After Fed, Now the ECB!

Fed did the expected and rate unchanged at 2%, albeit signaling rising worries about inflation risks. US dollar came under pressure, lost to euro, pushing the EUR/USD rate about 100 pips higher towards the closing. Amidst the credit industry’s cries for help via lower rates on one side, and the sky is falling under the weight of inflation, doomsayers on the other, it doesn’t seem like there is a solution.

Fear will grow when investors realize that no matter what the outside forces may perceive to be acting upon prices, the market trends are endogenous.

Well, with the Fed’s decision out of the way, all eyes are now on the European Central Bank (ECB) that meets next week, already hinting they may not sit on their hands like the Fed did on June 25.

However, one should take a closer look at the Europe’s real estate situation, which some already expect the housing mania in Europe is reaching its end and could make the US housing mania pale in comparison. Some studies that we have access to suggest that what the US has been going through is merely a ‘mild prelude of what could happen in Europe’ given the stronger dependence on debt financing for real estate than the US. If that is the case, the bubbles bursting in the US and Europe carry more deflationary potential than Japan’s did, because far more extensive credit leverage fueled today’s historic mania. With US and British consumers loaded with record level of debts, their economic stress may be worse than Japan’s was.