Archive for the ‘Interest Rates’ Category

Only a Half Trillion Dollars

Thursday, July 24th, 2014

It’s a sign of how much trouble we’re in when a budget deficit of a half trillion dollars seems like fiscal restraint.

It is progress, given that annual budget deficits were running above $1 trillion a year throughout President Obama’s first term and have been as high as $1.4 trillion.  And it could have been worse.  Recall the effort made by President Obama to stop the automatic spending cuts that took place when sequestration was adopted.

But a half trillion dollars is still a mountain of money.  It helps to give the number some context.CBO Chart

To reach a half trillion dollars, you would have to spend $8 per second beginning with the year 0 and continue spending through today.  If you had a stack of $1 bills adding up to $500 billion and were able to put them one on top of another, the stack would be 34,000 miles high.

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The QE Apocalypse

Friday, July 11th, 2014

The end is near.

The Federal Reserve Board has now put a date on the quantitative easing apocalypse, letting us know that bond buying will end in October – unless the central bank changes its mind, of course.

The October ending is not unexpected.  The Fed has been cutting back bond purchases by $10 billion a month since last year and it doesn’t take a math wizard to figure out that there will be nothing left to taper post-October.

Yet this news, reported in the just-released minutes to last month’s meeting of the Federal Open Market Committee, is being treated as a revelation.  It was, for example, the lead story in The Wall Street Journal, which typically doesn’t lead with news that was discussed last year and made official at a meeting that took place a month ago. Portugal

The real news, though, is what wasn’t discussed – the end of near-zero interest rates.  As a result, rather than pushing yields up and bond prices down, release of the meeting minutes had the opposite impact.

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Prozac Nation

Friday, June 27th, 2014

It’s all stress-free bliss these days … at least for anyone who’s not paying attention.

Has someone been putting anti-depressants in the water supply?  That’s one way to explain Wednesday’s non-reaction to the report that the economy shrank by 2.9% in the first quarter – not the 1% drop previously reported.

It would also explain continued investor complacency reported last week, with the VIX (volatility index) approaching single digits.  And it would explain the plunge in junk bond yields to 5.6%, which is a full 3.4% points lower than the decade-long average of 9%.

GDP GrowthYet investors showed that they still have a pulse, when they took the Dow down 100 points after James Bullard, president of the St. Louis Federal Reserve, announced that an interest rate hike may take place in the first quarter of 2015.

So consider this in context.  In addition to the slumping economy, we have Russia’s continued takeover of Ukraine, which is now being overshadowed by the continued takeover of Iraq by Muslim terrorists known as ISIS and the possibility of U.S. military intervention.  We have civil war continuing in Syria and continued nuclear development in Iran, in spite of the lifting of sanctions.  We have U.S. veterans in need of medical treatment being ignored while the Veterans Administration fudges numbers.  We have the missing e-mails of Lois Lerner and six other IRS employees who allegedly targeted conservative groups.  We have continuing fallout in the healthcare industry from the pains of implementing Obamacare.  We have a stock market so overblown that price-to-earnings ratios are at levels higher than they’ve been through 89% of the history of the S&P 500.

So what’s moving the market?  A statement made by a Fed board member that repeats a statement he previously made.

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Mario the Magnificent

Friday, June 6th, 2014

It will take more than higher prices to cure what ails the European economy, but Wall Street reacted to the European Central Bank’s inflation-boosting efforts by setting new records yesterday.

Action by the ECB has been widely anticipated since last month, when ECB President Mario Draghi announced that the ECB would be “comfortable acting” at this month’s meeting.  With a report this week that Eurozone inflation was just 0.5%, action by the ECB was all but certain.  The ECB’s target rate of inflation is just under 2%.

Mario Draghi

Mario Draghi

Anticipation of ECB action has been helping to prop up the U.S. market at a time when the Federal Reserve Board is winding down its quantitative easing program by reducing its purchase of bonds by $10 billion per month.  Apparently, as long as someone is following easy money policies, the markets are happy.

The actions announced by ECB President Mario Draghi did not include bond buying (although there are no Eurozone bonds).  That’s in keeping with previous actions by Draghi, who previously relied on “forward guidance” to boost European markets and achieve monetary goals.

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Fundamentally Flawed

Friday, March 14th, 2014

Imagine if the outcome of a football game depended more on the weather than on the talent of the players.

Weather, indeed, can have an impact and should, but its role is usually to test the talents of the players, not to be the primary factor in the outcome.  When it is the primary factor, anything can happen.  In such cases, would you put money on the game?

The weather is not the number one factor affecting the performance of the stock market these days, but neither is the talent of the players – that is, the fundamental performance of publicly held companies.

In recent years, The Federal Reserve Board has held sway over the market’s performance via quantitative easing, although under former Chair Ben Bernanke, it was somewhat more predictable than the weather.AUDJPY

Now, with tapering under way, that may change (we’ll see, as many expect plenty of bond buying ahead).  Yet other world events may replace QE in determining the performance of the market.  That means potentially greater volatility than we’ve experienced in the easy money era.

It doesn’t take much to affect today’s global economy, especially when the impact of events is amplified by high-frequency trading.  Consider, for example, the impact of the falling yen and Australian dollar on the S&P 500.

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Getting Your Bond Portfolio in Shape for 2014

Friday, December 13th, 2013

It’s time to start thinking about New Year’s resolutions.  It’s an American tradition to resolve to lose weight, exercise regularly, be nicer, work harder and give up everything you enjoy.

But who are we kidding?  Such resolutions are made to be broken.  So this year, why not make a resolution and keep it?  This year, resolve to pay attention to bonds.

That’s right.  Boring old bonds.  They don’t have the flash that stocks do, they lack the immediate thrill that cash can provide because of its liquidity and they’re not as mysterious as alternatives.  Yet, if you give them a chance, bonds can play a major role in ensuring that your retirement will be secure.Cost of zero interest rate

Bonds are not without risk – especially in a rising interest rate environment – but they can help you protect your principal, produce income and add to your total return.

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The Beat Goes On

Friday, September 20th, 2013


From a future article in The New York Times:

Janet Yellen, retiring chair of the Federal Reserve Board, announced that The Fed’s quantitative easing program, aka QE12, is close to meeting its goal of achieving a 6.5% unemployment rate. Yellen

With The Fed’s bond portfolio exceeding $10 trillion, The Fed is running out of government bonds to buy, but Chairwoman Yellen said she’s confident the U.S. Treasury will pick up the pace at which it issues new bonds.

Chairwoman Yellen praised the quantitative easing program, which she said has managed to bring the unemployment rate down to 6.8% from a peak of nearly 10% in just 12 years.  QE has also helped the economy grow at a rate of nearly 2% a year.

During a brief press conference, for the first time since the quantitative easing program began, she was asked, “How does buying bonds create jobs?”

She explained that QE obviously decreased unemployment, since the unemployment rate exceeded 9% when QE began and is now approaching 6.5%.

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America – The New Europe?

Friday, September 13th, 2013

Defaulting on bond payments isn’t just for Europe anymore.  Detroit and several cities in California have defaulted on bond payments.  Now Puerto Rico may be in trouble, as its bonds are trading as if they are going to default.

This week, the yield on Puerto Rico’s general obligation bonds (PR G.O.) pushed up over 10%.  That led the Government Development Bank on Tuesday to announce that it would scale back bond sales for the rest of 2013.

Puerto Rico’s bonds offer a double tax advantage, which should help hold their yield down.  Yet when considered on a tax-equivalent basis, PR G.O. yields this week exceeded CCC corporate yields, based on the Merrill CCC Index YTW.

Puerto Rico’s junk bond status reflects a weak economy, but it also signals that the island is in deep financial trouble.  And the problems extend beyond Puerto Rico, given that it is part of a growing list of state and local governments with financial troubles.

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At The Fed, Saying Trumps Doing

Tuesday, September 3rd, 2013

President Obama’s campaign slogan for last year’s election was “Forward.”  The Federal Reserve Board’s slogan in the coming months may be “forward guidance.”

According to Goldman Sachs, The Fed is expected to begin tapering its bond buying in September, but will place more of an emphasis on “forward guidance.”

So what exactly is “forward guidance?”  Here’s how The Fed defines it:Goldman 1

“Through ‘forward guidance,’ the Federal Open Market Committee provides an indication to households, businesses, and investors about the stance of monetary policy expected to prevail in the future.  By providing information about how long the Committee expects to keep the target for the federal funds rate exceptionally low, the forward guidance language can put downward pressure on longer-term interest rates and thereby lower the cost of credit for households and businesses, and also help improve broader financial conditions.”

In other words, it’s pontificating and predicting.

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Take Advantage of Rising Interest Rates by Understanding Duration

Friday, June 7th, 2013

Recently, there has been a lot of news about rising interest rates ending the bond rally.

Investors who have a significant percentage of their investments in bonds may be getting nervous, but there’s a simple strategy for protecting principal and taking advantage of increasing interest rates.

Bonds generally make up a significant portion of a diversified portfolio, so if the bond rally is over, it is important to be positioned in bonds that will maintain their value in a rising interest rate environment.

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