Posts Tagged ‘U.S. Treasuries’
The bond market is in trouble.
As we all know, the Federal Reserve has been the biggest driver of bonds since the financial crisis. The central bank lowered its benchmark interest rate to near zero, then started quantitative easing, all of which resulted in the bond market soaring as yields collapsed to multi-decade lows.
The chart below will show you what’s happened to the U.S. bond market since the mid-1970s.
As you can see from the chart, the declining yields on bonds stopped in the spring of 2013 and have increased sharply since then.
Chart courtesy of www.StockCharts.com
What’s next for bonds?
The Federal Reserve is slowly taking away the “steroids” that boosted the bond market. The central bank is now printing $65.0 billion of new money a month instead of the $85.0 billion it was printing just a few months back. And now we hear the Federal Reserve will be slowing its purchases by $10.0 billion a month throughout 2014.
Since May of last year alone, when speculation started that the Federal Reserve would cut back on its money printing program, bond yields skyrocketed and bond investors panicked.
According to the Investment Company Institute, investors sold $176 billion worth of long-term bond mutual funds between June and December of last year. (Source: Investment Company Institute web site, last accessed February 26, 2014.) I would not be surprised if withdrawals from bond mutual funds are even bigger this year.
And China is slowly exiting the U.S. bond market, too. According to the U.S. Department of the Treasury, in December, China sold the biggest amount of U.S. bonds since 2011. In … Read More
The savings of 500 million individuals living in the European Union are on the line.
Let me explain:
We all know Cyprus, one of the smallest countries in the eurozone and part of the European Union, went through what many feared. To save itself from default and pay down its out-of-control national debt, the government imposed a one-off capital levy on the bank accounts of individuals in that country. If you had more than a certain amount of money in your savings account, the government outright confiscated a portion of it.
Poland, another European Union country, did something very similar. In an effort to reduce its national debt, the government took assets from private pensions and made them public. (This incident never even made the big mainstream headlines.)
When these events took place, I started writing how this would be a new trend—governments would find new and crafty ways to take money from savers in their efforts to make the governments’ dire conditions better, be it for paying off their national debt or bailing out banks.
Now, we learn of documents from a European Union official stating more of the same is on the way. The savings of the individuals in those countries will be used to fund the countries’ long-term investments and reduce the gap that the region’s banks have created by pulling back on their lending.
The document, revealed by Reuters, said, “The Commission will ask the bloc’s insurance watchdog in the second half of this year for advice on a possible draft law to mobilize more personal pension savings for long-term financing.” (Source: “EU executive sees personal … Read More
Last night started out like every other State of the Union address I’ve seen…
The President told us all the good stuff about the U.S. economy, like how American corporate profits are at a record high, how the stock market is at record highs, how millions of new jobs have been created since the Credit Crisis of 2008, how the housing market is turning around, and on and on.
Like a good old politician, Obama spun the facts to give the viewer the impression his Administration has done a great job at turning the U.S. economy around.
What Obama, who now has a very low 43% job approval rating (Source: CNN Breaking News alert, January 28, 2014.), didn’t say about the U.S. economy—and which no other politician likely would—is that:
None of his 2013 State of the Union “priorities” made it through Congress.
American corporations ended 2013 with the slowest earnings growth rate since 2009.
The stock market has become a Federal Reserve-induced bubble.
The majority of jobs created in the U.S. economy since the Credit Crisis have been in the low-paying sectors of the retail and service (restaurant) sectors.
A record 47.41 million Americans, or 23.05 million households, in the U.S. economy are using some form of food stamps (Source: United States Department of Agriculture, January 10, 2014.)
The number of first-time home buyers in the housing market is going the wrong way. In December, first-time home buyers accounted for a near-record low of only 27% of all the existing-home sales transactions. (Source: National Association of Realtors, January 23, 2014.)
Midway through the speech, I nodded off. I … Read More
As is usually the case, several catalysts came together at the same time to produce an unsurprising stock market sell-off. These included: comments from the Federal Reserve regarding quantitative easing, rising 10-year Treasury yields, weak earnings from benchmarks, and concern over China’s real estate market and its banks.
While China’s stock market has been in a pronounced downtrend since the first week in June, its banks are still controlled by the government, so any potential banking crisis in that country is a different game than we’ve seen before because of China’s $3.3 trillion in foreign currency reserves (mostly in U.S. Treasuries).
But that very game could have serious consequences for the U.S. stock market if China needed that money to flood its capital markets with liquidity. With a different approach to saving, money creation, and fiscal management in general, currency destabilization from China is an ongoing risk.
It was just a few years ago that capital markets treated economic news from China as emerging market news only. Now, China’s economic news is taken very seriously by the global economy, and the country’s numbers directly affect the U.S. stock market.
It’s just one more reason to be very conservative with your equity holdings now. Investment risk across all financial asset classes is high.
One thing that China and many of its U.S.-listed companies have proven is that they’re unreliable with their numbers. After countless missteps with U.S. regulators and outright frauds on … Read More
Yesterday afternoon, the Federal Reserve announced it might cut back on its $85.0-billion-a-month money printing program later this year.
The Dow Jones Industrial Average tanked 200 points following the news (and continues to fall this morning), European stock markets fell about two percent, Asian stock markets saw about the same, bond yields jumped to their highest level in years, and gold bullion prices are getting hit hard this morning.
Now, here’s an opinion on what’s really happened over the past 20 hours, and what will happen going forward, that you won’t read anywhere else:
Back in December of 2012, the Federal Reserve announced it would continue with its quantitative easing program until the unemployment rate in the U.S. economy fell under 6.5% and inflation increased beyond 2.5%.
If I heard the Fed Chairman correctly yesterday, those targets are out the window now.
In a press conference after the Federal Open Market Committee (FOMC) meeting minutes were released, Federal Reserve Chairman Ben Bernanke said the central bank might change the pace of the asset purchases later this year depending on the performance of the economy. He hinted that the Federal Reserve may even end quantitative easing by mid-2014 if the outlook on the U.S. economy remains as it expects. (Source: Financial Times, June 19, 2013.)
The Federal Reserve expects the U.S. economy to grow between 2.3% and 2.6% this year and between 3.0% and 3.5% in 2014. And the central bank doesn’t expect the unemployment rate to decline below 6.5% until 2015. (Source: Economic Projections, Federal Reserve, June 19, 2013.)
So the … Read More
By looking at the stock market’s recent performance, one might think the U.S. economy has turned the corner and the worst is behind us. This is far from reality! The U.S. economy is fundamentally damaged, and since the financial crisis of 2008–2009, there really hasn’t been any real economic growth.
Even a novice economist will tell you: economic growth happens when general living conditions of citizens in a country improve; they are able to find jobs, they are able to maintain their standard of living, and they are able to spend and save.
Unfortunately, I see the opposite of this when I look at the state of the U.S. economy. Instead of economic growth, I actually see misery!
While politicians may rejoice over the recovery in the jobs market in the U.S. economy, it is still tormented. The job creation is unequal. During the financial crisis, 60% of the jobs lost were among the mid-wage earners. In the so-called “recovery,” 58% of all jobs created were in lower-wage sectors—retail and restaurant workers, mostly.
The year 2012 was the third year in a row that 40% of unemployed Americans were out of work for more than six months. (Source: National Employment Law Project, February 1, 2013.) In economic growth, there is equal job creation.
The middle class in the U.S. economy is suffering severely—its cost of living is going up, while income levels stay the same. Just look at the price of gasoline. The U.S. Energy Information Administration (EIA) reported that Americans paid $3.71 per gallon of gasoline during the second week of March 2013. (Source: U.S. Energy Information Administration, March … Read More
One of the biggest debates amongst American economists these days is whether the Federal Reserve’s continued $85.0-billion-a-month expansion of the money supply is making the U.S. economy more vulnerable, as opposed to helping strengthen the economy. One of the main reasons the central bank took on quantitative easing in the first place was to revive the financial system following the housing slump. After a $3.0 trillion increase in the Fed’s balance sheet, should the central bank put the brakes on money printing?
Federal Reserve Governor Daniel K. Trullo said late last week, “Significant increase in both the quality and quantity of bank capital during the past four years help ensure that banks can continue to lend to consumers and businesses, even in times of economic difficulty.” (Source: Federal Reserve, March 7, 2013.)
While this may be good news, I am more concerned about what may be next—the “exit” of a monetary policy, which in the eyes of many has now gone on for too long. As noted above, through quantitative easing, the Federal Reserve has added a significant amount of assets to its balance sheet.
How will it decrease its balance sheet and bring it back to historical levels? On one hand, the idea is that the Federal Reserve can continue to hold the bonds it has bought until maturity. On the other hand, the option is to go out into the open market and sell the bonds it has accumulated.
While these options sound feasible, I see them as troubling. If the Fed sells the bonds it has in the open market, then the prices of bonds will … Read More
The financial crisis of 2008-2009 crumbled the U.S. economy to a degree not seen since the great depression. Now another economic problem is emerging—a problem 46 times bigger than the gross domestic product (GDP) of the U.S. economy.
It’s the financial crisis involving derivatives markets.
Starting next year, to “prevent” another financial crisis, traders need to back up their derivatives by top-rated collateral such as U.S. Treasuries. (Source: Bloomberg, September 11, 2012.) The current value of the derivatives markets stands at about $648 trillion!
This collateral rule was the result of the Dodd-Frank Act, which was passed in the midst of the financial crisis of 2008. Companies like American International Group Inc (NYSE/AIG) did not have their derivatives backed up by enough capital; American International ended up needing a $182.3-billion bailout to protect itself from collapse.
It has been said that the worst financial crisis since the Great Depression was caused by derivatives backed by insufficient collateral. Hence, one would think raising the collateral requirement by which derivatives are backed should avert another financial crisis. It sounds like a great idea, in a perfect world. But it’s not the case in this current U.S. economy.
Two important points here:
The U.S. Treasury market is worth about $11.0 trillion. But the derivatives market is worth $648 trillion. The demand for U.S. Treasuries will surge next year, as derivative players rush to back their derivatives with U.S. Treasuries. Doesn’t this almost guarantee the yields on U.S. Treasuries will fall even lower?
Bank of America Corporation (NYSE/BAC) and JP Morgan & Chase Co (NYSE/JPM) have the biggest derivative components on their … Read More
There’s plenty of media focus on the annual symposium at Jackson Hole where central bankers and other market personalities meet. The common hope for further quantitative easing by the Federal Reserve is also looming in the air.
What’s my take on what the Federal Reserve’s plan for quantitative easing for the small investor will be? Gold bullion, the shiny yellow metal loved by many, and a true hedge against inflation.
So far, quantitative easing has been about the Federal Reserve buying U.S. Treasuries or similar securities to put more money into the financial system. But more of something is not necessarily a good thing.
It may take time, but history has shown us that inflation and currency devaluation are the end result of too much money pumped into a country’s financial system.
Gold bullion is a hedge against inflation and a devaluing currency.
The more quantitative easing the Federal Reserve announces, the more reason there is to be bullish on gold bullion. In these pages, I have been harping on the fact that numerous world central banks are raising their stakes in gold bullion as they diversify their reserves.
Central banks adding more gold bullion to their reserves could be a sign they are losing trust in the U.S. dollar or in fiat currency in general.
On August 22, the price of gold bullion broke above its 200-day moving average; a very bullish sign.
Chart courtesy of www.StockCharts.com
The chart above shows the price of gold bullion increased quickly and broke its price resistance that was in place at the $1,630 per ounce area. This resistance level was in … Read More
Simple economics dictates that when consumer confidence in an economy increases, it leads to higher consumer spending; that’s how you get economic growth. This is especially true in the U.S. where consumer spending accounts for 70% of the gross domestic product (consumer spending).
Consumer confidence this month dropped sharply to 60.6, the fifth drop in the last six moths and lowest level since November of 2011! (Source: Conference Board.) The data show that households are worried about the economy and are feeling it financially.
Reports from major consumer companies provide increasing evidence that American consumers are cautious.
Luxury jewelry retailer, Tiffany & Co. (NYSE/TIF), is one well-known company that’s feeling the effects of low consumer confidence and consumer spending. Following its second-quarter earnings report announcement (profit went up only two percent), the company’s CEO cut the outlook for Tiffany & Co. and was quoted as saying, “Not surprisingly, sales growth has been affected by economic weakness in a number of markets…” (Source: Wall Street Journal, August 27, 2012.)
Consumers are slowing down on their purchase of luxury goods; things they don’t necessarily need. They are looking for cheaper deals—not a great sign of increased consumer spending and consumer confidence.
But it’s not just the high end that’s suffering. McDonald’s Corporation (NYSE/MCD), the world’s largest operator of restaurants, serving 69 million people a day, reports that sales in July 2012 fell 0.1% in the U.S., 0.6% in Europe, and 1.5% in Asia-Pacific from last July despite its promotional activity.
Consumer spending is the fuel of the U.S. economy. If there is a decrease in consumer spending, it simply means … Read More
“Dumping more U.S dollars into the economy generates economic growth…” While this theory was famous during the credit crisis of 2008, four years later it has become obvious that troubling issues at hand suggest otherwise.
What we all know: The devastating effects of the credit crisis dampened economic growth, and in order to get economic growth going again, the Federal Reserve introduced the idea of quantitative easing, or simply stated, creating more money. The idea was that more money in the system would result in losing bank lending, which would lead to economic growth. It didn’t work.
What we are expecting: In the past few months, there has been a lot of discussion about the Federal Reserve providing more “stimulus” to the economy in order to boost economic growth. In other words: a third round of quantitative easing (QE3); something everyone seems to be waiting for.
What we don’t know: The question shouldn’t be whether the Federal Reserve will print more U.S dollars, as that is just a matter of time. The real question on hand is: will it help in generating economic growth? The main goal of quantitative easing is to provide liquidity in the markets and increase lending, so that the economic growth gets on its way. Great idea, but that’s not happening.
The gap between bank customer deposits and banks loans is growing at the fastest pace in two years. It’s at a record amount—$1.77 trillion. This is the biggest gap between bank deposits and bank loans since July 2010. (Source: Bloomberg, August 19, 2012.) The current gap is more than 17 times the $100-billion … Read More
Last Friday’s U.S. jobs report was just terrible and we also got data from China showing a weakening in that country’s manufacturing sector. This put an already lackluster stock market into very negative territory, hurting investor sentiment significantly.
At the same time that we got this economic news, we also heard from the Big Three automakers and, according to them, business is booming. But, there’s a big caveat to this good news and it’s the same thing that’s been going on in the U.S. economy for years now. Even in industries where business is good, there isn’t a lot of new investment in plants, equipment or employees. Industry remains gun shy and rightly so; there is just too much uncertainty out there.
There is some recovery in the U.S. economy, but expectations are coming down. The stock market bounced back from its recent correction low, but that uptick is now wiped out. The Dow Jones Transportation Average broke 5,000 again and this is with oil prices below $84.00 a barrel! The trading action in the stock market, oil prices, and U.S. Treasuries really signifies a major revision of expectations. The outlook for the U.S. economy in 2012 just got halved. At least that is what these markets are saying.
I repeat my view that this is a decent time to be identifying and following solid, dividend paying blue-chips. I do think the stock market has further downside until second-quarter earnings season begins. I wouldn’t be surprised at all now if the stock market stays very soft until the beginning of the fourth quarter. The U.S. economy is stronger than the … Read More
The only way the European debt crisis could be put temporarily aside is if the European Central Bank (the “ECB,” our equivalent of the Federal Reserve) prints money. Since Germany is the main voice within the ECB, printing is not the solution, because Germany is refusing outright. This means the European debt crisis continues to escalate on a daily basis.
The German Council of Economic Experts has developed a creative way around the European debt crisis. They call their proposal the “European Redemption Pact” (source: The Telegraph, May 29, 2012).
Under the proposal, a certain percentage of a troubled eurozone country’s public debt would qualify to be placed in a special fund. From this fund, Germany would issue joint debt, so that the country would enjoy the low interest rates paid by the stronger northern countries of the European Union.
To back this debt, Germany is asking that these countries put up 20% collateral. The concept, dear reader, is similar to that of a bank; they will be more than happy to provide you with a loan if you have assets they can seize, just in case you don’t pay.
The assets Germany wants from these countries is either their foreign currency reserves—like U.S. Treasuries or gold bullion.
Now, this is not the first time that stronger eurozone countries have offered to help countries like Greece, Spain and Italy during the European debt crisis. China and Britain offered to provide money to these countries in exchange for their gold bullion. These countries flat out refused, opting instead to hold … Read More
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