Few investors today would consider investing in long-term Treasury bonds.
The yield curve, which measures the spread between interest rates for short-term and long-term bonds, is not as flat as it has been in recent years, but that’s faint hope for investors.
A 10-year Treasury is still yielding less than 3% interest. If the Federal Reserve Board achieves its goal of pushing inflation up to 2%, the real interest on a 10-year bond purchased today will be under 1%, payable at maturity.
If the Fed overshoots its goal and inflation moves higher, which is highly likely, a 10-year bond would produce a negative yield. What’s the probability that inflation will remain lower that the current yield on a 10-year Treasury over that entire period?
The U.S. has not had a period when inflation remained below 3% for a 10-year period since the days of the Great Depression. During the period of recession then slow growth that we’ve experienced since the financial crisis began in 2008, inflation has remained low and the Fed’s focus has been on fighting deflation. But when the economy improves and normal growth returns, inflation is likely to move significantly higher, as higher inflation is a byproduct of a healthy economy.
“The markets are rigged. … These firms make their money by front-running trades. They’re using their speed advantage to buy shares first and then selling them back at a higher price. The result is higher prices for investors in those shares. That’s rigged.” Michael Lewis
Based on the Federal Reserve Board’s actions of the past five years, you may have thought that “market rigging” was a good thing. After all, a great deal of wealth has been created from the Fed’s bond buying – although, granted, almost all of it went to those who were already wealthy.
But suddenly, high-frequency trading is being charged with rigging the markets and it’s creating a bit of a furor. Apparently the Fed is responsible for good rigging and HFT is responsible for bad rigging. Consider this week’s HFT-related news:
Michael Lewis, author of Moneyball, was interviewed by “60 Minutes” in advance of publication of his book, Flash Boys, in which he makes the case that HFT rigs the markets against the small investor.
There was the heavy backlash from those who disagree with his conclusion … that is, the people who make money off of high-frequency trading. Supporters contend that HFT has created liquidity and reduced the cost of trading for small investors. In other words, the market is rigged against small investors, but it costs them less to make a trade. Yippee!!
Then there’s The Wall Street Journal’s announcement this week that HFT is being investigated by the FBI – not the Securities and Exchange Commission (although it is participating in the investigation), the FBI. You know, the guys who investigate bank robberies, money laundering, drug cartels and the Mafia. And now you can add high-frequency trading to that list. Apparently, insider trading was already taken. (more…)
While the week’s biggest news has taken place in Russia, Ukraine and China, it’s the news out of the Federal Reserve Board’s Federal Open Market Committee that’s most in need of translation.
The Fed regularly uses language that no one understands, because if America’s taxpayers really knew what’s been happening, they’d totally freak. Keep that in mind and proceed with caution as we attempt a translation of Fedspeak from new Chair Janet Yellen’s first press conference:
“ … the FOMC’s outlook for continued progress toward our goals of maximum employment and inflation returning to two percent remains broadly unchanged.”
The dots are moving and we’re not achieving the results we expected, but you won’t hear it from me.
“Unusually harsh weather in January and February has made assessing the underlying strength of the economy especially challenging.”
The economy still stinks, but we’re going to blame it on the weather.
The unemployment rate, at 6.7 percent, is three‐tenths lower than the data available at the time of the December meeting. Further, broader measures of unemployment such as the U6 measure, which includes marginally attached workers and those working part‐time, but preferring full‐time work, have fallen even more than the headline unemployment rate over this period. And labor force participation has ticked up.
You’ve probably heard that corporate America is swimming in cash. Something like $4 trillion worth of it. And once corporate America starts spending it, the economy will boom again, jobs will be created, GNP will soar and the stock market will boom ever higher.
Corporate cash is the good news. Corporate debt is the bad news.
While cash is at record levels, corporate debt now exceeds the level it was at in 2008 and 2009. In case your memory is really short, that’s when America was wondering whether its financial system would survive.
But temper your nostalgia for those bad old days. When we say “exceeds,” we mean that corporate debt is 35% higher than it was then.
Net debt – what you get when you subtract cash from total debt – has been climbing steadily for American companies since 1998, as the chart shows. It doesn’t mean corporate America is insolvent (not yet, anyway), but it does have nasty implications for future corporate growth, profitability, unemployment and income growth.
Given all of that cash on hand, some are making heady predictions about accelerating capital expenditures. Goldman Sachs’ David Kostin predicted that capex spending will grow 9% in 2014, compared with 2% growth in 2013.
He may be right, given the need to replace aging and outmoded equipment, but a prediction is only a prediction. And more capex spending will mean less cash for paying down corporate debt.
Russian President Vladimir Putin is a busy man. He’s found time to prop up Syrian dictator Bashar Assad, negotiate a face-saving chemical weapons deal with President Obama and support violence against Ukrainians, all while overseeing the construction of the most expensive Olympic Village in the history of the games.
The Olympic Village at Sochi had a projected cost of $12 billion. The actual cost was $50 billion. So no more complaining about The Big Dig. It could have been worst.
And, like The Big Dig, all that money failed to buy quality construction. Stories abound of shoddy construction and faulty work. The Olympic Village is more like a Potemkin Village.
At the Olympics, color, pageantry and the world’s best athletes draw the television cameras, while a few hundred kilometers away, the Ukrainian government, with help from the Russian government, is killing its people. This week, violence in Ukraine was the worst it’s been since the breakup of the Soviet Union.
As with Syria, the U.S. is leading from behind. While the European Union has at least announced sanctions, the U.S. is only considering sanctions. President Obama denounced Ukraine violence “in the strongest terms,” but talking is the weakest action.
With all of the talk in Washington about equality, you have to wonder how the gap between rich and poor has widened to the point where even The New York Times is questioning the future survival of the middle class.
Some have, indeed, made the transition from middle class to upper class and are enjoying a more comfortable lifestyle. They may not be part of the 1%, but they’ve broken away from the middle.
The New York Times noted that, “In 2012, the top 5 percent of earners were responsible for 38 percent of domestic consumption, up from 28 percent in 1995 … Even more striking, the current recovery has been driven almost entirely by the upper crust … Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.”
Put aside your class envy for a minute, though, and recognize that consumer spending by the top 5 percent is keeping the economy out of a recession – albeit, the current recovery has been so weak we may as well be in a recession.
The Great Divide
And while some are moving up, many more are falling down, creating a greater divide than ever between rich and poor. Consider a few statistics from a cheery blog called, The Economic Collapse (and republished on Zerohedge): (more…)
President Obama announced during this week’s State of the Union address that he is going to bypass Congress and issue more executive orders during the last three years of his presidency.
You might think that sounds like a dictatorship. After all, our government was formed around a foundation of checks and balances, with Congress and the judicial branch of government keeping the President from acting on his own. He’s not a king, a tyrant or a despot. He’s president of a democratic republic, not a banana republic.
But think about it. We’ve been waiting for years for Congress to handle tough issues like immigration reform, tax reform, Social Security reform, Medicare reform, trade reform and budget reform. Nothing ever happens. When Congress does handle tough issues, we end up with laws that run more than 2,000+ pages long, that no one understands and that bear little resemblance to their original intent.
Do we really want another Affordable Care Act or another Dodd-Frank Consumer Protection Act? Do we really want all of those milquetoast compromises? And what about the billions in pork that have to be added to even the most basic bill before Congress approves it?
The government’s stimulus programs are not working and neither are a growing number of Americans.
In October, we noted that the number of Americans not working exceeded 101 million, setting a record. But records are made to be broken and the number today is even higher – even while the official unemployment rate continues to drop.
When we wrote in October, the U.S. Bureau of Labor Statistics (BLS) reported that 90,609,000 Americans who are 16 or older were neither working nor looking for work. Since then, the number has increased to 91,808,000.
But that number doesn’t include unemployed Americans who are looking for work, which was 10.4 million in December, bringing the total number of Americans who are not working up to more than 102 million. That’s an addition of nearly 1 million since October … during what has widely been viewed as a period of economic recovery.
The civilian labor force fell from 155.3 million to 154.9 million in December, bringing the labor participation rate down from 63.0% to a 35-year low of 62.8%.
While the BLS expected 197,000 jobs to be created in December, only 74,000 jobs were created. That’s a miss of more than 100,000 jobs. The BLS says inclement weather affected the number of forced part-time jobs being created. “Forced part-time” jobs are those where a former marketing manager who has been out of work for two years runs out of money and takes a position working the deep fryer at Wendy’s because there are no other options.
That was the market’s initial reaction anyway. In fact, the market viewed this week’s announcement as a positive, setting yet another record. Conversely, when Fed Chairman Ben Bernanke first brought up the possibility of a taper in May, he sent the market reeling. So talking about buying bonds has a greater impact than actually buying bonds. Who knew?
Some believe the stock market rallied because The Fed made it clear that it will remain accommodative and that interest rates will remain near zero until the apocalypse. That being the case, though, why did bond yields soar? Go figure.
The taper announcement is not a big deal, though, because everyone knew it was coming – everyone except for the economists whose job it is to tell us when tapering is coming. First they guessed wrong that it was coming in October, then they guessed wrong that it wasn’t coming in December. Keep that in mind when you hear them tell you the economic benefits of more bond buying and more government spending.
Over the past couple of years, I’ve preached caution. Corporate profits were down and unemployment was up. The economy wasn’t growing, but the federal debt was. Iran was developing nuclear capabilities while the entire continent of Europe was going bankrupt. And investors were still shell shocked from the 2008 financial meltdown.
Not a good time to invest in stocks. Not a good time to invest, period. Common sense dictated restraint.
And the federal government’s answer was to spend as much as possible, while printing more money and buying more bonds than at any time in history. After record stimulus spending and $4 trillion in bond buying, common sense would suggest high inflation and a sagging stock market; a good time to invest in gold and other hard assets.
Brenda Wenning has 22 years of investment management and security analysis experience. Her company, Wenning Investments, applies the same principles discussed in this blog.
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