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Could 2022 Bring the Collapse of the Euro?

Like the Fed, the ECB is resisting interest rate increases despite producer and consumer prices soaring. Consumer price inflation across the Eurozone was…

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This article was originally published by Mises Institute

Like the Fed, the ECB is resisting interest rate increases despite producer and consumer prices soaring. Consumer price inflation across the Eurozone was most recently recorded at 4.9%, making the real yield on Germany’s 5-year bond minus 5.5%. But Germany’s producer prices for October rose 19.2% compared with a year ago. There can be no doubt that producer prices have yet to feed fully into consumer prices, and that rising consumer prices have much further to go, reflecting the acceleration of the ECB’s currency debasement in recent years.1

Therefore, in real terms, not only are negative rates already increasing, but they will go even further into record negative territory due to rising producer and consumer prices. Unless it abandons the euro to its fate on the foreign exchanges altogether, the ECB will be forced to permit its deposit rate to rise from its current —0.5% to offset the euro’s depreciation. And given the sheer scale of recent monetary expansion, euro interest rates will have to rise considerably to have any stabilising effect.

The euro shares this problem with the dollar. But even if interest rates increased only into modestly positive territory, the ECB would have to quicken the pace of its monetary creation just to keep highly indebted Eurozone member governments afloat. The foreign exchanges are bound to recognize the developing situation, punishing the euro if the ECB fails to raise rates and punishing it if it does. The euro’s fall won’t be limited to exchange rates against other currencies, which to varying degrees face similar dilemmas, but it will be particularly acute measured against prices for commodities and essential products. Arguably, the euro’s derating on the foreign exchanges has already commenced.

But there is an additional factor not generally appreciated, and that is the sheer size of the euro’s repo market and the danger to it that rising interest rates presents. Demand for collateral against which to obtain liquidity has led to significant monetary expansion, with the repo market acting not as a marginal liquidity management tool as is the case in other banking systems, but as an accumulating source of credit. This is illustrated in Figure 4, which is of an ICMA survey of 58 leading institutions in the euro system.2

The total for this form of short-term financing grew to €8.31 trillion in outstanding contracts by December 2019. The collateral includes everything from government bonds and bills to pre-packaged commercial bank debt. According to the ICMA survey, double counting, whereby repos are offset by reverse repos, is minimal. This is important when one considers that a reverse repo is the other side of a repo, so that with repos being additional to the reverse repos recorded, the sum of the two is a valid measure of the size of the repo market. The value of repos transacted with central banks as part of official monetary policy operations were not included in the survey and continue to be “very substantial”. But repos with central banks in the ordinary course of financing are included.3

Today, even excluding central bank repos connected with monetary policy operations, this figure almost certainly exceeds €10 trillion by a significant margin, given the accelerated monetary expansion since the ICMA survey, and when one allows for participants beyond the 58 dealers recorded. An important element of this market is interest rates, which with the ECB’s deposit rate sitting at minus 0.5% means Eurozone cash can be freely obtained by the banks at no cost.

The zero cost of repo cash raises the question of the consequences if the ECB’s deposit rate is forced back into positive territory. The repo market will likely contract in size, which is tantamount to a decrease in outstanding bank credit. Banks would then be forced to liquidate balance sheet assets, which would drive all negative bond yields into positive territory, and higher, accelerating the contraction of bank credit even further as collateral values collapse. Moreover, the contraction of bank credit implied by the withdrawal of repo finance will almost certainly have the knock-on effect of rapidly triggering a liquidity crisis in a banking cohort with exceptionally high balance sheet gearing.

There is a further issue to consider over collateral quality. While the US Fed only accepts very high-quality securities as repo collateral, with the Eurozone’s national banks and the ECB almost anything is accepted — it had to be when Greece and the other PIGS were bailed out. And the hidden bailouts of Italian banks by bundling dodgy loans into repo collateral was the way they were removed from national bank balance sheets and hidden in the TARGET2 system

The result is that the first repos not to be renewed by commercial counterparties are those whose collateral is bad or doubtful. We have no knowledge how much is involved. But given the incentive for national regulators in the PIGS to have deemed non-performing loans to be creditworthy so that they could act as repo collateral, the amounts will be considerable. Having accepted this bad collateral, national central banks will be unable to reject them for fear of triggering a banking crisis in their own jurisdictions. Furthermore, they are likely to be forced to accept additional repo collateral if it is rejected by commercial counterparties and bank failures are to be prevented.

The numbers involved are larger than the ECB and national central banks’ combined balance sheets.

The crisis from rising interest rates in the Eurozone will be different from that facing US dollar markets. With the Eurozone’s global systemically important banks (the G-SIBs) geared up to thirty times measured by assets to balance sheet equity, rising bond yields of little more than a few per cent will likely collapse the entire euro system, spreading systemic risk to Japan, where its G-SIBs are similarly geared, the UK and Switzerland and then the US and China which have the least operationally geared banking systems.

It will require the major central banks to mount the largest banking system rescue ever seen, dwarfing the Lehman crisis. The required expansion of currency and credit by the central bank network is unimaginable and comes in addition to the massive monetary expansion of the last two years. The collapse in purchasing power of the entire fiat currency system is therefore in prospect, along with the values of everything that depends upon it. 

Excerpted from “Gold and Silver Prospects for 2022” at Goldmoney.com.

  • 1. The Eurosystem’s balance sheet, that is the ECB’s plus those of the national central banks, has increased from €4,500bn in December 2019 to € 8,500bn today.
  • 2.  ICMA European repo market survey No. 38.
  • 3. The Euro system’s combined central banking balance sheet shows “Securities held for monetary policy purposes” totalling €3.694 trillion, and “Liabilities to euro area credit institutions related to monetary policy operations…” totalling €3.489 trillion at end-2020. Repo and reverse repo transactions are included in these numbers, and on the liability side represent an increase of 93% over 2019. It is evidence of escalating liquidity support for commercial banks, much of which is through repo markets, evidence that outstanding repos are considerably higher than at the time of the ICMA survey referenced above.

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Economics

Here’s What Triggered Yesterday’s Selloff

Well, the stock market sure woke up on the wrong side of the bed this morning!

Source: ventdusud / Shutterstock.com

After a long holiday weekend, investors…

Well, the stock market sure woke up on the wrong side of the bed this morning!

Source: ventdusud / Shutterstock.com

After a long holiday weekend, investors were greeted with a more than 1% drop in the major indices. The NASDAQ was hit particularly hard, down as much as 2% earlier in the trading day. The fact of the matter is Wall Street was cranky because the 10-year Treasury surged to a two-year high today.

The 10-year Treasury yield now sits at about 1.85%. That’s up from 1.51% on December 31, 2021. That’s a fairly dramatic rise in the 10-year Treasury, and it’s a big reason for why we saw a massive rotation out of the tech-heavy index today.

The financial media would have you believe higher rates will hurt tech stocks, but that’s simply not true. Here’s the reality: The global pandemic accelerated technological change, with many folks working and studying remotely. And this technological change boosted productivity in the U.S., with several industries leading the productivity miracle. So, tech stocks, especially semiconductor companies, will have some of the best quarterly results in mid-January through mid-February. And wave-after-wave of positive results will not only help these stocks firm up but also drive their shares higher. It’s one reason why I’m betting big on 5G.

Tech stocks aside, this earnings season should also trigger rebounds in fundamentally superior stocks that were hit during today’s selling. I expect Wall Street to become laser-focused on earnings over the next five weeks, and after all the reports are out, we’ll see who’s left standing. I anticipate the winners will be those with superior fundamentals, i.e., my Breakthrough Stocks. My Buy List companies have 57.2% average forecasted annual sales growth and 231% average forecasted annual earnings growth. They should also issue positive forward guidance.

Now, due to more difficult year-over-year comparisons, my Breakthrough Stocks are actually “decelerating” from the previous 78.2% average annual sales growth and 724.8% average annual earnings growth. However, my Buy List stocks are still set to achieve earnings and sales growth well above the average S&P 500 company. According to FactSet, the S&P 500 is anticipated to achieve 21.8% average earnings growth and 12.9% average revenue growth.

The Bellwether Steps Up to the Earnings Bat

We’ve heard from a few companies so far, including the Big Banks (I’ll review their quarterly results later in the week, so stay tuned for that!), but I’m most excited to hear from Alcoa Corporation (NYSE:AA), which will report its fourth-quarter earnings results tomorrow afternoon. As you probably know, Alcoa is known for establishing the aluminum industry more than 130 years ago. The company primarily manufactures and sells bauxite, the primary source of aluminum, as well as alumina, aluminum, cast products, energy and rolled products. Alcoa actually is one of the largest bauxite producers in the world with seven active mines, as well as is the leading producer of alumina.

Alcoa is also considered a “bellwether” for earnings season, as it’s a stock investors have turned to in the past as an indicator for how the coming earnings season will shake out. Currently, analysts expect Alcoa’s earnings to surge 653.8% year-over-year to $1.96 per share, up from earnings of $0.26 per share a year ago. Revenue is estimated to climb 40.5% year-over-year to $3.36 billion.

I should note that analysts have lowered earnings estimates in the past three months, following the company’s announcement that it will temporarily halt production at its Spain plant due to rising energy costs. Alcoa noted that the production halt would reduce earnings by $0.32 per share, which is why analysts have lowered earnings estimates initially. Interestingly, in the past week, analysts have increased estimates by nearly 11%.

Personally, I believe Alcoa will post impressive fourth-quarter results. The reality is that aluminum prices are trekking higher again. The World Bank revealed that aluminum prices jumped from $2,004 per tonne in January 2021 to more than $2,900 per tonne in January 2022. Prices are anticipated to rise 6% this year, thanks to ongoing demand from the auto industry, rising energy prices and supply shortages.

Suffice it to say, Alcoa is the stock to watch tomorrow.

But for today, don’t be discouraged by today’s wild market gyrations. The reality is that earnings work 70% of the time, so given that earnings momentum has tapped the brakes a bit due to tougher year-over-year comparisons, I think companies that achieve better-than-expected results will see their shares climb higher as investors celebrate their results.

It’s why now is the time to make sure you’ve filled your portfolio with fundamentally superior stocks. If you’re not sure where to look, you might want to review my Breakthrough Stocks Buy List. As I mentioned, my stocks should post much strong earnings than the average S&P 500 company. I should also note that I recently created a special model portfolio I call the 5G Hypergrowth Portfolio: Six Stocks to Incredible Wealth. Each company is directly in line to profit from 5G.

I will be recommending another 5G stock on Thursday, after the market close. So, if you join Breakthrough Stocks today, you’ll have access to this new recommendation as soon as it’s released.

For full details, click here.

Sincerely,

Louis Navellier

The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

Alcoa Corporation (AA)

Louis Navellier, who has been called “one of the most important money managers of our time,” has broken the silence in this shocking “tell all” video… exposing one of the most shocking events in our country’s history… and the one move every American needs to make today.

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Precious Metals

Cleantech Boom 2.0: Does Mining Have a Place?

Investment in mining and its resources is an integral part of cleantech as green initiatives to make the energy transition possible.
The post Cleantech…

The climate crisis is back at the forefront of political discussions following COP26 and several initiatives aiming to reduce carbon emissions have been announced. Decarbonising our economy is a difficult but urgent task and continued technological innovation will help. Although new technologies will aid the reduction of carbon emissions, the sheer volume of raw materials required to innovate are significant. Is investment in decarbonisation a reasonable excuse to further dig up the planet?

Defining cleantech

‘Cleantech’ (often used interchangeably with ‘climatetech’) refers to innovative solutions to address the challenges of climate change. These solutions help to achieve the goals of environmental sustainability by storing or generating energy with limited carbon emissions, thus assisting decarbonisation efforts. Investors are recognising the importance and potential longevity of this industry and investment is pouring in.

Electric vehicles (EVs) are one of the leading technologies required to reduce the emissions of the transport industry, but the transition to renewables and EVs will require an abundance of materials and extraction rates are rising.

Investment floods in

While there was a boom in cleantech investment in 2005, it began to be seen as a risky choice and interest dwindled due to investment failures in areas such as biofuels and solar. The investment bubble then burst. However, the urgency to reach net-zero has reignited interest in cleantech and, as innovations in areas such as agriculture and batteries are announced, investors are scrambling for their share. This investment boom is spurring an increase in the number of start-ups, driving the much-needed innovation required to help solve the climate crisis.

Mining activity is on the rise

To deal with the growing number of clean technologies, mining extraction rates are also growing. Various metals and minerals are required in the transition to decarbonisation and minerals such as cobalt and lithium are the building blocks of cleantech. As the world attempts to reach net zero, demand for critical minerals will skyrocket.

According to a 2020 World Bank Report, a low-carbon future will be more mineral intensive as clean energy requires more materials than fossil-fuel-based technologies. The International Energy Agency estimates that EVs require six times the amount of minerals as a typical car and nine times more minerals are required for wind energy plants than gas-fired equivalents. However, ESG concerns around the traditional heavy industry are so far causing investors to look the other way.

ESG in mining

There are several ESG concerns tied to mining, notably, the environmental degradation caused by the erection and operation of mines to meet the growing demand for materials. Social and governance concerns are becoming increasingly apparent and stories of dangerous working conditions, artisanal miners and child labour are common. ESG funds often exclude mining as a result. To counteract this, the mining sector is beginning to show signs that it is taking ESG seriously. A leading example is Glencore, who GlobalData classifies as a climate leader. Glencore has pledged to reach net-zero carbon emissions by 2050. Its carbon reduction strategies include the electrification of mining fleets, which has been pioneered by companies such as Newmont and Boliden.

As investors are increasingly becoming more climate aware, mining companies are recognising the potential upsides of taking ESG seriously. This will drive companies to innovate to establish how they can decouple their growth from emissions.

Investors need to think about the future

A boom in green investment has begun again but shifting investment away from mining will undermine the green energy transition. Mining companies should further implement ESG principles and demonstrate that they are serious about ESG. Green funds should also include these mines in their portfolios instead of blacklisting them. Without the mining industry, the energy transition is not possible and investors should stop shying away from this heavy industry by focusing all their investment on renewable technologies. Currently, the production of these technologies cannot be achieved without mining and the resources it produces. Investors should instead use the power they possess to exert pressure on mining companies to consider ESG strategies. They would then need to prove that they are more sustainable and innovate their techniques to achieve this. Therefore, the boom in green investment can be used to tidy up the mining industry and keep the cleantech bubble afloat.

The post Cleantech boom 2.0: Does mining have a place? appeared first on Mining Technology.

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Economics

Today’s Mortgage Rates Cross Over 4% Mark | January 19, 2022

The average rate for a 30-year fixed-rate mortgage is up to 4.033% today. It’s the first time this daily rate has averaged more than 4% since September…

The average rate for a 30-year fixed-rate mortgage is up to 4.033% today. It’s the first time this daily rate has averaged more than 4% since September 2020. All other loan categories are also seeing higher rates, with the average for a 30-year refinance loan increasing to 4.148%. The rate for a 5/1 adjustable-rate mortgage is up to 2.475%.

While rates have been steadily climbing over the past few weeks, many borrowers with strong credit can still find attractive rates and monthly payments on a new mortgage or when refinancing.

  • The latest rate on a 30-year fixed-rate mortgage is 4.033%.
  • The latest rate on a 15-year fixed-rate mortgage is 3.067%. ⇑
  • The latest rate on a 5/1 ARM is 2.475%. ⇑
  • The latest rate on a 7/1 ARM is 3.824% ⇑
  • The latest rate on a 10/1 ARM is 4.067%. ⇑

Money’s daily mortgage rates reflect what a borrower with a 20% down payment and a 700 credit score — roughly the national average score — might pay if he or she applied for a home loan right now. Each day’s rates are based on the average rate 8,000 lenders offered to applicants the previous business day. Freddie Mac’s weekly rates will generally be lower, since they measure rates offered to borrowers with higher credit scores.

Today’s 30-year fixed-rate mortgage rates

  • The 30-year rate is 4.033%.
  • That’s a one-day increase of 0.117 percentage points.
  • That’s a one-month increase of 0.464 percentage points.

The 30-year mortgage is the most common home loan in America thanks to its long payback time, relatively low and steady monthly payments and predictable interest rate. The downside is that the interest rate will be higher compared to a shorter-term loan, so you pay more interest over the years.

Today’s 15-year fixed-rate mortgage rates

  • The 15-year rate is 3.067%.
  • That’s a one-day increase of 0.124 percentage points.
  • That’s a one-month increase of 0.525 percentage points.

The 15-year fixed-rate mortgage has a lower interest rate compared to a longer-term loan, so you’ll save over time with this type of loan. However, the shorter term also means the monthly payments will be higher than a similar 30-year loan.

The latest rates on adjustable-rate mortgages

  • The latest rate on a 5/1 ARM is 2.475%. ⇑
  • The latest rate on a 7/1 ARM is 3.824%. ⇑
  • The latest rate on a 10/1 ARM is 4.067%. ⇑

The interest rate on an adjustable-rate mortgage will be fixed for the first few years before it becomes variable. The rate on a 5/1 ARM, for example, is fixed for five years, then resets yearly. An ARM could be a good option if you don’t plan on staying in the home long term, as the initial interest rate is usually very low. The downside is that there could be a big increase once the rate starts to reset .

The latest VA, FHA and jumbo loan rates

The average rates for FHA, VA and jumbo loans are:

  • The rate on a 30-year FHA mortgage is 3.9%. ⇑
  • The rate on a 30-year VA mortgage is 4.012%. ⇑
  • The rate on a 30-year jumbo mortgage is 3.726%. ⇑

The latest mortgage refinance rates

The average refinance rates for 30-year loans, 15-year loans and ARMs are:

  • The refinance rate on a 30-year fixed-rate refinance is 4.148%. ⇑
  • The refinance rate on a 15-year fixed-rate refinance is 3.185%. ⇑
  • The refinance rate on a 5/1 ARM is 2.77%. ⇑
  • The refinance rate on a 7/1 ARM is 3.967%. ⇑
  • The refinance rate on a 10/1 ARM is 4.212%. ⇑

Where are mortgage rates heading this year?

Mortgage rates sank through 2020. Millions of homeowners responded to low mortgage rates by refinancing existing loans and taking out new ones. Many people bought homes they may not have been able to afford if rates were higher. In January 2021, rates briefly dropped to the lowest levels on record, but trended slightly higher through the rest of the year.

Looking ahead, experts believe interest rates will rise more in 2022, but also modestly. Factors that could influence rates include continued economic improvement and more gains in the labor market. The Federal Reserve has also begun tapering its purchase of mortgage-backed securities and announced it anticipates raising the federal funds rate three times in 2022 to combat rising inflation.

While mortgage rates are likely to rise, experts say the increase won’t happen overnight and it won’t be a dramatic jump. Rates should stay near historically low levels through the first half of the year, rising slightly later in the year. Even with rising rates, it will still be a favorable time to finance a new home or refinance a mortgage.

Factors that influence mortgage rates include:

  • The Federal Reserve. The Fed took swift action when the pandemic hit the United States in March of 2020. The Fed announced plans to keep money moving through the economy by dropping the short-term Federal Fund interest rate to between 0% and 0.25%, which is as low as they go. The central bank also pledged to buy mortgage-backed securities and treasuries, propping up the housing finance market but began cutting back those purchases in November.
  • The 10-year Treasury note. Mortgage rates move in lockstep with the yields on the government’s 10-year Treasury note. Yields dropped below 1% for the first time in March 2020 and have been rising since then. On average, there is typically a 1.8 point “spread” between Treasury yields and benchmark mortgage rates.
  • The broader economy. Unemployment rates and changes in gross domestic product are important indicators of the overall health of the economy. When employment and GDP growth are low, it means the economy is weak, which can push interest rates down. Thanks to the pandemic, unemployment levels reached all-time highs early last year and have not yet recovered. GDP also took a hit, and while it has bounced back somewhat, there is still a lot of room for improvement.

Tips for getting the lowest mortgage rate possible

There is no universal mortgage rate that all borrowers receive. Qualifying for the lowest mortgage rates takes a little bit of work and will depend on both personal financial factors and market conditions.

Check your credit score and credit report. Errors or other red flags may be dragging your credit score down. Borrowers with the highest credit scores are the ones who will get the best rates, so checking your credit report before you start the house-hunting process is key. Taking steps to fix errors will help you raise your score. If you have high credit card balances, paying them down can also provide a quick boost.

Save up money for a sizeable down payment. This will lower your loan-to-value ratio, which means how much of the home’s price the lender has to finance. A lower LTV usually translates to a lower mortgage rate. Lenders also like to see money that has been saved in an account for at least 60 days. It tells the lender you have the money to finance the home purchase.

Shop around for the best rate. Don’t settle for the first interest rate that a lender offers you. Check with at least three different lenders to see who offers the lowest interest. Also consider different types of lenders, such as credit unions and online lenders in addition to traditional banks.

Also. take time to find out about different loan types. While the 30-year fixed-rate mortgage is the most common type of mortgage, consider a shorter-term loan like a 15-year loan or an adjustable-rate mortgage. These types of loans often come with a lower rate than a conventional 30-year mortgage. Compare the costs of all to see which one best fits your needs and financial situation. Government loans — such as those backed by the Federal Housing Authority, the Department of Veterans Affairs and the Department of Agriculture — can be more affordable options for those who qualify.

Finally, lock in your rate. Locking your rate once you’ve found the right rate, loan product and lender will help guarantee your mortgage rate won’t increase before you close on the loan.

Our mortgage rate methodology

Money’s daily mortgage rates show the average rate offered by over 8,000 lenders across the United States the most recent business day rates are available for. Today, we are showing rates for Tuesday, January 18, 2022. Our rates reflect what a typical borrower with a 700 credit score might expect to pay for a home loan right now. These rates were offered to people putting 20% down and include discount points.

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