Eurozone Still To Be Avoided

I think the ECB and in particular Jean Claude Trichet does not get it. The ECB raised its base interest rate by 25 basis point citing inflationary pressures. Guess what, the ECB is causing inflation. No sooner do they raise interest rates than do commodity prices rise and voila (that is a word with French etymology) we get more inflation.

Of course, the ECB has a bigger nut to crack – the unions. The ECB faces labor cost push inflation which was to a great extent ameliorated in the US thanks to Ronald Reagan’s firing of the air traffic controllers and the erosion of the US car manufacturing industry. At this point in time the UAW is nothing more than a retirement management organization. What is the UAW going to do – strike? Sure, then we make less Tahoes and Expeditions. Big deal. Then the public buys more Carollas and Maximas.

However, no European nation will dare touch their own third rail of politics – the unions. According to the AP, “Ground staff at German airline Lufthansa AG have gone on strike seeking a 9.8 percent pay increase while British public sector workers voted to strike for a 6 percent wage hike to keep pace with soaring inflation.”  So why can’t the ECB just admit that they are increasing interest rates to help justify higher union pay raises and that they don’t give a damn about global inflation?  It is easier to blame it on the hated Americans and Chinese.

You can knock Ben Bernanke and the FOMC all you want, but the ECB makes the Fed look real smart sometimes. My hats off to the British, who told the ECB “No thanks” many years ago, kept their currency the pound sterling and maintained the Bank of England’s autonomy and authority.

As for my investing themes, the Eurozone has been rated an “avoid” for many years and remains so today.

 

Comments

[madplanet]

Why would rising interest rates lead to a rise commodity prices ? By strengthening the Euro it should have a deflationary impact on commodities.

[captbob]

Mad: I'll try to explain. 1st it depends who is doing the buying. 2nd most commodities are priced in Dollars which just lost value vs the Euro.

Let's say coffee (retail is a commodity) and Hans, Pierre and Luigi go into their Starbucks and have a Latte on Monday, price 4 Euros.
Tyrone on Times Square goes in and it's $6.

OK Tuesday the Euro goes up 10%. Does Starbucks an American Co. charge Hans and friends in Europe 3.6 Euros and Tyrone $6. Bite your tongue! At Der Starbuken Cafe it stays 4 Euros. and Tyrone will get -(slowly)- moved up to 6.60, probably driving him back to cheap Calif. wine.

Same thing with Oil when a barrel goes up it's in dollars so we get a direct hit. In Euros its less since a Euro buys more dollars with which to buy the oil--Comprenez??