interest rates
Written by David, November 02nd, 2011
There were no surprises in today’s decision by the Federal Reserve to leave interest rates unchanged, and at nearly zero. The Fed said that “low rates of resource utilization and a subdued outlook for inflation” are the reasons why interest rates will remain what they call “exceptionally low” until at least the middle of 2013.
Although the Central Bank stood pat on interest rates, it did give Wall Street a slightly more encouraging view of the economy. “Economic growth strengthened somewhat in the third quarter,” according to the FOMC statement, which added that, “Household spending has increased at a somewhat faster pace in recent months.” Of course, the Fed hedged here by citing the “continuing weakness in overall labor market conditions.” It also mentioned the “elevated” unemployment rate as a headwind facing the economy.
Markets pulled back somewhat after the Fed failed to announce any new stimulus, but I still think that if things get worse economically we could see the central bank move to do what it does best—pump more money into the economy. I don’t know what, precisely, the Fed would do to accomplish this task, but it’s proven in the past that it can be creative when it comes to manipulating monetary policy. Case in point is the Fed’s current commitment to the so-called Operation Twist.
As the old saying goes—don’t touch that dial! The Fed drama and the struggling economy are far from over.
Written by David, July 20th, 2011
The action in the equity and bond markets so far in 2011 can be characterized by what I call a sort of “nervous uncertainty.” Let’s face it, we’ve had a lot of cause for worry, and we’ve had a lot of reasons to be encouraged. On the bond front, that nervous uncertainty has translated into a big surge in cash holdings among bond mutual funds. Apparently, bond fund managers aren’t in any hurry to purchase new debt, and that comes despite the fact that bond fund inflows are on the rise.
According to mutual fund research firm Morningstar, the average cash stake in the 1,623 funds that the company tracks rose to 9.8% at the end of June from 9.1% at the end of 2010. In dollar terms, that’s about $243 billion. The average bond fund’s cash position was at 10.2% at the end of 2007, and 10.1% at the end of 2008, according to the data.
Meanwhile, investors have been funneling money into bond funds in 2011, adding some $92.8 billion through June 30. That’s the biggest inflow seen in any of the fund categories that Morningstar tracks. In other words, bond fund managers are raking in the cash, and essentially hoarding it.
So, the logical question here is why aren’t bond fund managers investing in new debt right now?
Well, for starters, we can blame that debt-ceiling debate for at least some of the uncertainty. Although I am not sure how to quantify this, I suspect that no bond fund manager wants to get caught with his guard down if the unthinkable does happen, and if the powers that be in Washington drive the nation into default.
Another reason why bond fund managers aren’t gobbling up new debt is the possibility of a credit rating downgrade. Such a downgrade has been threatened by both Moody’s and Standard & Poor’s. Although I suspect that we are in no danger of a downgrade here, the mere discussion of such a negative turn of events for the bond market is understandably spooking bond fund managers.
Then there’s the issue of the Federal Reserve’s follow-up policy to quantitative easing, part 2, or QE2. Will we see another round of money creation in some form or another and, if so, what will be the impact on the U.S. dollar and U.S. Treasury bonds? Nobody knows for certain, and this uncertainty is keeping cash on bond fund books.
Written by David, August 04th, 2010
Over the course of the last several years, I’ve been telling you about the threat that deflation (as opposed to inflation) may pose to your serious money. Well, it seems as though now I am not the only money manager concerned with the threat of inflation.
According to an article in The Wall Street Journal aptly titled, “Big Investors Fear Deflation,” many prominent investors now are becoming concerned over the prospect of deflation and how it could take a bite out of investor wealth. The article specifically calls out PIMCO bond-fund manager Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier as among the best-known investors preparing for a potential deflationary wave.
The article also points out that these investors are growing increasingly concerned that relatively weak economic data, along with a general consensus that global policy makers are unable to take further steps to stimulate their respective economies, will bring about a new deflationary future.
“Deflation isn’t just a topic of intellectual curiosity, it’s happening,” Bill Gross told The Wall Street Journal. I respect Mr. Gross’ opinion on just about every economic issue, even when I don’t agree with him. On the deflation issue, however, I find myself unable to object to his logic. That logic includes the citing of an annualized 0.1% decline over the past two years in the U.S. consumer-price index. This kind of aggregate price decline may not seem like much, but as Gross points out, “It’s an uncertain world that’s tipping toward deflation.”
Now, you may remember that after the 2008 financial crisis, many people feared a deflationary spiral would take hold of the global economy. That didn’t happen, of course, and part of the reason why is because governments around the globe infused the financial system with hordes of new capital. But like these investors in the article point out, how long are governments going to be able to prop up their respective economies before the whole house of cards come crashing down?
Before we go any further, I must say that I do not think we are on the precipice of disaster or on the verge of a deflationary meltdown in the global economy. If I truly thought that, then I wouldn’t own any stocks in any of my investment advisory services.
What I am saying is that there is a growing chorus of some very smart minds out there that have now become aware that deflation is no pie-in-the-sky abstraction or fear-mongering rant designed to scare you into a bunker. Rather, deflation is a potentially dangerous scenario, not just for global policymakers but for anyone who is trying to manage their serious money.
I know I am going to continue monitoring economic conditions so that I can identify any warning signs of a pending deflationary wave.
Written by David, December 31st, 2009
Join Doug Fabian for his first investment conference of the New Year. On Saturday January 9, 2010 at 12:00 pm (noon) Pacific, Doug will be discussing the investment landscape for 2010.
Doug has been writing on the subject of stocks, interest rates, commodities, and currencies for decades and he is presenting a unique opportunity to learn from his expertise. He believes that 2010 will present an entirely new list of winners and losers in the investment markets, but you must be on the call to act on Doug’s advice.
This one hour tele-seminar will be held exclusively for the first 800 registrants. Early registration is your best way to ensure you will have a seat for Doug’s thoughts on the the investment markets.
Five important keys you’ll learn:
- His opinion on the direction of stocks in the New Year.
- What sectors Doug believes show the most potential for profits.
- What you can do to hedge your portfolio against rising interest rates.
- His thoughts on Gold for 2010.
- Which commodity ETFs deserve your attention right now.
The live teleconference will reach capacity because we’ve built an enormous following for this learning series. We urge you to take advantage of this opportunity and reserve your spot today.
Click here to register for this event.
Written by David, December 09th, 2009
You may not have heard this news, but Greece just had its bond rating cut to BBB from Moody’s. Now, you may be asking what the big deal is. After all, what does Greece’s credit rating have to do with my investments here at home? Well, just like you, countries have credit ratings. They issue bonds and borrow from banks just like a large corporation does. A downgrading of a country’s sovereign debt means they are likely in fiscal difficulty, and that’s never good.
One of the investment themes I believe will take shape in 2010 has to do with large debt defaults from strong corporate and sovereign institutions that were formerly considered bulletproof. Now, many people here in the United States think we have the worst debt levels in the world. That’s in part why we are seeing the rush to own gold, and the rush to put money to work in international markets. Sure, we do have our debt problems in this country, but they are far from the level of dangerous debt many other countries hold.
A widespread sovereign debt crisis could rock the world’s stock markets, and it could even cause a stampede back into the U.S. dollar. I will be watching this Greek tragedy unfold in the weeks and months ahead, and I promise I will let you know if I think it will affect your investments here at home.
If we do see a sovereign debt meltdown, the crisis it will likely show up first in the bond market. In last week’s radio show, I talked about how investors need to start paying attention to risk. Most people are aware of the risk in the stock market, but when it comes to the bond market, somehow people think that they can’t lose money.
So far this year, investors have poured more then $230 billion into bond funds. This is a huge amount of money, especially when you consider that only a net $2 billion was funneled into stock funds. This tells me that investors now are thinking that they are more properly diversified than they were last year. They reason that if stocks take a hit again, at least their bonds will buoy their portfolio. Well, I think this line of thinking is a big mistake.
Bonds can get hurt in two primary ways. First, if interest rates rise, the value of bonds go down sharply. A 1% rise in long-term interest rates will send bonds down 7-15%, depending on the type of bond. Second, there is credit risk. As I mentioned earlier, we are starting to see things happen in the bond market that rarely happen. A Sovereign country going into default is a risk nobody has really planned for, and a blowup in this market could really send the value of all sorts of bonds lower.
As of right now, the bond market is holding up fine. If, however, interest rates rise, and/or if countries around the world continue having their credit ratings slashed, it could spell bond market trouble.
One indicator of early bond risk is the trend in high-yield corporate bonds, otherwise know as junk bonds. So far junk bonds still are enjoying a solid uptrend. But if this uptrend begins to falter, and if bonds start to lose their luster, then even those “safe” bond positions could be at risk.
If you want to find out how to prepare yourself from the risk of a potentially substantial bond market downturn, then I suggest listening to my radio show last week for more details. To listen to the show, just click here.
Written by David, November 09th, 2009
In my third installment of the five-part series, The Obama Impact on Your Money, I share with you three simple strategies to grow and protect your wealth using exchange traded funds. The world of ETF’s keeps getting better and better. We can now invest in almost any asset class, currency or country in the world.
Three important keys you’ll learn:
- How to get defensive with your stocks and mutual funds.
- How to prepare for rising interest rates and how to profit from them.
- Which commodity ETF deserves your attention right now and how much of your portfolio to invest in them.
Simply click here to access the one-hour audio recording of this call and download my handout to follow along.
Sincerely,
Doug Fabian, President – Fabian Wealth Strategies
Written by David, October 30th, 2009
In my third installment of the five-part series, The Obama Impact on Your Money, I will be sharing with you three simple strategies to grow and protect your wealth using exchange traded funds. The world of ETF’s keeps getting better and better. We can now invest in almost any asset class, currency or country in the world.
Three important keys you’ll learn:
- How to get defensive with your stocks and mutual funds.
- How to prepare for rising interest rates and how to profit from them.
- Which commodity ETF deserves your attention right now and how much of your portfolio to invest in them.
Join me live Saturday November 7th at 12:00 (noon) Pacific time, 3:00 pm Eastern, as I discuss how to organize your assets, identify new opportunities, and position yourself for safety using my favorite investment vehicle – ETF’s.
The live teleconference will reach capacity because we’ve built an enormous following for this learning series. I urge you to take advantage of this first announcement and reserve your spot today. Click here to register.
These are unprecedented economic times. The government spending, interference in the financial markets, planned takeover of healthcare, and the assault on capitalism all have me concerned about our future.
We can help you navigate these difficult times ahead. Join me for our teleconference Obama Impact on Your Money – Part THREE. It’s time to regroup your wealth plan. Click here to register.
