Dear Mr. Berko:
Now that the economy has recovered, when will certificate of deposit rates come back to their normal 4 or 5 percent? What do you think about the European stock market and interest rates? Are there any attractive European investments you'd recommend? I have $17,500 to invest, and I can afford to take more-than-average risks.
-HS, Waterloo, Iowa
Dear HS:
I don't trust the Obama administration's numbers, because there are still huge pockets of pain. Why are so many Americans having trouble keeping current with their monthly auto payments, credit card bills and home mortgages? And why do so many Americans feel they were better off eight years ago than today? It's quite possible that low interest rates are the new normal.
No matter how you slice the bologna, nearly zero interest rates are the result of weak demand. And the reluctance among Federal Reserve officials to raise rates suggests that most of them believe that the economy still faces serious growth challenges. The Fed is mindful that gross domestic product growth in the past few years has been financed by borrowed money, record federal debt, record corporate debt and record consumer debt. Today's consumer can buy a car and finance it over eight years, purchase a home with 3 percent to zero money down and buy a houseful of new furniture with no payments till 2016.
Because of the $4.5 trillion quantitative easing infusion and ultra-low interest rates to level the road, our economy wobbles forward on stilts and will lose its balance if it steps in a pothole. We've recognized too late that an economy dependent on low interest rates is like a person who's hooked on cocaine; withdrawal is seldom successful. Despite the recent pickup in activity, the economy still faces unmet challenges to restore long-term growth. And despite the decrease in the jobless rate, the real unemployment number is 12.6 percent. This 12.6 percent may explain the administration's reluctance in disclosing its U-6 report, which truthfully explains the full employment picture by including workers "marginally attached to the labor force" and those "employed part time for economic reasons." This makes responsible timing of the Fed's interest rate decisions almost impossible. If the Fed increases rates too soon, the economy may collapse because most consumers don't have the income or buying power to maintain the status quo. The talk is that some Fed governors are keen to keep rates low, believing an increase would hurt consumers and put the economy in a tailspin. Some observers suggest that the Fed won't raise rates this year.
Also, rates in Europe will continue to remain low. And because the European Union is embarking on its first quantitative easing, I think Italy's, Germany's, France's and other EU nations' markets will soar this year and next. Last January, European Central Bank President Mario Draghi disclosed his QE plan to purchase about $1.3 trillion of public- and private-sector assets in the coming 18 months. Commencing this March, the Eurosystem will purchase, in the secondary market, euro-denominated investment-grade securities issued by eurozone governments, agencies and institutions. This Fed-style QE in Europe will massively increase the money supply, which Draghi hopes will be inflationary. Though the U.S.' $4.5 trillion QE wasn't inflationary (a discussion for another time), the trillions of dollars of loose cash sloshing in U.S. bank accounts went directly into our stock market, running the Dow Jones industrial average to 18,000, from 11,000 in 2009. I expect that a similar phenomenon will occur in the EU markets. Draghi's ECB will purchase assets of each eurozone country proportional to its size. The stock markets-even in small eurozone countries, such as Malta, Slovenia, Latvia, Estonia and Slovakia-may take off like racing greyhounds. And the bourses of countries with larger economies-such as Germany, France and Italy-will have plenty of room to zoom.
The most effective way for you to invest in those markets is via single-country closed-end funds. So consider The New Germany Fund (GF-$14.23), yielding 5.5 percent, the iShares MSCI Italy Capped ETF (EWI-$13.69), yielding 2.4 percent, and the iShares MSCI France ETF (EWQ-$25.31), which yields 3.35 percent. They should do very well.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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Published: Tue, Feb 17, 2015
