Weekend Reads for Global Investors: Europe’s QE, Gundlach’s 2015 Forecast, and Your Wallet

Central bankers are opening the spigot again. Last Thursday the European Central Bank (ECB) announced a widely anticipated asset-purchase program, commonly known as quantitative easing, or QE.

There seems to be good reason for action. Despite the positive signs the US economy has started to show, there is not much to cheer for around the world. Nobel Laureate Paul Krugman remarked this week at the Asian Financial Forum that the “burden of proof is now on whoever does not think Europe has become Japan.”

Krugman: The burden of proof is now on whoever doesn't think Europe has become #japan . #AFFHK2015 pic.twitter.com/MCD3XGOuFC

— Larry Cao, CFA (@LarryCaoHK) January 20, 2015

Krugman has not been known as a fan of QE, however. In his column for The New York Times earlier this month, he wrote that “Europe is a dead end.” He has been pessimistic about monetary stimulus measures in Europe for some time, and appears to be right so far. (The politics in Europe further complicate the issue — so much so that even those who might be in favor of QE in general question whether it’ll work in this case.)

And yet the ECB is far from alone. A slew of central banks around the world cut interest rates over the last two weeks in an effort to fight off deflationary pressures and stimulate the economy. It all started on 15 January when the Swiss National Bank (SNB) surprised the entire world and cut its official interest rate to -0.75%. The SNB’s counterparts in Egypt, India, and Peru immediately followed suit. Canada, Denmark, and Turkey also announced rate cuts this week.

So what does this mean for your wallet? If you are an average consumer in one of these countries with a mortgage and an investment portfolio, you may be able to negotiate better terms for your mortgage and your local stock portfolio probably got a positive jolt. Your vacation overseas and import car may burn a bigger hole in your wallet now that your currency probably depreciated somewhat, but the rate cut is mostly good for you in the near term.

Where economists disagree is how effective QE and monetary easing are in accomplishing their main objective: moving the economy in the right direction. The answer to that question apparently can mean much more to your wallet.

More Monetary Easing: ECB and around the World 

• More QE, this time in Europe: “European Central Bank Unleashes Quantitative Easing” (Financial Times)
• A primer on quantitative easing. (The Economist)
• The SNB sent shock waves across global markets by announcing a rate cut last week. A slew of central banks around the world has already followed suit. “World Central Banks on Deflation Alert as Swiss Cut Tate to -0.75%” (Fortune)
• My colleague Ron Rimkus, CFA, gives his take on the SNB breaking the peg of the Swiss franc to the euro: “The Swiss Franc: Markets 1, Central Banks 0” (Enterprising Investor)
• Why QE will not work? The former chief economist at the Bank for International Settlements (BIS) thinks it’s because banks will still not lend to small- and medium-sized enterprises. “Former BIS chief economist warns that QE in Europe is doomed to failure and may draw the region into deeper difficulties.” (The Telegraph)

Davos

• If not for the central bank rate cuts, Davos would have no doubt dominated the headlines. So in case you missed it, here are some interesting tidbits from the slopes of Switzerland: “Davos Watch” (Associated Press)
• “WEF 2015: We Enjoy Being a Ruckus Democracy, Says SBI Chief Arundhati Bhattacharya” (Economic Times)

Investing 

• Carl Richards makes the point that risk is one thing and your exposure to that risk is another. (The New York Times)
• Foreign exchange is a game best reserved for the professionals in my opinion. Even in the old days (before the euro came into existence), there was so much institutional money chasing so few currency pairs, not to mention the typical leverage in the business. It’s hard to imagine where retail investors can have an edge. “Six in Ten Mom-and-Pop Currency Traders Lose Money Each Quarter” (Wall Street Journal)
• We are not in the business of making market predictions here, but when Jeffrey Gundlach talks, the market listens. It might not be a bad idea for you to tune in as well. “Gundlach’s Forecast for 2015” (Adviser Perspectives)
• A good refresher on drivers of intrinsic value: “Intrinsic Value: Interest Rates, Inflation, and the Forgotten Concept of the Time Value of Money” (Philosophical Economics)

Economics

• “Which Economic Theories Are Especially Widely Misunderstood?” — according to one respected economist. (Marginal Revolution)
• Much of the “Keynesian Economics and ‘Socialism’ Don’t Mix” (Pragmatic Capitalism)
• Six years after the global financial crisis, we are still searching for answers. “Low-Income Loans Didn’t Cause the Financial Crisis” (CBS MoneyWatch)
• This should stay on many institutional investors’ radar screen: “The Greek Time Bomb” (Project Syndicate)

Retirement 

• A perennial question: “How to Tell if Your Retirement Nest Egg Is Big Enough” (Wall Street Journal)
• Tools to help you get some answers: “The Best Online Tools for Retirement Planning and Living” (Wall Street Journal)
• And if you have gotten all your retirement questions answered, the editors at Forbes have just the right place for you to spend your time and money. “The Top 25 Countries to Retire to in 2015” (Forbes)

And Now for Some Reading Truly for the Weekend . . . 

• If you want to learn one thing this weekend, I’d say read this and try to become a better listener: “How ‘Active Listening’ Makes Both Participants in a Conversation Feel Better” (Wall Street Journal)
• You cannot lose checking this article out: If it does not trick you into exercising more, you must be the world’s smartest. “The World’s 2nd-Smartest Man Shares Tips for Tricking Yourself into Exercising” (Business Insider)
• “Assessment: How Resilient Are You?” (Harvard Business Reivew)

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo credit: ©iStockphoto.com/JLGutierrez