Quantitative easing is a monetary policy tool used by a central bank to try and stimulate an economy when the economic cycle is far below optimum levels. Central banks increase the quantity of money in the financial system through quantitative easing by purchasing securities, such as treasury bonds, to increase the price of assets; this will lower prevailing yields and entice investors into other areas that might be more beneficial for an economic rebound. One worry with quantitative easing is that the increase in the supply of money might lead to inflation, or the overall increase in the price of goods.
Don’t buy into the notion that there’s economic growth in America!
We’ve already seen U.S. gross domestic product (GDP) “unexpectedly” decline in the first quarter of 2014, and now there are signs of another contraction in the current quarter. (The technical definition of a recession is two negative quarters of GDP—we’re halfway there!)
As you know, consumer spending is the biggest part of our U.S. economy, accounting for about two-thirds of our GDP. And consumers are pulling back.
Consumer spending in the U.S. economy declined 0.26% in April from March. This was the first monthly decline since December of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 4, 2014.)
And while consumer spending is one indicator that suggests a recession may soon be coming into play in the U.S. economy, there’s also one very interesting phenomenon occurring that suggests the very same.
The Federal Reserve is serious about pulling back on its quantitative easing program. And in anticipation of the Fed pulling back on money printing (when it first indicated it would start tapering), the yields on bonds shot up.
But since 2014 began, and the Federal Reserve actually started to taper, the yield on the long-term 30-year U.S. bond has declined more than 12%.
Chart courtesy of www.StockCharts.com
If the Fed is pulling back on printing (it has said it wants to be out of the money printing business by the end of this year), why are bond yields declining?
From a fundamental point of view, it suggests the market anticipates very slow growth for the U.S. economy ahead.
Dear reader, the perfect … Read More
With the Dow Jones hitting 17,000 being pretty likely in the not-too-distant future, from there, it’s only another 18% or so until the Dow hits 20,000, which is pretty incredible.
These numbers seemed so unrealistic just a few years ago but now, it’s not too farfetched. The most amazing thing to me is that stocks still haven’t experienced a material price correction since the financial crisis.
Stocks aren’t necessarily stretched in terms of valuation, especially with corporate earnings outlooks holding up for this year and going into 2015. What is stretched is investor determination with a market at its high.
Johnson & Johnson (JNJ) is a great company and a worthy long-term investment (see “Three Blue Chips Set to Drive Higher”), but it’s tough to buy stocks at all-time record-highs. In Johnson & Johnson’s case, the position’s up almost 20 points since the beginning of February, and this is on top of a previous 20-point gain in 2013.
One of these days, stocks are going to get walloped. But there’s got to be some sort of catalyst for it to happen.
The Federal Reserve can be a catalyst if it decides to suddenly change its outlook for interest rate certainty. The catalyst could also be a geopolitical event or something that comes out of nowhere, like a big derivatives trade gone bad.
In any event, there will have to be a shock that is perceived to have a lasting effect on capital markets.
In the lull between earnings seasons, which we’re currently experiencing, stocks reaccelerated on the back of very modest economic news and that in itself is … Read More
Yesterday was an amazing day for the markets.
Gold bullion hit a three-month low despite: 1) inflation rising rapidly in North America; and 2) the Chinese buying half of this year’s world gold production.
The stock market was up to a new high despite: 1) corporate insiders selling like mad; 2) corporate earnings growth collapsing; 3) the amount of money investors have borrowed to buy stocks standing at a record high; and 4) the economy stinking.
In the words of Robert Appel, my esteemed colleague, the following best describes what is happening with the markets:
“Time to take those ruby slippers out of the closet because we are definitely on our way to the ‘Wizard of Oz’ show once again. There is a view that the government and its ‘special contractor’ (the Fed) have things under control and we are now at the beginning of the biggest stock bull in history. We don’t buy that theory for a minute but we do acknowledge it exists.
“Those opposing this view—an ever-declining number—suggest that if inflation were defined as it was when the greatest economic minds of our age were still alive—the U.S. economy would be in big trouble. The recent corporate earnings wipeout in the retail sector was one of the most under-reported financial stories of the year.
“Interestingly (this is too bizarre to make up) the only major upside surprise in the retail sector in respect to first quarter earnings reports was Tiffany’s…where they can barely keep up with demand. No surprise for our readers as the ‘gap’ between rich and poor under QE [quantitative easing] has only intensified. QE … Read More
Looking at the current state of the U.S. housing market, one could say, “It’s the perfect time to buy a home.” Mortgage rates are historically low. Home prices are still down significantly from their peaks in 2006. But unfortunately, potential homeowners are not coming into the housing market.
The reality of the U.S. housing market is that it never recovered. It’s still sick at heart. Low mortgage rates and low home prices definitely provided some support; but now, as the Federal Reserve is pulling back on quantitative easing and mortgage rates are rising, we see home buyers running away.
The biggest bump we saw in housing was in 2012, when institutional investors came in and bought billions of dollars worth of empty homes in bulk. This gave the mainstream a hope that there was going to be a recovery in the housing market.
But as I have been writing since last year, investors buying houses to rent them will not create a healthy housing market recovery.
In fact, in the first quarter of 2014, the homeownership rate in the U.S. declined to its lowest levels in almost two decades, falling to 64.8%. (Source: U.S. Census Bureau, April 29, 2014.)
New-home sales are declining at a very ridiculous rate, further strengthening my argument that home buyers are just tapped out. The chart below is of new-home sales in the U.S. going back to 2005.
Chart courtesy of www.StockCharts.com
Back in 2005, the annual rate of new homes sold in the U.S. housing market was about 1.2 million. In March of this year, this rate was just 384,000. And in 2014, … Read More
The International Monetary Fund (IMF) has lowered its growth forecast for the global economy. It says the world economy will now grow by 3.6% in 2014 and 3.9% in 2015; it grew at three percent in 2013. (Source: International Monetary Fund, April 8, 2014.)
I see the IMF forecast on global growth as being far too optimistic. In fact, I think we’d be lucky to get three percent growth in the global economy this year. Key indicators I follow suggest demand in the global economy is close to outright collapsing.
Consider the chart below of the Baltic Dry Index (BDI). This index tracks the shipping prices of dry goods in the global economy. If it declines, it suggests global demand is declining. The BDI has plunged more than 48% since the beginning of the year, pointing to slow growth for the global economy ahead.
Manufacturing is another indicator of demand in the global economy that we follow. If manufacturing activity increases, it means demand is increasing and that consumers are buying more. Sadly, global manufacturing is suggesting an economic slowdown is the most likely scenario ahead.
The JPMorgan Global Manufacturing Purchasing Managers Index declined to its lowest level in five months in March. (Source: Markit, April 1, 2014.)
Adding to the misery, most economic hubs are telling the same tale.
The eurozone is still in trouble; the European Central Bank is contemplating its own quantitative easing program as Italy just reported its highest unemployment rate ever recorded. China is pumping out weak economic data. Japan’s economic slowdown isn’t taking any break despite the central bank … Read More
This is an entirely free service. No credit card required.
We hate spam as much as you do.