expensive discretionary purchases.

Yet amidst the bearishness towards bling, Visa ($V) and MasterCard ($MA) have been notable bright spots.  Visa is just 1-2 good trading days away from a new all-time high, and MasterCard is not far behind. 

There are a lot of high expectations built into the stock prices of both credit card companies.  Visa sells for 19 times trailing earnings and MasterCard for a lofty 27 times trailing earnings.  Forward estimates put the ratios at a more reasonable 17 and 16 times earnings, respectively, though both are well above the average for the S&P 500.

The optimism is not unwarranted.  Both companies are debt free. Visa enjoys mouth-watering operating and profit margins of 60% and 42%, respectively, and MasterCard’s profitability is only a hair’s breadth lower.   Both also enjoy returns on equity that would be the envy of any company outside of the technology sector.  In short, both companies deserve to trade at a premium to the broader market.

Still, with so much optimism baked into the stock price, a slight earnings miss by either could send shares tumbling in the short-term.  This is always the risk you run when buying a “hot” stock, and I would be wary of it as we enter earnings season.

Any sustained weakness should be viewed as a fantastic buying opportunity.  When I made Visa my pick in InvestorPlace’s 2011 “10 for 2011”stockpicking contest, I noted two durable macro trends that are still very much in place:

1. The   transition to a global cashless society
2. The rise of the emerging market consumer

The first point should be obvious.  Even in the United States, where credit and debit cards are ubiquitous, roughly 40% of all transactions are conducted with cash or paper checks.  Not all transactions will ever be captured with credit and debit cards, of course, but with internet commerce growing relative to “bricks and mortar,” you can bet that the percentage will grow. 

Consumers without access to traditional credit or banking services are embracing prepaid cards, branded with the Visa and MasterCard logos, and both companies are experimenting with ways to let consumers pay at retail cash registers using their mobile phones. 

This is a long way of saying that even if overall consumer spending growth is tepid, growth in electronic payments has plenty of room to grow.

The second point is the one I find the most promising, however.  Credit and debit card usage is soaring in virtually all major emerging markets as incomes rise and consumers join the ranks of the global middle class.  Both Visa and MasterCard stand to benefit from this trend, though Visa has the better presence globally.  Visa expects to get more than half of its revenues from overseas by 2015, and the overwhelming amount of this will come from emerging markets. 

Visa is what I call a classic “emerging markets lite” investment.  You get all the benefits of emerging markets growth but without the volatility and headache of investing in emerging markets directly.

Both Visa and MasterCard are due to report earnings within the next month.  I will be curious to see how the management of each addresses the effects of the economic slowdown in China and the rest of the developing world.

I suspect that, once the numbers are sorted, it will be clear that Chinese imports of iron ore and copper are in a protracted decline, but Chinese credit and debit card swiping are healthier than ever. 

In the meantime, I reiterate my recommendation to buy shares of both companies on any protracted weakness.

Disclosures: Sizemore Capital holds shares of Visa and Coach.

If you liked this article, consider getting Sizemore Insights via E-mail. 

Related posts:

• Visa, MasterCard Still Charging Forward
• Warren Buffett Buying the Sizemore Investment Letter’s Picks
• 10 Stock Picks for 2011

Source: ForexYard

At FOREXYARD, we believe in keeping our clients prepared for potentially significant news events. As such, traders will want to carefully monitor the US Crude Oil Inventories figure, set to be released on July 11th, at 14:30 GMT. Demand in the United States, the world’s leading oil consuming country, tends to have a direct impact on the price of crude. As can be seen in the chart below, the price of oil spiked by almost $1.50 a barrel on June 13th after the US inventories data showed crude stockpiles falling by 0.2 million barrels the week before.

Don’t miss out on another opportunity to capitalize on market volatility!

Should Wednesday’s news show crude oil stockpiles fell again last week, investors may take the news as a sign that demand in the United States is increasing, which may help oil reverse some of its recent losses. This is an excellent opportunity for forex traders to take advantage of potentially significant news, so don’t miss out!

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

London Gold Market Report
from Ben Traynor
BullionVault
Tuesday 10 July 2012, 07:30 EDT

WHOLESALE prices for gold bullion climbed to $1597 an ounce during Tuesday morning’s trading in London – their highest level so far this week – while stock markets also ticked higher following news that Spain should receive some financial assistance for its banks later this month.

Silver bullion also gained, climbing as high as $27.61 per ounce, while other commodities were broadly flat.

US, UK and German government bond prices fell, while on the currency markets the Dollar gave back early gains against the Euro, with the latter rallying back above $1.23.

“Loose monetary policies, with a scope for more aggressive balance sheet use in the US and Europe, will keep real [interest] rates in most reserve currencies low (or negative) during 2012,” says a note from Merrill Lynch analysts today.

“We continue to believe that this will allow investor demand to remain strong and prices to reach our $2,000 an ounce target by the end of the year.”

Spain’s government has been given an extra year to meet its 3% deficit-to-GDP target. Eurozone finance ministers meeting in Brussels Monday agreed that Spain should have until 2014 to meet the target.

“The move hardly offers Spain a reprieve,” says James Nixon, chief European economist at Societe Generale.

“The same painful and sizeable adjustment will now be spread over three years instead of two.”

The Eurogroup of single currency finance ministers also reached a “political understanding” on using Eurozone bailout funds to directly recapitalize Spanish banks once a single European banking supervisor has been set up next year, an official statement said.

Last month, the Eurogroup agreed a credit line of up to €100 billion for Spain’s government to finance the restructuring of the country’s banking sector. Finance ministers agreed yesterday that €30 billion can be used this month.

The €30 billion is “to be mobilized as a contingency in case of urgent needs in the Spanish banking sector,” said Eurogroup president and Luxembourg prime minister Jean-Claude Juncker yesterday.

“There’s no emergency here,” added Luxembourg finance minister Luc Frieden.

“There’s a clear path towards stabilization…the markets have to realize that the money is there, more money than is necessary.”

The loans to Spain will be come from the temporary European Financial Stability Facility, and will later transfer to the permanent European Stability Mechanism “without gaining seniority status,” the Eurogroup confirmed – meaning the ESM would not be a preferred creditor in the event that the full value of the loans are not repaid.

Benchmark yields on Spanish 10-Year government bonds fell back below 7% during Tuesday morning’s trading. Italian 10-Year yields also eased, falling below 6%.

Elsewhere in Europe, Germany’s Constitutional Court today began a hearing today looking at whether the ESM and the fiscal pact, which could see more budgetary powers transferred to Brussels, are in contravention of German law.

The case has been brought by a collection of academics, politicians and members of the public, and could further delay the launch of the ESM, which had been due at the start of this month.

“A considerable postponement…could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the Eurozone’s ability to make necessary decisions in an appropriate timeframe,” warned German finance minister Wolfgang Schaeuble Tuesday.

“Some member states of the Eurozone would end up having further big problems financing themselves.”

The European Central Bank meantime “will do everything that is needed to improve the situation in the Euro area…within the limits of our mandate,” ECB president Mario Draghi told the European Parliament Monday.

Over in the US, America’s economy is “right at [the] edge” of needing further policy stimulus, Federal Reserve Bank of San Francisco president John Williams said Monday.

“If economic data keep coming in below our expectations…then I think we would need more [policy] accommodation,” said Williams. A day earlier, two other Fed presidents said they could see a case for further accommodation measures such as more quantitative easing.

“There’s skepticism that such actions will have a significant impact,” says Standard Bank currency analysts Steve Barrow.

“Many countries are in, or close to, a liquidity trap. In a liquidity trap monetary policy becomes ineffective and fiscal policy is super-effective…if major policymakers get together and really decide to try to grow the global economy they need to co-ordinate fiscal expansion, not monetary expansion.”

In New York, the speculative net long position of Comex gold futures and options traders – calculated as the difference between bullish and bearish contracts – rose 18.6% in the week ended last Tuesday, data released by the Commodity Futures Trading Commission show.

The value of China’s trade balance meantime jumped by nearly 70% to $31.7 billion last month, according to official data published Wednesday. Export growth slowed however, falling from an annual rate of 15.3% in May to 11.3% last month. Growth in imports saw a bigger slowdown, growing by 6.3% in the year to June, compared to 12.7% year-on-year to May.

“[We expect] the government to introduce more policy easing measures to offset the slowdown in export growth,” says Bank of America Merrill Lynch economist Lu Ting in Hong Kong.

“There will be huge stimulus.”

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

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Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.