Showing posts sorted by relevance for query europe. Sort by date Show all posts
Showing posts sorted by relevance for query europe. Sort by date Show all posts

Wednesday, January 11, 2012

Teutonic versus Latin Banking Regimes

Prof Walter Russell Mead wrote the following today in The American Interest:
Germany is in big trouble in Europe, and the Franco-Italian coalition is going to make things much tougher. Germany’s ultimate choice may well lie between submitting to a fundamentally Latin currency regime with a few Teutonic decorations and the division of Europe into two or more currency zones.
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Insignia of the Teutonic Order by Arnaud Bunel

The ongoing struggle between northern and southern Europe reaches back to biblical times. I doubt that the Germans can convert France and Italy, let alone Spain, Portugal, and Greece, to its monetary banking regimes in the near-term. Dark times may be descending upon much of Europe.

Source: Mead, Walter Russell, (2012, January 11), Europe: The New German Nightmare Begins, The American Interest.

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Thursday, December 08, 2011

Prospects for Europe (and the US)

I just finished listening to today's press conference by European Central Bank (ECB) Pres Dr Mario Draghi. According to Pres Draghi, the ECB will not be monetizing sovereign debt in the Eurozone regardless of the consequences. Moreover, Pres Draghi made clear that channeling external funds (e.g., US Federal funds) through the International Monetary Fund (IMF) would violate the "spirit" of the EU treaty, and so the ECB would block any such efforts. Pres Draghi stated that the ECB would not stand in the way of the European Financial Stability Facility (EFSF) dispersing emergency funding, though the current capacity of the EFSF is known to be limited. Also, Pres Draghi predicted that the ECB's current contractory monetary policies will result in economic contraction in the Eurozone as a consequence.

Dr Mario Draghi (1947- )

In summary, a) the ECB will not be monetizing sovereign debt in Europe; b) the ECB will block efforts to monetize the debt by the IMF; c) the ECB will use the EFSF as its sole emergency funding facility; and d) the ECB is prepared to accept economic contraction across the Eurozone as a consequence of its efforts toward monetary contraction in the Eurozone.

My tentative conclusion is that severe austerities are coming to Europe, and especially southern Europe, regardless of whether challenged countries such as Greece, Italy, Ireland, Spain, and Portugal agree to sovereign concessions under an amended EU treaty.

My best advice for the US -- take cover...

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Tuesday, November 08, 2011

Why Italy Matters More Than Greece

The economic disaster in Greece has reached a crescendo in recent weeks, and the Greek tragedy is indeed worrisome. However, the real problem that Europe must confront is not Greece, but Italy, which represents 16.9% of Europe's total GDP. As the chart below makes clear, the GDP's of Greece, Spain, and Portugal are essentially sideshows to that of Italy and the Eurozone as a whole.


Europe simply does not have the resources to act as lender of last resort to Italy. Certainly, Greece is a major issue for Europe, but if Italy defaults, then the Eurozone will disintegrate.

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Thursday, December 29, 2011

US Economic Prospects for 2012...

Europe will blowup once everyone realizes that the degree of "restructuring" required in Portugal, Italy, Ireland, Greece, and Spain (PIIGS) is politically infeasible. Consequentially, public spending cuts and tax increases are imminent across the PIIGS, be they instituted by public policy or national defaults. Either way, economic depression is descending upon Southern Europe.

Protestors wearing "Guy Fawkes" masks in London

The US is also facing a blowup given that banks made a "seasonal" decision to hold off on new foreclosures until after the New Year. In 2012, the US will be confronted with the largest increase in new foreclosures since 2008.

Likewise, a budget blowup in California has been on tacit hold until after the holidays. Nevertheless, California revenues are trailing budget requirments by a significant margin. Moreover, Gov Jerry Brown appears determined to conduct "business as usual" in order to amplify the California budget crisis into a voter mandate for tax increases. Whatever happens, it's bad news for California where major cuts in government employment and/or tax increases will eventually force California into economic depression on a scale not seen on the West Coast since the Great Depression.

The combination of sharp increases in mortgage foreclosures and budget remedies in California means catastrophe along the US West Coast on a scale similar to what is about to unfold along the southern flank of Europe. Deflation and depression are already evident across America in home values, real wages, and the employment to population ratio.

The economic prospects for 2012 in the US and much of Europe are grim at best. Accredited investors are certainly in a "buy" window of opportunity at this point. However, much of America is in for hard times this coming year...

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Saturday, November 13, 2010

How to Save the Euro? Lessons from the US

by Jacques Melitz © VoxEU.org

Earlier this year, the fiscal situation in Greece caused turmoil across Europe. This column examines why the financial difficulties of several state governments in the US are not having similar impacts on its economy.

The problems of the Eurozone this year brought to light some failures of the system. Nevertheless, the resulting drop in confidence in the system has gone further than we might have expected. Questions have even arisen about the survival of the system (see Baldwin 2010 and Blejer and Levy-Yeyati 2010 for discussions). Yet monetary systems do not tend to dissolve simply because of faulty performance. On the contrary, as a rule they endure even when they function very badly. It takes a political force majeure to bring about the break-up of a single currency area, typically without connection to monetary performance. Why, then, has the possible default of a country engaged in irresponsible fiscal policy and accounting for only 3% of the Eurozone’s GDP raised questions about ‘saving the euro’ and the survival of the Eurozone?

The issue has not received the attention it deserves. It is often simply taken for granted that the departures from the Stability and Growth Pact provide a sufficient reason for the earthquake that has shaken the whole currency area. Yet if we look around the world past and present, the mismanagement of finances by regional governments has no particular tendency to bring down entire monetary systems, far from it. In line with the usual – I think superficial – diagnosis of the ailment, proposed remedies for the Eurozone centre on strengthening the Pact, increasing joint political control over fiscal policy, and providing joint insurance against government default, or some mixture of the three. But what if a vital element of the problem is really the official doctrine that sovereign default is incompatible with the euro? What if the scale of the crisis that took place this year has resulted from financial markets’ conviction, based on this doctrine, that the future of the euro was at stake? What if assuring the long-run sustainability of the euro means convincing those markets, quite differently, that nothing as manageable as a Greek default can upset the Eurozone?

Lessons from the US

That is precisely what the US example would suggest and what I will defend. With this idea governing beliefs, the right road ahead looks quite different. It means shifting the emphasis away from avoiding government defaults toward assuring the stability and the solvency of the banking system at all times, regardless of the financial difficulties of some member governments.

In the US, default on state and municipal contractual obligations is very much a possibility whenever lower-level governments are in financial trouble; bailout cannot be taken for granted. New York City defaulted in 1975, the biggest default of all by a lower-level government unit since World War II took place in 1983 when the Washington Public Power Supply System went into bankruptcy, and Orange County defaulted in 1995. Various municipal governments have been on the verge of default at times in the last few decades, including Philadelphia and Cleveland. There is also no Stability and Growth Pact in the US. Yet financial discipline is considerably higher in the US at the state government level than in the Eurozone at the national level. All states except Vermont have balanced-budget rules; but these rules are self-imposed. It is easy to argue that this difference in fiscal discipline on the two sides of the Atlantic is related to the fact that when push comes to shove in the US and a lower-level government unit cannot or will not meet its debt obligations, the lenders can expect to take a big part of the hit.

Some rudimentary analysis is relevant. Consider any government unit unable to print money and without any prospect of a bailout. Theory tells us that credit rationing is very much a possibility. As the interest rate that such a government offers on its debt goes up, extra lending dries up completely at some point as the expected rate of return on the government debt falls. This must happen because higher nominal interest rates impair the government’s solvability and bring default nearer. Risk aversion simply lowers the interest rate at which credit rationing begins.

Suppose we compare the situation in the US and the Eurozone since the 2007-2009 financial crisis in this light. The crisis brought about dire financing problems for many lower-level government units in the US and some national governments in the Eurozone. According to the spreads on credit default swaps, California and Illinois now have a higher probability of non-performance on public debt than Portugal and Spain. This has been true for months. Consider next the difference in response in the States and Europe. Recently Illinois simply stopped paying $5 billion of bills. In June of last year California issued vouchers for wage payments. In addition, savage cuts in public services have begun and are now threatened in various states in difficulty, not only these two. Nevada has made startling reductions in spending on higher education and welfare. In the case of Portugal and Spain, nothing so drastic has happened thus far. There have been occasional spikes in interest rate spreads over German bunds of 100 to 200 percentage-points above usual levels. Both Spanish and Portuguese governments have also been forced to plan greater austerity and reduced government deficit spending. Meanwhile, they have been able and willing to keep borrowing.

Why the difference between the Eurozone and the US?

Part of the explanation may be that Portugal and Spain are more able to raise tax revenues than US states. But another part is the higher probability of a bailout in Europe. The example of Greece is to the point. Greece has been able to continue borrowing this year at interest rates typically around 200 percentage-points above Portugal and Spain on 10-year government bonds (and since May more than 500 percentage-points higher than German bunds). If you do the math, it is clear that this could never have happened without a high probability of a bailout. In fact, you do not need to do the math: there have been occasions in February/March and particularly May when some Greek issues would clearly have failed without the assurance of public lending and ECB support. If Greece can borrow on the probability of a bailout, so could Portugal and Spain.

Based on this evidence, the current Eurozone strategy of treating government default as anathema permits member governments to sink into deeper waters, weakens the forces that would otherwise exist toward self-imposed budget restraints, and thereby raises the probability of a bailout. But an actual bailout is perhaps the most likely setting for the breakdown of the Eurozone. If taxes ever need to rise all over the Eurozone in order to bail out a member government, one can easily imagine a pullout by Germany, followed by the Netherlands and Austria (if no others), in order to form a separate monetary union.[1]

What are the dangers of the opposite strategy of mimicking the US instead and moving toward heavier reliance on markets to discipline member governments and to price sovereign risk? The answer lies in the external effects of government default on the payment system and the banks, and this problem would be aggravated by contagion. But those dangers exist in the US as well. If the US federal government were to allow Illinois or California to default on state government debt in today’s circumstances of widespread financial difficulties across the states, there is a serious threat that interest premia would go up on the debt of most state governments and a wave of state defaults would follow. For this reason, the federal government might well step in. But if we look at the institutional manner in which the US deals with the problem, we find the answer to lie in country-wide prudential rules for banks and central bank powers of lender of last resort. There is no general announcement that state government default is incompatible with the dollar. Instead there is a strict separation of the issue of joint support of the financial system and joint support of financing by the sub-government units in the country. Would Europe not be wise to adopt the same strategy and to cease to conflate the two issues?

Tweaking the Pact

What this would mean, of course, is adopting Eurozone-wide prudential rules on banks, providing the ECB full powers of lender of last resort, and, very significantly, dismissing the idea that the Stability and Growth Pact is the pillar on which the whole Eurozone project stands. This idea is highly perilous.[2] Markets believe it, and at times of financial precariousness, what markets believe is extremely important. According to my proposal, the Pact could still be upheld as a code of good behaviour which improves public finances in Europe and facilitates the task of the ECB. But the basic philosophy would be that if any individual member government in the Eurozone engages in irresponsible fiscal conduct, contrary to the Pact, the creditors and its taxpayers would bear the brunt of the consequences. Everything would be done to assure the stability of the financial sector in the Eurozone and the lack of repercussions on the risk premiums that the more financially responsible member governments need to pay. Banks might be bailed out but not governments. Any aid to member governments, if it came, would not concern the euro system but the IMF or if any aid did come from the EU it would be part of a programme that could as well have existed had the euro never appeared and would be clearly sealed off.

VoxEU Editors' note: This article will appear as a roundtable discussion in Miroslav Beblavy, David Cobham and Ludovit Odor, eds., The euro area and the financial crisis, Cambridge University Press, forthcoming.

References:

Baldwin, R (2010), A re-cap of Vox columns on the Eurozone crisis” VoxEU.org, 13 May.

Blejer, M and Levy-Yeyati, E (2010), Leaving the euro: What’s in the box, VoxEU.org, 21 July.

Economist (2010), Can pay, won’t pay, June 19.

Poterba, J (1996), Do budget rules work? NBER Working Paper 5550, April.

Public Bonds (2010), Municipal bonds and defaults, downloaded 23 August.

Reinhart, C M and Rogoff, K (2009), This time is different: eight centuries of financial folly, Princeton: Princeton University Press.

Sinn, H-W (2010), Rescuing Europe, CESifo Forum, special issue, August.

Notes:

[1] Many would say that Greece has already been bailed out. But so far no holder of Greek debt has yet suffered a credit event. Further, no one outside of Greece has yet paid any taxes to fulfil a claim on Greek debt. Thus, according to my usage, no bailout has happened. However, none of the argument hinges on this choice of words.

[2] If we really think that a government default would bring the euro under, we must conclude that the euro has no long-run future ahead – that it is doomed. A reading of Reinhart and Rogoff (2009) should convince anyone.

Republished with permission of VoxEU.org

Monday, October 03, 2011

Austria and France Restricting Gold and Silver Sales

According to Mac Slavo of SHTFplan.com:
A couple of weeks ago our report that some Austrian banks had begun restricting the sale of gold and silver to 15,000 Euro (~$20,000 USD) reportedly because of money laundering issues was met with disbelief by many readers of financial news and information web sites. As we mentioned in that commentary, it is our view that governments, namely in Western nations, are making it more difficult for individuals to make gold purchases, as well as to do so anonymously.

It looks like this trend of restricting the peoples’ ability to acquire assets of real monetary value is expanding. If a recent report from France is accurate, and based on the French governments official web site it looks like it is, then as of September 1, 2011, anyone attempting to sell or purchase ferrous or non-ferrous metals, which includes gold and silver, will be required to pay for their purchase via a credit card or bank wire transfer if it exceeds 450€ (~ $600 USD).
Assuming these reports are accurate, one has to wonder what is motivating a restriction on gold and silver sales in Europe...

Source: Slavo, M (2011, September 23), Tightening the Noose: France Bans Cash Sales of Gold/Silver over $600, SHTFplan.com.

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Thursday, September 20, 2012

Central Banks Make Historic Turn

Writes Anatole Kaletsky in Reuters (2012, September 19):
When the economic history of the 21st century is written, September 2012 is likely to be recorded as a defining moment, almost as important as September 2008. This month’s historic events – Ben Bernanke’s promise to buy bonds without limit until the US returns to something approaching full employment, Angela Merkel’s support for the European Central Bank bond purchase plans and the Bank of Japan’s decision to accelerate greatly its easing program – may not seem earth-shattering in the same way as the near-collapse of every major bank in the US and Europe. Yet the upheavals now happening in central banking represent a tectonic shift that could transform the economic landscape as dramatically as the financial earthquake four years ago.
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I tend to believe that global austerity measures have yet to run their full course, especially in public sectors. Nevertheless, all indications are that central banks are seeking ways to inject liquidity into the global economy in ways that will foster consumption. Quantitative easing to date in the US has been about capitalizing producers and bankers. In contrast, QE3 appears to be solidly focused on creating demand, which is a major change...

Source: Kaletsky, A (2012, September 19), Central Banks Make an Historic Turn, Reuters.

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Thursday, June 21, 2012

A Global Perfect Storm

According to Prof Nouriel Roubini (2012, June 15):
Dark, lowering financial and economic clouds are, it seems, rolling in from every direction: the eurozone, the United States, China, and elsewhere. Indeed, the global economy in 2013 could be a very difficult environment in which to find shelter.... Batten down the hatches.
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Prof Nouriel Roubini (1959- )

I tend to agree with Prof Roubini -- now is the time to take cover, not only in Europe, but globally...

Source: Roubini, M (2012, June 15), A Global Perfect Storm, EconMonitor.

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Monday, July 09, 2012

Iceland's Success in Battling Joblessness

According to Matthew Yglesias (2012, July 9) of Slate:
Currency depreciation by no means eliminates the pain of an economic crisis. On the contrary, it makes everyone poorer. But by spreading the shock across all citizens and assets, it does a much smoother job of mitigating the secondary trauma of idleness and unemployment.
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Reykjavik, Iceland [photo by Thomas McKibbin]

Clearly, Iceland has taken the utilitarian path of doing what is best for most of its people, which is to depreciate its currency in order to reduce unemployment. In contrast, the US and Europe have generally sought to avoid expansive monetary actions that would likely reduce currency values. In the meantime, the Icelandic experience is instructive for monetary and fiscal policy-makers on both sides of the Atlantic.

Source: Yglesias, M (2012, July 9), Iceland's Success in Battling Joblessness, Slate.

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Friday, February 25, 2011

Back in the Day...

The first automobile I ever purchased was a brand new 1980 Mazda RX-7 -- here's the television commercial that no doubt caught my eye...



I drove that Mazda all over Europe (where I was assigned in the US Army) and coast-to-coast across the USA - back in the day...

Thursday, August 04, 2011

Storm Clouds Ahead

The DJIA was down 512.76 points registering a disappointing 4.31% decline for the day -- markets in Europe and Asia were also down sharply -- apparently, the world's markets are not impressed with the recent budget deal passed by Congress earlier this week -- I see storm clouds ahead...


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Wednesday, June 23, 2010

Soros on German Austerity Planning

German Chancellor Angela Merkel unveiled austerity plans earlier this month for 80 billion euros ($107 billion) in national budget cuts over the next four years. Chancellor Merkel’s planning proposal prompted this ominous response by George Soros regarding the future of the European Union:
German policy is a danger for Europe; it could destroy the European project… Right now the Germans are dragging their neighbors into deflation, which threatens a long phase of stagnation. And that leads to nationalism, social unrest and xenophobia. Democracy itself could be at risk.
The larger lesson here for the world is that monetary contraction and austerity carry political risks that may be worse than the risks of monetary expansion and inflation. The austerity hawks are real, as are the political risks…


Source: Carrel, P & Brown, S (2010, June 23), Soros Says Germany Could Cause Euro Collapse, Reuters.

Wednesday, March 17, 2010

A Global Readership

As of today, almost a third of the "hits" on The Vantage Point have come from Asia and Europe -- around half came from North America -- I guess this means that The Vantage Point has gone global!

Source: SiteMeter.com

Monday, April 27, 2009

Risk Management in Demand

As the global financial disaster continues unabated, research is beginning to percolate findings about some of the causes of the storm, as well as the precautionary measures that might avert future crises of this nature. In a recent survey of over 500 key financial executives conducted by MPI Europe (April 2009), several important views prevailed. One of the survey's strongest findings was the perceived need to develop a “risk management culture” in today’s financial institutions, including bolstering the relative power of risk management functions vis-à-vis its trading counterparts. Now, as good as that sounds, I am skeptical as to whether our financial services industry has it within itself to embed a new risk-aware culture without demonstrable intermediate measures to lead the way (after all, our world is inspired by capitalism). The good news is that several other findings were more specific and actionable. Over 75 percent of the respondents saw a shortage of sufficiently and appropriately trained personnel as having a “high impact” on creating the crisis. Additionally, a significant majority of respondents wanted to see an improvement in their “risk management applications,” to include a shift from predominantly quantitative measures toward qualitative methodologies (e.g., internal controls). Both of these latter measures are fully actionable through increased investment in risk management technologies and training. Moreover, implementing stronger spreadsheet control regimes, coupled with stricter guidelines for spreadsheet checking and auditing, are another immediate requirement. Finally, I would argue that by funding and initiating improved risk management technologies and training, executives will be taking the first vital steps toward creating the risk management culture that they seek. The recognized need for effective risk management is gaining traction in today’s financial services industry. The real question remains whether the industry’s leaders will have the courage to recognize the deficiencies of their existing risk management structures, and respond by investing in the technologies and training that can address these shortcomings.

Friday, March 04, 2011

Plagiarism is Ruinous

Need proof that plagiarism can ruin your career. Consider recent events in Europe where Karl-Theodor zu Guttenberg recently resigned his office as German Defense Minister after admitting that he plagiarized his doctoral dissertation at the University of Bayreuth.


Karl-Theodor zu Guttenberg is a notable descendant of Leopold II, Holy Roman Emperor, and Aloys II, Prince of Liechtenstein. Prior to this plagiarism scandal, Guttenberg was considered a rising star in German politics. No doubt, plagiarism is ruinous...

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Plagiarism Visualized

Saturday, June 26, 2010

Threat of Another Economic Stumble Is Real

According to Dr Norman J Ornstein of the American Enterprise Institute for Public Policy Research, the global economy remains in a state of great uncertainty:
We are nowhere near out of the woods. The danger of deflation is still there. The risk of another stumble in our economy is real, including the continuing fragility of community banks over commercial real estate loans. The global economy remains fragile, with Greece the leading edge of what could become a set of dominoes toppling in Europe as creditors become nervous and raise the premium on loans from several shaky countries, adding to their woes and endangering the euro zone and by extension the rest of us.
In the mean time, the political debate over austerity measures versus monetary expansion remains as real today as it did during the 1930's...

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Protestors at the G20 Toronto Summit

Source: Ornstein, N J (2010, June 23), Threat of Another Economic Stumble Is Real, American Enterprise Institute.

Tuesday, August 11, 2009

More Small Businesses Needed

A new report by Dr John Schmitt and Nathan Lane of the Center for Economic and Policy Research In Washington, DC (2009, “An International Comparison of Small Business Employment”) dispels some misconceptions about the scale of small business employment in the US. According to the report, the US has a much smaller small-business sector (as a share of total employment) than Canada and essentially all of Europe. The authors suggest that the relatively high direct cost of health care discourages small business formation in the US. In contrast, small businesses and start-ups in other countries tend to rely on government-funded health care systems. As of 2007, the US self-employment rate was well below that of other nations.


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Tuesday, December 21, 2010

Well Said...

"I'd like people to remember me as someone who was good at his job and seemed to mean what he said."

~ Jimmy Stewart

Brig Gen James M Stewart, USAF (1908-1997)

Brig Gen Stewart enlisted in the US Army as a private in 1941 and rose to the rank of Colonel in the US Army Air Corps during World War II with credit for flying 20 combat missions over Europe. Following the war, Brig Gen Stewart served in the US Air Force Reserve achieving flag officer rank before his retirement in 1968.

Visit the Jimmy Stewart Museum in Indiana, Pennsylvania.

Thursday, September 13, 2012

US Federal Reserve Announces QE3

I am not surprised that the Fed has embarked on QE3, especially given the complete failure of America to create new jobs for the future -- that failure has the potential to overthrow the USA as we know her, something that economists simply cannot comprehend -- said another way, QE3 is required to avert the overthrow of the USA by fascists and socialists -- the same is true in Europe, so I expect to see the ECB announcing monetary expansions as well -- politics always wins over economics -- always.

US First-Class Postage Stamp (1998)

The jobs that America will create will be low paying -- while the number of jobs will increase, real working wages will continue to stagnate at late 1960's levels through the remainder of the century.

The good news is that those who have been buying up cheap equities will see their fortunes rise in the short-run -- assuming that the amount of QE3 required to restore employment growth exceeds a trillion dollars, at least some of that money will find its way into equities.

Watch for cries for capital flight legislation (in one or more of its sinister forms) to appear in the headlines by early 2013 -- also, keep an eye on oil prices, and to some extent gas prices -- finally, watch for global skill poachers to appear in the US seeking to hire professional atheletes, moviestars, skilled surgeons, top scientists, and skilled engineers to work in Asia and elsewhere, either in person or remotely.

We should also keep an eye on the Chinese who are likely to begin buying up equities in the US with abandon, including equity positions in America's prized corporations such as Apple, Cisco, and Intel -- stock prices will surge in the short-term.

Accredited investors stand to win big -- world-class skills will likely earn even higher premium wages in the coming year -- everyone else should remain under cover.

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