European Central Bank Sounds Alarms on European and Global Economy

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Last Updated on: 28th January 2019, 11:43 am

Adding his considerable voice to the growing chorus of international worry on the global economy this past week at the World Economic Forum in Davos was Mario Draghi, President of the European Central Bank. Draghi has his plate full in Europe, with a recession coming on in economic powerhouse Germany, France in full-blown domestic crisis and chaos seemingly every weekend, and Great Britain within the 60 day window of the looming large Brexit departure (seemingly without an agreed upon exit deal). His warning should serve as a wake up call to you personally.

You can not count on the likes of Mario Draghi and Fed Reserve Chairman Jerome Powell to bail out your retirement portfolio after the markets reel from the upcoming next global financial crisis and international recession. That duty is all on you. Fortunately, you have IRA-approved gold to ride to your rescue if you act now while there is still time. Gold makes sense in an IRA because of all the “I don't knows” in the world today. Now is your time to check out the Top 5 Gold Coins for Investors before markets go into full blown decline again.

ECB's Draghi Is As Serious As They Get

Draghi is not one to issue panic-inducing alarms lightly. Yet he is in earnest on this latest insistence that the euro zone area is in trouble. He was out sharing their overwhelming challenges at Davos last week, alerting people to the fact that his ECB will be more careful than ever on withdrawing anymore of the crisis epoch stimulus later in the year.

Already Draghi and company did not draw down any further stimulus in December. This Thursday, he announced that the growth risks have now “moved to the downside.” Only six weeks ago, he was calling the euro zone risks “broadly balanced” and capping off monetary tools support. He has not yet gone so far as to pledge another round of long-term practically free loans to banks though.

Yet Draghi had some alarming things to say this past week, including:

“The persistence of uncertainties in particular relating to geopolitical factors and the threat of protectionism is weighing on economic sentiment. Today's meeting was essentially an assessment: Where are we? Why are we here? How long will the slowdown last?”

Mario Draghi also affirmed that a significant downturn in one part of the euro zone block could quickly and easily spread to other parts. That is why they reaffirmed at the meeting continuing to reinvest the proceeds from the maturing bonds for “an extended period of time past the date” of their first rate increase.

Yet he did admit that the discussion of another long-term funding round for troubled banks had come up. Such longer-term loans would enable banks to support lending to consumer households and businesses as well as measuring up to the toughened regulatory standards.

Data out of France encouraged Draghi and his ECB colleagues to err on the side of caution. German manufacturing data showed a shrinking economy while the euro-wide Purchasing Manager's Indexes offered the worst results in over five years of surveys, as the chart below shows:

Eurozone PMI October 2018

Draghi was not alone in his scare mongering either. The U.S. Federal Reserve has nearly promised that it will slow down the speed of the ongoing rate increases. Other central banks across the developed world are starting to signal much the same policies.

Robert Shiller Also Worries About A “Full Blown Bear Market” Approaching

Robert Shiller is on the same page as Mario Draghi. The Yale university professor and 2013 Nobel Prize Laureate was spreading his own doom and gloom on the snowy slopes of Davos. He said that American stock markets may have posted a slight recovery from the dramatic declines in December, but the risks of a substantial downward move are still high.

“I'm not confident of my ability to predict, but I think there's a risk of a bear market in 2019, yes. I categorize risks in terms of narratives and this bear market narrative has taken a strong hold. There is a feeling that the stock market might be due for some deflating now because it's been a long time, and we've seen some hints of it and we haven't seen the real deflation yet.”

Shiller admits that he does not give much regard to market-driving fundamentals. Instead he is far “more interested in psychology and popular narratives” such as the Trump movement. He has drawn the correlation between narratives and the Depression of 1920-1921, The 1930's Great Depression, and the Great Recession and Global Financial Crisis of 2007-2009. Shiller warned:

“I'm thinking that some narratives that have been live in the recent past might come back. There was the narrative that began at the beginning of 2018. And in January and February we had a correction and 10 percent decline. And then we had another downturn between September and Christmas Eve last year, and on the S&P 500 it went down from peak to trough 19.8 percent and it almost made this classical definition of a bear market. And I think these things weigh on people's mind and there' s a sense that maybe it's finished for people who see a buy signal, or maybe it's going to complete the job and go down further.”

It is an ominous warning of a bear market. These correspond with lengthy and painful stock market declines. Bear markets only need 20 percent or greater declines from recent peaks to be called. The S&P 500 etched that mark December 24th, when it reached the 20 percent decline from its 52 week long high. Yet the closely watched index did not close at the bear market level. Since early January, the S&P 500 index has jumped approximately five percent.

Shiller's comments were well-timed to coincide with a great deal of uncertainty over the future movements of markets for 2019. Rising interest rates from the Federal Reserve combined with American- and Chinese-led geopolitical tensions have rocked the global economic boat most of this past year.

Markets Are Jittery Despite Ongoing Best Efforts to Stabilize Them

American and global markets remain highly sensitive to the ongoing Federal Reserve rate hikes. U.S. President Trump has heavily criticized the Fed for boosting rates too quickly. They responded by mollifying their increase pace in December, yet still signaled that there will be two more rate increases in 2019. Yet many market participants are concerned that the markets have not yet priced in any rate hikes prospects for the year.

Meanwhile Shiller says the irony is that while the Fed are viewed as among the chief of fundamentals forcing the market down, these are the same “people trying to stabilize markets.” Shiller remarked:

The shutdown is an existential angst I think. It is a living testament to the polarization that we see in the U.S. today and it makes people nervous. It doesn't have any obvious impact on the direction of the market, but I think it creates an anxiety level that makes the market more vulnerable to volatility.”

The shutdown may have finally ended, but the uncertainty hanging over U.S. and global markets certainly has not. It explains why you can not leave the future valuation of your retirement portfolio in the hands of the world policy makers, despite their noblest and best of intentions. You need a plan.

This can start with something as simple as buying gold in monthly installments and storing it in top offshore storage locations. Whatever you do, remember that doing nothing is also a choice. Consider the Top Gold IRA Companies and Bullion Dealers today while you still have a relative calm before the proverbial storm over markets.

David Crowder
David Crowder

W.D. Crowder is an American published author. His background and areas of expertise include history, economics, expatriate living, international relations, investments and personal finance. A widely read and top of his class graduate of Stetson University, he obtained his bachelor of arts degree in History with minors in Latin American Studies and International Relations and a special emphasis in Economics. He was President of his Phi Alpha Theta (National History Honors Fraternity) Stetson University chapter and a Phi Beta Kappa (National Honors Fraternity) member.

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