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You, Me & the ECB

Posted by kdadmin on November 10th, 2014.

“Imitation is the sincerest form of flattery,” wrote Charles Caleb Colton in his horribly titled Lacon, Or, Many Things in a Few Words: Addressed to Those who Think.

It seems the ECB (European Central Bank) may just begin to flatter the Federal Reserve, especially given the hard evidence in the graph below. The shaded area is the USA’s most recent recession. As you can see, the US unemployment rate (orange line) was very low before the recession, as was the EU (European Union) unemployment rate (blue line). Both shot up to 10% levels during the financial crisis. However, beginning in early 2010, their paths diverged. The Federal Reserve took the path less traveled and began pumping billions of dollars into the money supply (red line), whereas the EU did not. Over the four years from 2010-2014, the US unemployment rate dropped nearly in half to 5.8%, whereas the EU unemployment rate hung at 10%, even exceeding 10.5%.

You, Me & the ECB

The respective stock market performance has been just as telling. The S&P 500 is up nearly 114% from it’s low, whereas the European FTSE is up just over half of that at 59%. (SPY, an ETF of the US S&P 500, is in orange and the Euro FTSE Index is in blue.)

You, Me & the ECB

Though some would argue that the Federal Reserve has pushed the stock market into bubble territory, these “some” miss the fact that we’re sitting at 5.8% unemployment, an increasingly strong dollar, and a country with huge employable work force. We’ll see how the bond market handles the Fed’s inevitable bond liquidation, but our significantly stronger currency in the global markets will likely increase demand.

From the cheap seats, it appears that the Fed’s gamble has paid off. We’ll see if the ECB is as successful, and if this means that we’ll break our six year hiatus from recommending direct foreign investments.


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