Risk/Reward Vol. 409
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Not much happened in the equity markets this week. They closed slightly negative but remain up double digits year to date and up 5% for the past 12 months. This annualized return is not spectacular given the performance of the past decade, but is approximately twice what one can achieve in short to medium term bonds. As loyal readers know, I remain disappointed in the returns available via bonds which have yielded very little over the past ten years. The average annual interest rate in US government securities was 6.6% in 2001. Today it is 2.5%. Despite some upward movement in 2018, rates appear destined to remain LESS THAN HALF their long term average for the foreseeable future.
Why, you ask?
As detailed previously, central banks world wide have taken extraordinary steps since the financial crisis of 2008 to suppress interest rates. They manipulated short term rates and then literally printed money which they used to outbid all other buyers of longer term bonds, mortgages and other debt instruments. (Remember, the higher the bid the lower the yield.) This unprecedented move, termed quantitative easing, crowded all other potential buyers out of these securities. After all, who wants a negative return on one's money, a situation that has persisted in Europe and Japan for several years. Cheap debt has been viewed traditionally as a short term means of spurring consumer spending and corporate investment. But cheap debt orchestrated on a massive scale and a coordinated fashion has proven addictive. We are now hooked.
Here are some facts. Total global debt (government, corporate and consumer) reached $244trillion in 2018 compared to total global income (GDP) of $85 trillion, a ration of 3 to 1. The US is even worse: $69trillion of total debt to income of $19.4 trillion or 3.6 to 1. From 1950 to 1980, our debt to equity ratio was 1.5. Not only is our government mired in debt, so are our corporations, where the debt load is up 50% since 2010, and our households. Can you imagine the drag on our economy should interest rates DOUBLE or TRIPLE to their long term averages? This is the real reason the Fed has curtailed its previously announced plan to return to normal rates. No one can afford it. God forbid we have a recession. We have little if any room to lower rates further. To paraphrase a line from the famous story of addiction, Manchild in the Promised Land, "We gotta a jones."
Sunday, March 3, 2019
Sunday, February 24, 2019
February 24, 2019 TINA Again
Risk Reward
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I have not published for 3 weeks. During that time I have attended subscriber events in South Haven, MI, Frisco, CO and Orlando, FL. Conditions favorable to equites have not changed. TINA is alive and well. The major indices are up double digits for the year and nearly 5% in the past 12 months. The Federal Reserve continues to skew dovish, a fact made more evident by meeting minutes published this week. Therein the Fed reiterated 1) that it will end its balance sheet reduction in 2019 and 2) it sees no need to lower the Fed Funds rate anytime soon. The cheap money punch bowl remains; the effect of which I described in detail in Vol. 407 redisplayed below.
Adding to the upward tilt of the exchanges is encouraging news that a long term trade deal with China could actually come to pass. Lastly, surprisingly, stocks remain undisturbed by the Democratic controlled House of Representatives which has not moved forward to impeach The Donald. Members must be awaiting the Mueller report which rumor has being completed in the near future. But with a new Attorney General in office some question whether the Mueller report, at least in its raw form, will see the light of day. This is causing my old law school professor (and Clinton crony) Walter Dellinger to flip out on Twitter. His paroxysms are worth a look. Stay tuned.
Risk/Reward Vol. 407
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL RELFECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Two news items rallied stocks on Friday resulting in the major indices remaining flat for the week. The first was the temporary settlement of the government shut down. That was inevitable. The second was less touted but will have a much more lasting impact on investors. In Friday's Wall Street Journal it was reported that the Federal Reserve is weighing an earlier than expected end to its portfolio reduction program. This is a disappointment for fixed income investors, such as yours truly. It signals that the era of cheap and plentiful credit may continue. If true, stock buy backs fueled by inexpensive borrowing will continue, much to the benefit of stockholders. TINA (There Is Not Alternative--to stocks) may be returning.
Why does the curtailment of the Fed's portfolio reduction program portend poorly for fixed income (bond) investors? A little history is in order. In the aftermath of the 2008 financial crisis, the Federal Reserve reduced short term (Fed Funds) interest rates to near zero with the dual purpose of reducing the cost of borrowing and discouraging savings. The intention was to spur consumer consumption and concomitantly economic growth. Believing that that effort was insufficient, the Fed also reduced longer term interest rates by literally printing more money, increasing its balance sheet from $800 billion to $4.5 trillion and outbidding virtually every other buyer of long term Treasury bonds and mortgages. This effort caused the interest rates borne by those securities to plummet. (Remember, the higher the bid price, the lower the interest rate.) The impact of this "Quantitative Easing" was monumental. The interest rate on the US Ten Year Bond plummeted from 4- 5% to well below 2%. It now rests at a meager 2.75%. Similar QE efforts around the world had an even greater impact with much of the world's sovereign debt yielding a NEGATIVE return (invest 100 Euros and get 98 back in ten years). In 2018, many central banks realized that government intervention via lowering short term rates and quantitative easing was not sustainable. Several such banks announced that overnight rates would gradually increase, that QE would end and that they would start selling their portfolio of bonds into the market. The obvious impact of these efforts would be and was a rise in interest rates across the board---a return to normalcy if you will.
But Friday's news story from the Fed (and a similar one reported earlier in regard the European Central Bank) plus a previously announced halt to short term rate increases in 2019 are nothing short of a reversal of the decisions made in 2018. With the economies of the world doing well, one is left to wonder why. The answer is obvious, if underreported. In cheapening the cost of money (lowering rates) and printing money this past decade, central banks have created a debt bubble of historic proportions. Global sovereign (government) debt is an astounding $66Trillion or 80% of global GNP. The situation in the US is just as bleak. In 2007 before the financial crisis and the Fed's financial engineering projects, the US national debt was $9Trillion which was serviced by income tax collections of $1.5Trillion. Currently, the US debt is $22Trillion (2 1/2 times what it was in 2007) serviced by $2.5Trillion in income tax collections of which nearly 15% is devoted to interest payments. If the interest rate on the US debt were to double (which it would if rates were normal), debt service would consume 30% of tax revenue. In other words, we couldn't service our debt and otherwise run our government. Duh! Given this upward spiral of debt, logic dictates that central banks will do even more to suppress rates. Bond holders may be lucky to get their principal back--- let alone any interest. Think not? Take a look at Puerto Rican bonds. Very depressing. I may have to rethink my fixed income strategy.
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
I have not published for 3 weeks. During that time I have attended subscriber events in South Haven, MI, Frisco, CO and Orlando, FL. Conditions favorable to equites have not changed. TINA is alive and well. The major indices are up double digits for the year and nearly 5% in the past 12 months. The Federal Reserve continues to skew dovish, a fact made more evident by meeting minutes published this week. Therein the Fed reiterated 1) that it will end its balance sheet reduction in 2019 and 2) it sees no need to lower the Fed Funds rate anytime soon. The cheap money punch bowl remains; the effect of which I described in detail in Vol. 407 redisplayed below.
Adding to the upward tilt of the exchanges is encouraging news that a long term trade deal with China could actually come to pass. Lastly, surprisingly, stocks remain undisturbed by the Democratic controlled House of Representatives which has not moved forward to impeach The Donald. Members must be awaiting the Mueller report which rumor has being completed in the near future. But with a new Attorney General in office some question whether the Mueller report, at least in its raw form, will see the light of day. This is causing my old law school professor (and Clinton crony) Walter Dellinger to flip out on Twitter. His paroxysms are worth a look. Stay tuned.
Risk/Reward Vol. 407
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL RELFECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Two news items rallied stocks on Friday resulting in the major indices remaining flat for the week. The first was the temporary settlement of the government shut down. That was inevitable. The second was less touted but will have a much more lasting impact on investors. In Friday's Wall Street Journal it was reported that the Federal Reserve is weighing an earlier than expected end to its portfolio reduction program. This is a disappointment for fixed income investors, such as yours truly. It signals that the era of cheap and plentiful credit may continue. If true, stock buy backs fueled by inexpensive borrowing will continue, much to the benefit of stockholders. TINA (There Is Not Alternative--to stocks) may be returning.
Why does the curtailment of the Fed's portfolio reduction program portend poorly for fixed income (bond) investors? A little history is in order. In the aftermath of the 2008 financial crisis, the Federal Reserve reduced short term (Fed Funds) interest rates to near zero with the dual purpose of reducing the cost of borrowing and discouraging savings. The intention was to spur consumer consumption and concomitantly economic growth. Believing that that effort was insufficient, the Fed also reduced longer term interest rates by literally printing more money, increasing its balance sheet from $800 billion to $4.5 trillion and outbidding virtually every other buyer of long term Treasury bonds and mortgages. This effort caused the interest rates borne by those securities to plummet. (Remember, the higher the bid price, the lower the interest rate.) The impact of this "Quantitative Easing" was monumental. The interest rate on the US Ten Year Bond plummeted from 4- 5% to well below 2%. It now rests at a meager 2.75%. Similar QE efforts around the world had an even greater impact with much of the world's sovereign debt yielding a NEGATIVE return (invest 100 Euros and get 98 back in ten years). In 2018, many central banks realized that government intervention via lowering short term rates and quantitative easing was not sustainable. Several such banks announced that overnight rates would gradually increase, that QE would end and that they would start selling their portfolio of bonds into the market. The obvious impact of these efforts would be and was a rise in interest rates across the board---a return to normalcy if you will.
But Friday's news story from the Fed (and a similar one reported earlier in regard the European Central Bank) plus a previously announced halt to short term rate increases in 2019 are nothing short of a reversal of the decisions made in 2018. With the economies of the world doing well, one is left to wonder why. The answer is obvious, if underreported. In cheapening the cost of money (lowering rates) and printing money this past decade, central banks have created a debt bubble of historic proportions. Global sovereign (government) debt is an astounding $66Trillion or 80% of global GNP. The situation in the US is just as bleak. In 2007 before the financial crisis and the Fed's financial engineering projects, the US national debt was $9Trillion which was serviced by income tax collections of $1.5Trillion. Currently, the US debt is $22Trillion (2 1/2 times what it was in 2007) serviced by $2.5Trillion in income tax collections of which nearly 15% is devoted to interest payments. If the interest rate on the US debt were to double (which it would if rates were normal), debt service would consume 30% of tax revenue. In other words, we couldn't service our debt and otherwise run our government. Duh! Given this upward spiral of debt, logic dictates that central banks will do even more to suppress rates. Bond holders may be lucky to get their principal back--- let alone any interest. Think not? Take a look at Puerto Rican bonds. Very depressing. I may have to rethink my fixed income strategy.
Sunday, January 27, 2019
January 27, 2019 Return of TINA
Risk/Reward Vol. 407
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL RELFECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Two news items rallied stocks on Friday resulting in the major indices remaining flat for the week. The first was the temporary settlement of the government shut down. That was inevitable. The second was less touted but will have a much more lasting impact on investors. In Friday's Wall Street Journal it was reported that the Federal Reserve is weighing an earlier than expected end to its portfolio reduction program. This is a disappointment for fixed income investors, such as yours truly. It signals that the era of cheap and plentiful credit may continue. If true, stock buy backs fueled by inexpensive borrowing will continue, much to the benefit of stockholders. TINA (There Is Not Alternative--to stocks) may be returning.
Why does the curtailment of the Fed's portfolio reduction program portend poorly for fixed income (bond) investors? A little history is in order. In the aftermath of the 2008 financial crisis, the Federal Reserve reduced short term (Fed Funds) interest rates to near zero with the dual purpose of reducing the cost of borrowing and discouraging savings. The intention was to spur consumer consumption and concomitantly economic growth. Believing that that effort was insufficient, the Fed also reduced longer term interest rates by literally printing more money, increasing its balance sheet from $800 billion to $4.5 trillion and outbidding virtually every other buyer of long term Treasury bonds and mortgages. This effort caused the interest rates borne by those securities to plummet. (Remember, the higher the bid price, the lower the interest rate.) The impact of this "Quantitative Easing" was monumental. The interest rate on the US Ten Year Bond plummeted from 4- 5% to well below 2%. It now rests at a meager 2.75%. Similar QE efforts around the world had an even greater impact with much of the world's sovereign debt yielding a NEGATIVE return (invest 100 Euros and get 98 back in ten years). In 2018, many central banks realized that government intervention via lowering short term rates and quantitative easing was not sustainable. Several such banks announced that overnight rates would gradually increase, that QE would end and that they would start selling their portfolio of bonds into the market. The obvious impact of these efforts would be and was a rise in interest rates across the board---a return to normalcy if you will.
But Friday's news story from the Fed (and a similar one reported earlier in regard the European Central Bank) plus a previously announced halt to short term rate increases in 2019 are nothing short of a reversal of the decisions made in 2018. With the economies of the world doing well, one is left to wonder why. The answer is obvious, if underreported. In cheapening the cost of money (lowering rates) and printing money this past decade, central banks have created a debt bubble of historic proportions. Global sovereign (government) debt is an astounding $66Trillion or 80% of global GNP. The situation in the US is just as bleak. In 2007 before the financial crisis and the Fed's financial engineering projects, the US national debt was $9Trillion which was serviced by income tax collections of $1.5Trillion. Currently, the US debt is $22Trillion (2 1/2 times what it was in 2007) serviced by $2.5Trillion in income tax collections of which nearly 15% is devoted to interest payments. If the interest rate on the US debt were to double (which it would if rates were normal), debt service would consume 30% of tax revenue. In other words, we couldn't service our debt and otherwise run our government. Duh! Given this upward spiral of debt, logic dictates that central banks will do even more to suppress rates. Bond holders may be lucky to get their principal back--- let alone any interest. Think not? Take a look at Puerto Rican bonds. Very depressing. I may have to rethink my fixed income strategy
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL RELFECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Two news items rallied stocks on Friday resulting in the major indices remaining flat for the week. The first was the temporary settlement of the government shut down. That was inevitable. The second was less touted but will have a much more lasting impact on investors. In Friday's Wall Street Journal it was reported that the Federal Reserve is weighing an earlier than expected end to its portfolio reduction program. This is a disappointment for fixed income investors, such as yours truly. It signals that the era of cheap and plentiful credit may continue. If true, stock buy backs fueled by inexpensive borrowing will continue, much to the benefit of stockholders. TINA (There Is Not Alternative--to stocks) may be returning.
Why does the curtailment of the Fed's portfolio reduction program portend poorly for fixed income (bond) investors? A little history is in order. In the aftermath of the 2008 financial crisis, the Federal Reserve reduced short term (Fed Funds) interest rates to near zero with the dual purpose of reducing the cost of borrowing and discouraging savings. The intention was to spur consumer consumption and concomitantly economic growth. Believing that that effort was insufficient, the Fed also reduced longer term interest rates by literally printing more money, increasing its balance sheet from $800 billion to $4.5 trillion and outbidding virtually every other buyer of long term Treasury bonds and mortgages. This effort caused the interest rates borne by those securities to plummet. (Remember, the higher the bid price, the lower the interest rate.) The impact of this "Quantitative Easing" was monumental. The interest rate on the US Ten Year Bond plummeted from 4- 5% to well below 2%. It now rests at a meager 2.75%. Similar QE efforts around the world had an even greater impact with much of the world's sovereign debt yielding a NEGATIVE return (invest 100 Euros and get 98 back in ten years). In 2018, many central banks realized that government intervention via lowering short term rates and quantitative easing was not sustainable. Several such banks announced that overnight rates would gradually increase, that QE would end and that they would start selling their portfolio of bonds into the market. The obvious impact of these efforts would be and was a rise in interest rates across the board---a return to normalcy if you will.
But Friday's news story from the Fed (and a similar one reported earlier in regard the European Central Bank) plus a previously announced halt to short term rate increases in 2019 are nothing short of a reversal of the decisions made in 2018. With the economies of the world doing well, one is left to wonder why. The answer is obvious, if underreported. In cheapening the cost of money (lowering rates) and printing money this past decade, central banks have created a debt bubble of historic proportions. Global sovereign (government) debt is an astounding $66Trillion or 80% of global GNP. The situation in the US is just as bleak. In 2007 before the financial crisis and the Fed's financial engineering projects, the US national debt was $9Trillion which was serviced by income tax collections of $1.5Trillion. Currently, the US debt is $22Trillion (2 1/2 times what it was in 2007) serviced by $2.5Trillion in income tax collections of which nearly 15% is devoted to interest payments. If the interest rate on the US debt were to double (which it would if rates were normal), debt service would consume 30% of tax revenue. In other words, we couldn't service our debt and otherwise run our government. Duh! Given this upward spiral of debt, logic dictates that central banks will do even more to suppress rates. Bond holders may be lucky to get their principal back--- let alone any interest. Think not? Take a look at Puerto Rican bonds. Very depressing. I may have to rethink my fixed income strategy
Sunday, January 20, 2019
January 20, 2019 BuzzFeed
Risk/Reward Vol. 406
Positive corporate reports, encouraging news on the China negotiation front, continued expressions of rate-hike timidity by the Fed and a healthy labor market caused the indices to register their fourth consecutive week of gains. Year to date the major indices are up on average over 6% although they lag where they were a year ago by a similar percentage. This performance comes despite a continued government shut-down which the Fed has warned may negatively impact overall growth this year by as much as a half of a percent. Look for a spike if and when the standoff ends.
On the fixed income front, rates on the 10 Year continue to languish below 2.8% while bonds of durations 6 months and less continue to hold steady between 2.4 and 2.5%. This is hardly surprising considering that the Fed funds overnight rate (the shortest and ostensibly the lowest available) is between 2.25 and 2.5%. Unfortunately, I don't foresee any event that is going to cause the rates of longer duration bonds to increase. Typically, one would expect the recent stock market rally to cause rates to rise, but that has not happened this time. And for reasons discussed in the next paragraph I don't foresee the bond market becoming less attractive and thus providing a better yield. (Remember as bond prices fall, bond yields--rates--increase.)
The rattling of sabers aimed at The Donald's head continues unabated. The bombshell this week was a report issued by BuzzFeed (a Washington insider tattle sheet) that the President's former attorney, Michael Cohen (he of Stormy Daniels fame), told the Special Prosecutor that Trump instructed him to lie to Congress as to when negotiations for a Moscow Trump Tower ceased. This expose caused such a furor the Special Prosecutor's office issued a statement specifically refuting the BuzzFeed report. Nevertheless, look for Congress (specifically the Democrat controlled House) to chase this and every other allegation of Trump wrongdoing. Let's hope that Mr. Market can rise above this partisan bickering. I fear he cannot.
Positive corporate reports, encouraging news on the China negotiation front, continued expressions of rate-hike timidity by the Fed and a healthy labor market caused the indices to register their fourth consecutive week of gains. Year to date the major indices are up on average over 6% although they lag where they were a year ago by a similar percentage. This performance comes despite a continued government shut-down which the Fed has warned may negatively impact overall growth this year by as much as a half of a percent. Look for a spike if and when the standoff ends.
On the fixed income front, rates on the 10 Year continue to languish below 2.8% while bonds of durations 6 months and less continue to hold steady between 2.4 and 2.5%. This is hardly surprising considering that the Fed funds overnight rate (the shortest and ostensibly the lowest available) is between 2.25 and 2.5%. Unfortunately, I don't foresee any event that is going to cause the rates of longer duration bonds to increase. Typically, one would expect the recent stock market rally to cause rates to rise, but that has not happened this time. And for reasons discussed in the next paragraph I don't foresee the bond market becoming less attractive and thus providing a better yield. (Remember as bond prices fall, bond yields--rates--increase.)
The rattling of sabers aimed at The Donald's head continues unabated. The bombshell this week was a report issued by BuzzFeed (a Washington insider tattle sheet) that the President's former attorney, Michael Cohen (he of Stormy Daniels fame), told the Special Prosecutor that Trump instructed him to lie to Congress as to when negotiations for a Moscow Trump Tower ceased. This expose caused such a furor the Special Prosecutor's office issued a statement specifically refuting the BuzzFeed report. Nevertheless, look for Congress (specifically the Democrat controlled House) to chase this and every other allegation of Trump wrongdoing. Let's hope that Mr. Market can rise above this partisan bickering. I fear he cannot.
Sunday, January 13, 2019
January 13, 2019 Fed Speak
Risk/Reward Vol. 405
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a flat close on Friday, the year to date has been very good for Mr. Market. The Dow is up over 2.8%. The S&P is up over 3.5% and the NASDAQ is doing even better. Part of the impetus upward undoubtedly arises from improved prospects for a deal with China, but clearly the major stimulus has been indications from the Federal Reserve and its individual board members that the Fed will tread lightly in 2019 when it comes to raising interest rates. Mr. Market turned bullish on Thursday when the Fed's December minutes were released. Therein, the Fed stated that with inflation posing little threat, it could afford to be patient with rate increases. Moreover, given the upheaval in the market experienced as 2018 closed, the Fed admitted that its path for normalizing rates was less clear than it had been in October.
As it now stands, the Fed futures are predicting NO interest rate hikes at all in 2019. Thus those investors counting on higher rates in the coming months (read, me) may be disappointed. As a consequence it is not surprising that money flows have weighed heavily on the equity side these past several days. That said, it is hard for me to conclude that there will be no rate hikes given that the dot plot issued on the same day that the December Fed meeting was held showed a consensus of two rate hikes in 2019. Huh? Maybe the Fed should just hold its tongue and let its actions speak.
Even if rates do not increase, it is difficult for me to see how the stock market is going to provide much of a return this year. Led by Apple, 72 of the S&P 500 companies issued earnings warnings, twice as may as have issued positive guidance. And then there is the matter of The Donald and his enemies in the House of Representatives. God only knows where that will lead. Time will tell. Both the Dow and the S&P sit 6.5% lower than they did last year at this time which indicates to me that despite a good couple of weeks, winter is upon us
THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
Despite a flat close on Friday, the year to date has been very good for Mr. Market. The Dow is up over 2.8%. The S&P is up over 3.5% and the NASDAQ is doing even better. Part of the impetus upward undoubtedly arises from improved prospects for a deal with China, but clearly the major stimulus has been indications from the Federal Reserve and its individual board members that the Fed will tread lightly in 2019 when it comes to raising interest rates. Mr. Market turned bullish on Thursday when the Fed's December minutes were released. Therein, the Fed stated that with inflation posing little threat, it could afford to be patient with rate increases. Moreover, given the upheaval in the market experienced as 2018 closed, the Fed admitted that its path for normalizing rates was less clear than it had been in October.
As it now stands, the Fed futures are predicting NO interest rate hikes at all in 2019. Thus those investors counting on higher rates in the coming months (read, me) may be disappointed. As a consequence it is not surprising that money flows have weighed heavily on the equity side these past several days. That said, it is hard for me to conclude that there will be no rate hikes given that the dot plot issued on the same day that the December Fed meeting was held showed a consensus of two rate hikes in 2019. Huh? Maybe the Fed should just hold its tongue and let its actions speak.
Even if rates do not increase, it is difficult for me to see how the stock market is going to provide much of a return this year. Led by Apple, 72 of the S&P 500 companies issued earnings warnings, twice as may as have issued positive guidance. And then there is the matter of The Donald and his enemies in the House of Representatives. God only knows where that will lead. Time will tell. Both the Dow and the S&P sit 6.5% lower than they did last year at this time which indicates to me that despite a good couple of weeks, winter is upon us
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