The U.S. Treasury department issues debt obligations, including long-term bonds. U.S. bonds range in length, from short-term to very long-term. U.S. bonds are debt obligations by the government. The government issues U.S. bonds for current spending needs, with the intention to pay back the total plus interest over the life of the debt instrument. U.S. bonds are quite important as many other interest bearing securities are priced off this heavily traded security. Since many investors around the world watch the rates of U.S. bonds for signs of economic strength or weakness, it is important for all investors to be aware of the interest rate environment.
As the key stock indices continue to climb higher, optimism amongst investors and stock advisors rises to a dangerous level.
According to the Advisor Sentiment tracked by Investors Intelligence, an indicator I follow to gauge optimism in the stock market, the number of stock advisors who are bullish towards key stock indices is at its highest since April of 2011. (Source: Investors Intelligence, May 22, 2013.) To bring this into perspective, in April of 2011, the key stock indices like the S&P 500 started to decline, dropping nearly 20% through October of that year.
The stock market is becoming very overbought and very overpriced. It’s not a matter of “if” the market faces a major set-back, but “when.”
The U.S. economy continues to struggle and early indicators of economic slowdown are flashing warning signs. Consider the Business Outlook Survey by the Federal Reserve Bank of Philadelphia, which provides an outlook for manufacturing activity in the Philadelphia area. The survey indicates demand has been weak, with new orders and shipments declining and inventories building up. (Source: Federal Reserve Bank of Philadelphia, May 16, 2013.)
The index of current manufacturing activity in the Philadelphia region registered at negative 5.3 in May compared to positive 1.3 in April. Any number below zero indicates conditions in the manufacturing sector are becoming poor.
This isn’t the only troubling statistic that shows the U.S. economy is headed towards an economic slowdown. Our economic growth is questionable; unemployment is still staggering; the majority of jobs created since the financial crisis have been in low-paying jobs, and a significant portion of the U.S. population is on food stamps…. Read More
While testifying in front of the Joint Economic Committee in Washington regarding monetary policy and the economic outlook of the U.S. economy, the Chairman of the Federal Reserve, Ben Bernanke, said yesterday, “…the committee has said that it will continue its securities purchase until the outlook for the labor market has improved substantially in a context of price stability.” (Source: “The Economic Outlook,” Board of Governors of the Federal Reserve System, May 22, 2013.) In other words, the Federal Reserve has made it clear, once again: it will not stop quantitative easing until the unemployment rate comes down.
The Federal Reserve continues printing $85.0 billion a month in new money, using this newly created money to purchase long-term U.S. bonds and mortgage-backed securities (MBS). The Fed has already inflated its balance sheet to over $3.0 trillion, and by keeping the pace of quantitative easing the same, its balance sheet will reach $4.0 trillion very quickly.
I believe the longer the Federal Reserve continues with the quantitative easing, the bigger the eventual troubles will be.
First of all, quantitative easing and artificially low interest rates by the Federal Reserve have essentially forced investors to take higher risk elsewhere, as guaranteed yields have collapsed. The yield on 10-year U.S. bonds is less than two percent; meanwhile, tax-favored dividends from the rising Dow Jones Industrial Average stocks pay 2.35%.
It is very well documented in these pages how investors are rushing to get higher yields as the Federal Reserve stays the course. Investors are adding junk bonds to their portfolio; conservative investors, like the central banks, are buying stocks; and bond funds … Read More
Looking at the monthly budget statement from the Department of the Treasury, in fiscal 2013, year-to-date (that’s October 2013 to this April), the U.S. government has already paid interest of $227 billion on its national debt. For the entire fiscal year 2013, the government expects to pay a little more than $420 billion in interest payments. (Source: U.S. Department of the Treasury, Financial Management Service, May 10, 2013.)
If I calculate the amount of interest payments relative to the national debt outstanding, which is around $17.0 trillion, the U.S. government is paying interest on the national debt at the rate of about 2.5%.
Now, look at these two scenarios…
If we assume that the U.S. national debt will be $23.0 trillion by 2023, then the interest payments on the debt will rise to about $575 billion, not taking interest rate changes into account.
If in 10 years from now, interest rates go back to historical levels and double to five percent, interest payments on the national debt will exceed $1.0 trillion per annum. 2023 is 10 years from now. You can be assured the economic environment will be very different one decade out from today.
But as I wrote the other day, according to the action in the 30-year Treasury market, interest rates may already be on their way up.
Since their peak in July of 2012, the 30-year U.S. bonds have declined in value—they are down almost six percent. Trading above $153.00 in mid-2012, 30-year U.S. bonds now hover around $144.00.
Take a look at the chart of 30-year U.S. Treasury bond prices below:
Chart courtesy of www.StockCharts.com
As … Read More
Wal-Mart Stores, Inc. (NYSE/WMT), the biggest retailer in the U.S., just reported its second-quarter same-store sales declined 1.4%. As a reader of Profit Confidential, this should come as no surprise to you.
Consumer spending in the U.S. economy is bleak; it doesn’t seem to be improving, and it’s nowhere near what the stock market is depicting. Consumer spending makes up about two-thirds of U.S. gross domestic product (GDP), so if consumer spending continues to decline, our economic growth becomes questionable.
Personal consumption expenditure, a measure of consumer spending, has been experiencing a decline. From between 2010 and 2011, consumer spending increased by little more than five percent. Meanwhile, the rate of change between 2011 and 2012 was only 3.64%. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 16, 2013.)
What Wal-Mart’s contracting same-store sales and slowing consumer expenditure rates show is that consumer spending in the U.S. is not growing. From the statistics, we can see the average American consumer is suffering.
As of February (the latest available figures), there were more than 47.5 million Americans, which is 15% of the population or 23 million households, on food stamps. (Source: U.S. Department of Agriculture, May 10, 2013.) Food stamp usage has increased immensely. So, how can consumer spending increase when we are sitting at record poverty levels in the U.S.?
This “job growth” the government talks about—the official rate—doesn’t include people who have given up looking for work and people who have part-time jobs but want full-time jobs. And even if we put that aside, the majority of jobs that have been created over the … Read More
Core retail sales declined 0.1% in April—and that’s after they already fell 0.4% in the previous month! (Source: U.S. Census Bureau, May 13, 2013.)
When compared to the first four months of 2012, consumer spending in the U.S. economy declined in the first four months of 2013 at electronics and appliance stores, health and personal care stores, gasoline stations, and general merchandise stores.
And looking forward, consumer spending in the U.S. economy doesn’t appear to look very promising either.
If companies don’t spend or create better-quality/better-paying jobs, can consumer spending really pick up? It’s well documented in these pages: the job creation we have seen since the financial crisis started has been in low-wage-paying sectors.
Keeping all this in mind, with consumer spending still bleak and core retail sales constantly declining, the retailer must be suffering.
But that’s not so!
When you look at the stock market and, more specifically, at the retailers, it appears that consumer spending in the U.S. economy is booming! Consider the chart below of the S&P Retail Index. This index tracks the performance of some of the most well-known retailers in the U.S. economy.
Chart courtesy of www.StockCharts.com
Dear reader, the stock market isn’t portraying the real picture of the U.S. economy. The retail sales number actually shows how consumer spending—the biggest contributor to our gross domestic product (GDP)—is fairing, and those numbers look terrible.
Even with the printing of trillions of dollars of new money via quantitative easing, the Federal … Read More
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