Last week the European Central Bank cut its main refinancing rate in half to 0.25 percent. The ECB also cut its emergency borrowing rate from 1 percent to 0.75 percent and kept the deposit rates it pays banks at zero.
Officials pointedly said they are willing to take interest rates even lower in order to keep the euro zone’s fledgling recovery from stalling.
The ECB announcement caught most economists by surprise, according to media reports. If that’s true, then I have to believe most economists have been living under rocks.
Europe’s politicians are so entrenched in their "austerity" doctrine that they refuse to stimulate growth through fiscal policy. That leaves the European Central Bank’s monetary policy as the only effective tool to defend against deflation and a much-deeper recession.
The ECB is working from the same playbook as the U.S. Federal Reserve: monetary stimulation. With inflation well under the 2 percent ECB target, the rate cuts should surprise no one.
Inflation both here in the U.S. and Europe will not be a problem for a long time. Deflation remains the bigger risk.
Economists should also know that central banks around the world coordinate with one another. ECB President Mario Draghi and Federal Reserve chair Ben Bernanke are always on the same page. In today’s modern economic world, not cooperating would invite even more chaos.
So what should we take from the ECB action? It’s quite simple:
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Both the ECB and the Federal Reserve will maintain loose monetary policy for the near future. We will not see interest rates climb here in the United States or Europe until inflation is a clear, imminent threat.
My view, based on current economic indicators, is we will not see higher interest rates through 2014 and maybe not until 2015. The dollar and euro will trade in a very tight range relative to each other.
So how can investors capitalize on this?
Lower interest rates and very accommodative monetary policy are extremely bullish for equities. I fully expect the U.S. and European economies to regain their footing. Friday’s employment report and revisions to previous jobs numbers clearly indicate the U.S. economy is growing.
This should fuel another banner year for the Dow Jones, S&P 500 and Nasdaq. I think 2014 will be a very good year for oil companies, too. Economic growth will raise energy demand and drive WTI crude oil back to or slightly over $100.
Last week I mentioned that I believe energy is the great "economic compounder." Some of my favorite energy names include:
- Anadarko Petroleum (APC)
- Baytex Energy (BTE)
- Chesapeake Energy (CHK)
- Devon Energy (DVN)
- EOG Resources (EOG)
- Pioneer Natural Resources (PXD)
(For full disclosure, two of these names appear in my Junior Resource Millionaire service and one is in my Global Resource Hunter service.)
Oil prices dipped after this summer’s Middle East tensions eased. The "risk premium" caused by the Iranian nuclear weapons threat and the Syrian chemical weapons episode has all but vanished. Now oil is once again trading on its supply/demand fundamentals.
Right now, these stocks are lagging the big integrated oil refiners and marketers like ExxonMobil (XOM), Chevron (CVX) and BP (BP), but this will change soon. The integrated oils have lower P/E ratios and lower earnings growth compared to the exploration and production names.
Investors are hiding out in these mega-cap energy names, but the real growth potential is in the next tier. When they understand how the U.S. and euro zone economies are finally primed for genuine growth, I think the better oil stocks will climb 25% to 40%, with the bulk of the rebound coming in the first six months of 2014.
Now is the time to diversify and load up on key energy companies. I’m watching several that I believe could produce gains of 50% or even 70% in the next year. Global Resource Hunter subscribers will know their names soon. Get ready to step on the gas!
Good luck and best wishes,
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