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Why is yield chasing so out-of-control these days? I’ll give you 11.7 trillion very good reasons!
That number represents the dollar value of sovereign bonds globally that are now yielding less than 0%. Not only is that a mind-bogglingly high figure, it’s up a staggering $1.3 trillion just since May, according to new research from Fitch Ratings.
Long-term bonds make up an increasing percentage of the NIRP pie, too. The dollar value of negative-yield bonds with maturities at least seven years from now has surged 86% in only two months. In Switzerland, you can’t find a positive yield unless you buy a bond maturing almost a half-century in the future. Then in the wake of an announcement by Bank of England Governor Mark Carney that his central bank may cut rates further, do more QE, or otherwise loosen policy, yields on a handful of U.K. bonds slipped into negative territory for the first time ever.
The result? Investors are engaged in the most-heated yield chase in world history. They’re buying utilities. They’re buying consumer staples. They’re buying telecommunications names. They’re buying bond funds, bond ETFs, even zero-coupon Treasuries.
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| Investors are engaged in the most-heated yield chase in world history. |
They’re even buying gold as a “yield” play. After all, the 0% interest rate on a gold bar beats the negative-0.12% you “earn” on a German 10-year Note, or the negative-0.31% you “earn” on a Japanese 2-year Note, to cite just a few examples.
You never hear about it on CNBC – but the result is that ultra-safe government bonds are absolutely trouncing stocks. Not only that, but safer, more reliable, higher-dividend, lower-volatility, non-economically sensitive stocks are absolutely beating the pants off the supposedly “sexy” names that the talking heads like to trot out on TV.
[Read More – The Consequences of Reckless Lending- Mike Larson]
Alphabet (GOOGL)? It’s down about 10% year-to-date, while Netflix (NFLX) is off 20%. Widely held banks like JPMorgan Chase (JPM) and Bank of America (BAC) are down 7% and 22%, respectively. Microsoft (MSFT)? It has lost you almost 9% so far in 2016, while Apple (AAPL) has cost you 10%.
What about popular transportation stocks, like FedEx (FDX) or Delta Air Lines (DAL)? A gain of less than 1% … and a loss of 28%. Widely held industrials like General Electric (GE) or General Motors (GM)? Try minus-2% and minus-17%. Even those names every tech guru likes to gossip about — Facebook (FB) and Amazon.com (AMZN) — are only up 6% and 9% this year.
By comparison, the Vanguard Extended Duration Treasury ETF (EDV) is up 23% in the first half of 2016. The SPDR Gold Shares (GLD) is up 24%. The iShares US Telecommunications ETF (IYZ) has risen more than 14%, while the Utilities Select Sector SPDR Fund (XLU) has gained 20%.
[Read More – Yet ANOTHER Billionaire Warns About Coming Chaos – Mike Larson]
Why do I keep hammering this point home? Because few pundits seem to want to champion “Safe Money”/”Safe Yield” investing. They all want to talk about the next whiz-bang tech stock or high-risk IPO, as if those investments were actually working well.
My advice? Focus on what’s working (safe dividend stocks) … and on why it’s working (the lousy economy, never-ending NIRP/ZIRP policy, demographics, and more) unless and until conditions change. And for more specific names, “Buy” and “Sell” recommendations, and so on, be sure to check out my Safe Money Report.
Until next time,
Mike Larson
{ 44 comments }
You have very good thoughts. Personally, I don’t believe in paper at this point in time. I feel that it is important to have something that you can sell to the guy next door if need be. I don’t have faith in our Government and most pundits.
I agree with that. I’m staying away from financial assets. After MF Global and the Sentinel decision, financial assets are too risky, no matter what they are. If you haven’t taken delivery, you don’t own it.
Like the Fed did in past the BOJ and the Bank of England are both playing the “we promise more easing game” and investors ignore truths and performance and earnings and Brexit and the main reason why the above are talking easing again. Its so obvious business is bad and yes that is why they are “talking” easing and markets are riding these promises daily despite past failures of doing the same thing over and over again. The Fed has played this game in threatening rate hikes in the past but and that has disappeared off of the radar entirely. A crack has to appear in this scenario sooner or later and the fallout will be unimaginable. I follow a lot of your readers comments and a lot just chomping at the bit to get in this maelstrom.
The Fed’s went out of there way to help Wall St.Let ‘s throw Dodd- Frank in there too…QE’s1,2,3
Negative interest rate is already here. What’s your opinion in investing on zero coupon bond
We are supposed to buy low and sell high, right? Are bonds low or high right now?
With ZIRP or NIRP in place, bonds are about as high as they are going to get. I wouldn’t buy any bonds right now, but especially not zeros.
I think it is rediculus how the media sensationalizes a one day drop in the market such as the Brexit They figure out how many “trillions have been”lost” in 401-k plans” and never mention subsequent recoveries such as the following several days. They seem to encourage panic selling at a loss and moves into other asset classes of presumed “safety “
I notice that the banks are down and Deutsche bank which has 55 Billion in derivatives just failed its stress test for the second year in a row . This does note bode well for European banks .
correction I mean 55 Trillion in derivatives and ” This does not bode well for European Banks ” .
Correction again it was the U.S. subsidiary of Duetsche Bank that failed . My mistake !
“Safe money” in the stock market is an illusion.
Maybe I’m missing your point here Mike, but it takes a LOT of money to save the economy and to keep it from collapsing after another Republican Stock Market Crash and Depression, just like it did after 1929. Sadly since we only lost 60% of the Stock Market value by 2009 rather than the 90% loss by 1932, the voters did not completely throw out the Republicans who were more than ready to save their sponsors (the Big Banks) from collapsing, but had NO interest in saving Main Street….. Had the GOP supported another WPA/CCC type program, the recovery on Main Street (for the average American) would have happened a lot faster……..
Insiders from both Parties supported bailing out Wall Street. Obama selected Wall Street lapdogs Geithner and Summers as advisers resulting in an inadequate stimulus package. Progressive economists touted a more aggressive stimulus as you suggested. As you pointed out Republicans put Party before country in their opposition to support for Main Street. Their hypocrisy was amply demonstrated when, after voting against the meager stimulus, they returned to their districts and posed at photo ops at stimulus projects. The ruinous austerity policies of Germany and Republicans have undermined the ability of Western Economies to generate sufficient growth. The QE policies (a LOT of money) have placed most of these monies in the non-productive hands of the financially well placed few. As 52% of the British said the only thing that has trickled down is a yellow malodorous liquid.
Stop living in the 1930’s. We’ve had almost 8 years of a Democrat President who has nothing to show for his stewardship but weak GDP growth, 19 trillion in debt and extra-constitutional regulation stiifiling the growth of small business.
blame the republican! let’s see, who made a secret speech to the Wall Street Banks? who has millions from out of country sources? who cannot tell a lie? my gosh, it is none other than hillary, a democrat! &, what party has been in power for 8 years? &, who is the “wonder kid” elected as president?
fees-up demos, your priggish game has died aborning-
Yes we need more trickle down.
You must not have a dime invested.. :(
If in 1913 you had buried $1,000,000 paper dollars and $1,000,000 igold dollars and dug them up today you would still have $1,000,000 in paper but $65,000,000 worth of gold. During this period we had eight Democrat and nine Republican Presidents. All this wealth has gone to the politicians and their cronies in Washington. It is a patently false hope to think voting for either party this fall will address this massive theft. Progressives created the Federal Reserve and Republicans used it to commit the crime of the century. H.L. Mencken once said that an election is but an advance auction of stolen goods. They promise to give us things by borrowing from our children and gramdchildren. I wish we could all wake up and recognize our common enemy. Jim
P.S. This is why smart companies finance both parties. Also, do you think Bill Clinton reminded Lorretta Lynch he appointed her to the Federal Bench in Western New York and that there would be Supreme Court slots to be filled over the next four years? Jim
Jim,
Since this is an investment site, I will share this with you…….Between 1929 and 2012 the Stock Market did roughly 65 times better under Democratic Administrations than under Republican Administrations, despite the fact that both parties were in power roughly the same number of years….. I believe the quote was that between 1929 and 2012 (the end of the study), $10,000 invested in ONLY Democratic Administrations would have grown to over $300,000 and the same amount invested in ONLY Republican Administrations would have grown to only about $11,000…
Opps, Key stroke error….. That should be 290 times better under Democratic Administrations…. So much for the party of “Big Business” aye?
False.
the CLINTONS ARE CRIMINALS they have been from the beginning and they will be to the end
Probably. But he probably also mentioned that he has $2B in his “charity”.
Oh 151…..
Actually, it is true….. Educate yourself and Google “Poor Dumb Rich People”….. Has to do with Income Inequity….. During Democratic Administrations (the party of the 97%) it is generally down and the stock market flourishes…. During Republican Administrations (the party of the 3% and anyone dumb enough to drink their kool-aid propaganda) it is generally up and the stock market falters…… You’ve been snookered….. :(
Right on Jim!
And Trump never LIES, and he never has sent his company’s overseas to take
advantage of the low wage, no worker’s comp, And when a worker get’s sick, they
are FIRED AND SENT HOME, AND SOMEONE IS HIRED IN THEIR PLACE!!!
And he does hide money’s in other countries!!
TRUMP IS NOT PERFECT EITHER!!
DO YOUR RESEARCH!!
GO TO…….. FACTS.COM
If your going put down Hilery….you need too research Trump as well!!
Trump nor Hilery are good for this country…..
OH YES…. TRUMP IS PERFECT……….RIGHT!!
Economists mistakenly think wealth is unlimited. If wealth were unlimited there would be no poverty or debt. Increasing taxes for the small number of people who have accumulated most of a nation’s wealth creates a healthy and harmonious society.
The idiocy of low or negative interest rates should be obvious to any fool. Why would anyone lend money if he/she couldn’t make a decent return? It explains the reason stocks in things like high dividend MLPs and REITs are so popular, while most investors avoid government bonds that pay little or nothing. If the Fed is really interested in promoting prosperity, it would be RAISING rates to a reasonable level, not lowering them. Low rates tell people that things are NOT good in the economy, and merely exacerbate the situation. Negative rates are even worse.
Banks don’t lend money to the masses at zero or negative rates. Last I look, US banks lend credit card loans at around 15 to 23 percent. Banks lend student loans at 6 to 12 percent. Banks lend mortgage loans at 3.5 to near 4 percent. Prime rate (bank rate of loans to solid companies) is 3.5%. It is only when the banks “borrow” from the masses that the rates are a quarter, or less percent pay by the banks to the masses. When central banks can “print” money a the press of a computer key, how much does it physically cost to press a computer key to fill up bank accounts with trillions? Why would any sane banker paid for money deposits, when they can press a computer key at essentially no cost to generate trillions for themselves? There used to be a television advertisement for the masses that said “you have a friend at so and so bank.” That advertisement had not been aired for a long time. It seems that main street masses no longer have any friends at the banks. It is everybody for themselves, as in 20 of so years, the 1 percent will double their ownership of the national wealth from 50 percent to 100 percent. As this number is a zero-sum-game-number by definition of the measurement, it means that the 99% will own absolutely nothing at that time. It will be worth than in the former Soviet Russia, where 2 percent Communist Party members control and “own” everything, as here only 1 percent instead of 2 percent will control and own everything, plus here the 1 percent show no pretense of having any concerns for the rest of the masses as in Soviet Russia, where the 2% party members were suppose to serve the 98% of the people. It will probably like in the Dark Ages, where the common people forage in Sherwood Forest.
As I said, most investors avoid government bonds for the reasons you give, ric. They don’t pay enough interest. Rising defaults are causing corporate bonds to lose value, effectively driving up interest, if they do pay up. National governments, in most places can print money, so they pay off, but the surplus money also loses value, and prices rise as a result. That is how the politicians screw us. State and local gov. bonds may also pay off, because the politicians can tax us more to avoid default – up to a point. Puerto Rico went past that point. So did Illinois. The proceeds from ALL bonds will buy less, even if they pay off, due to politically motivated inflation.
Because Euro countries central banks CANNOT print their own money, their banks are in real trouble. Deutsche Bank lost $7 TRILLION in the 4th quarter of 2015, alone. It owes about $55 TRILLION in credit default swaps (swamps). It’s stock, amazingly, is only down 62% from it’s 2015 high, and 89% from it’s all time high in 2008. In this country, the big four of JP Morgan, Citibank, Goldman Sachs and Bank of America, between them, owe around $170 TRILLION in swaps, but the US can print money and bail them out, putting the debt on US.
Should have said, “the US Fed can print money”.
I agree that cheap money is a bad idea historically but this market is
melting up.
As Anthony says, “this market is melting up”. because investors are seeking some kind of yield, and the stock market is about the only hope we have anymore, since money is now entirely controlled by the big banks and their minions in the Fed. As long as the money guys want the markets to keep fluctuating up and down at this huge top, we can play the fluctuations, at least. Just remember, it can’t last.
Agreed. We can melt up another 600+ Dow points or so…..but that will be about the max.
Those that have lots of cash lying around would love to see higher interest rates. But unfortunately in this environment higher rates would sink the stock market (and Gold), collapse housing prices and thereby also collapse the economy.
The US is a consumer driven economy but most consumers are broke, or ‘underwater’, QE helped the banks but nobody else, so the banks have money to lend but no takers as most cannot afford to pay interest.
One way to boost the economy is to provide all tax payers a minimum income, i.e. via negative tax rates. Helicopter money if you wish, but most of this would be quickly spent and rescue the economy. Positive profits would save the stock market and help the banks via trickle up. The reason QE did not work very well is that it put the money into the wrong end of the money flow.
Higher interest rates would also sink the u.s government as Internet alone would be over a Trillion Dollars!
How do you get money into the hands of ordinary people? Should the government have “make work” projects as in the thirties? Increase the minimum wage? Pay everyone a minimum salary? I guarantee the minimum two per cent inflation would be reached but what is the cost? Who wins who loses?
I commend you on laying the truth on the table, as to bond frenzied and the actual status of stock performances.
The entire global financial system is on the verge of collaspe and we know what occurs in the DOW (dropping 75 – 50%) but what blows me away is the zero and negative coupon buying, that would seem to be 100x more harsher than a stock decline.
Your already earning 0 and is some insane cases paying to “park” your money. So why would one quad triple the eventual loss prospects? Why not stay in stocks and at least there may be some type of equitable value left over after the dust settles?
Because Millions are not doing their own do diligence and instead, are buying into the Right Wing Republican B.S. lie that the “Sky is going to fall under Obama”, when in fact, his administrative has recovered all of the Republican Losses from 2007-2009 and taken the markets to new highs!….. :(
When those that bought into the GOP B.S., finally realize that they have been snookered by the GOP, the voters will turn them out as they did in the 1930’s and the markets will go to new highs as those investors return in droves…..
The above comments would indicate that Safe Money Report has some very intelligent, thoughtful subscribers
Has anyone read that book Connected by Economists Nicholas Christakis and James Fowler it’s got to be the best economics book I have ever read, very well put together and coherent.
I have read it and found it to be very accurate…..
Now I will do you one better: The average American citizen lives longer and better during periods of Democratic domination….. Yep, it well known and documented that from 1932-1981 Americans experienced the biggest climb in their standards of living and the greatest growth of the Middle class in our history, when the majority of those years were with Democratic leadership…..
It is also well documented that during the Republican Revolution from 1981-2007 (which like 1929 ended with a Republican Stock Market Crash) n the living standards of the average American fell and the Middle class got crushed……
Simple Economic history of America during roughly the past 100 years……. So who are you going to vote for?