United States Financial Recovery Confirmed

A vision of the first Quarter gives us a projection in regards to the possible developments in the year 2015.

The United States financial recovery is confirmed, with its strong dollar and close to full employment (now with only 5.5% unemployment) coming close to energy independence, almost about to enter the category of oil exporter, thanks to the new “fracking” technique, what might change one of the geopolitical balance elements, to wit, the relationship between countries that export and countries that import oil and its derivatives. Its sustained growth, control of its budget deficit (which is now less than 3% as opposed to 10% at the deepest moment of the recession) and the confidence in its recuperation, transfers the analysis into the political and ideological fields, since this reclaims the prestige of capitalism and the democratic system as an adequate coexistence arrangement. There still remains refining the issue of increased social inequalities, the stagnation or decline of the middle class income: “rich people don’t spend so much, save too much and therefore there is less demand,” to generate increased growth that extends its advantages to all the population.

This emergence of the United States, which contrasts with the precarious European recovery, forces the review of its probable causes. Until now, the conviction that in the United States things where done with correct thinking predominates. The fiscal and monetary measures to stimulate the economy, taken in 2009, were maintained until recuperation was evident. The plan of reducing interest rates and bond acquisition, which reached three trillion dollars, are just concluding. On the other hand, the Europeans took a different road when confronted with the United States warning (May 2010 before the G-20 meeting) against removing the growth stimulus too soon. Europe opted for the application of austerity measures to those countries that had needed the rescue of their banks and treasuries. The steps for exiting the crisis, even though there are some very encouraging news, have some stumbles.

The issue of Greece is still not resolved. There is still no agreement between the creditors and the new government elected in January 2015. The first require, as a requisite for unblocking the loans, what the country agrees with them on a group of measures to assure payment. The government offers corruption control and efficacy in tax collection measures, as well as selling unproductive public companies, but objects to austerity measures in salaries and pensions. The rumor is that without the awaited cash flow by April 20 the State will not be able to cover obligations and will default on its sovereign debt. The debated great question is if the consequence of this situation, that is, Greece exiting the Eurozone (the common coin for 19 European countries) would damage its value, which is already falling in regards to other denominations. What is detected until now is that the comings and goings of these negotiations reflect directly in their quotes: when a solution seems closer, the Euro increases its value; when it looks more distant, the Euro falls. On the positive side, though, the European Central Bank (ECB, equivalent to the FED in the United States) has entered into the same system of stimulus with the acquisition of sovereign bonds and other European countries’ private securities in order to stimulate the economy and avoid the stagnation of demand and prices of goods and services, and to reach the desired inflation close to an annual 2%, to ensure an increased growth, improving salaries and increasing employment.

With the illustrated background, including the deceleration of China’s growth, which will not get to 7% and will have negative effects on the growth of the countries which provide it with raw materials, the following is expected for the rest of the year: a) once the stimulus policy has concluded, there will probably be an increase in interests rates beginning in summer in the United States, which will bring a decrease in the price of fixed yield papers, unless due to doubts on the consistency of the rate of growth, the FED maintains interests to their lowest level for longer; b) the ECB’s monetary expansion policy, even though it may attain elevating Europe’s inflation to an annual 2%, will maintain the European Bonds yield, both sovereign and private, at very low levels, but it is improbable that they will raise interest rates; c) it is calculated that the Euro will close 2015 with a 1:1 with the US dollar.

Then, with very low yields or almost zero on the fixed yield securities, those who look for higher returns will have to assume more risks, bigger or smaller, depending on them being conservative, moderate or daring. For them, shares seem the best option, and amongst these, European shares, where growth could be bigger, if the buying policy by the ECB is effective.

In March, the Dow Jones, S&P 500 and Nasdaq indexes decreased close to 3%, the Italian and Spanish Indexes increased (3%), Paris increased (2%), in London it decreased (2.4%), in Asia, with increases lower than 2%, except Shanghai with more than 12%.

Italian and Spanish sovereign bonds present annual yields of 1.24%, Germany and Switzerland barely over zero and USA close to an annual 2%.

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