I’ve been saying for a couple years now that low or zero or negative interest rates — not to mention, QE — just aren’t cutting the mustard. They’ve inflated asset prices, sure. But they haven’t done squat for the real economy.
Market Roundup
But in a fascinating just-released research piece, “Bond King” Bill Gross goes even further. He says ultra-low rates aren’t just failing to stimulate the economy. They’re actually hurting it.
I’m sure heads are exploding amid the Paul Krugman/Keynesian crowd today. After all, they believe low rates are exactly what you need to spur home and car buying, corporate borrowing, and so on.
But former Pimco and current Janus executive Gross issued this indictment in his thinkpiece:
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| Janus executive Bill Gross. |
“After nearly six years of such policies producing only anemic real and nominal GDP growth … it is appropriate to question not only the effectiveness of these historical conceptual models, but entertain the increasing probability that they may, counter-intuitively, be hazardous to an economy’s health.”
His thesis, in a nutshell and trying to use as little econ-jargon as possible:
Zero or negative rates cause the traditional lending and savings process to break down, while also causing the yield curve to flatten dramatically.
That provides investors with little incentive to invest for the long term. It also crushes bank profit margins. That hurts overall corporate profitability and yanks the rug out from under the very same banks the Federal Reserve wants to get out there and loan money like mad.
Pension funds are forced to cut benefits because they can’t earn adequate returns to cover past promises. Consumers and companies are forced to squirrel away more money because the yields on their savings collapse. That, in turn, saps disposable income, reduces corporate spending, and helps “Japan-ify” the economy.
Gross proposes a solution whereby the Fed and its foreign counterparts would abandon six-plus years of ineffectual policy. They should instead dump long-term bonds to steepen the yield curve and/or adopt a higher inflation target. But in the same breath, he basically said that won’t happen because they are too “stubborn, and reluctant to adapt to a significantly changed finance based economy.”
| “Gross’ solution: The Fed and its counterparts abandon six-plus years of ineffectual policy.” |
My take? Gross’ comments won’t help explain or predict what stocks will do tomorrow, or over the next few days. But they seem right on target considering the news we’ve gotten about weakening corporate profits, slumping manufacturing activity, lousy wage growth, and widespread market divergences. So while many of the analysts on CNBC say everything is hunky-dory again, Gross’ comments probably serve as a nice reality check.
So what do you think of his comments? Are low rates actually bad for the economy? Helpful? Somewhere in between? Why is that? Should we even care about the fundamentals in an environment where stocks have been rallying for five weeks? Let me know your thoughts over at the Money and Markets website.
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I’m back from my trip to Europe, with stops in Germany and Amsterdam. Everything went smoothly, and I enjoyed presenting to and speaking with subscribers to our German Safe Money publication. I noticed that stocks took a nasty spill late on Friday, only to rebound yesterday.
Mike Burnick pointed out some of the headwinds for this market, and several of you weighed in on whether you thought they would hold stocks back or if they would just keep running.
Reader Greg said: “Don’t overlook the foolish low interest rates causing folks to dabble into equities. Maybe they’ll lose their shirts or maybe double their money — time will tell. Balance is the key. I like some cheap biotechs, some cheap lithium shares, some undervalued gold shares, and some cheap semiconductor share companies.”
Reader Broomy said: “You mention that stock buybacks are one factor that is keeping the market up. But I’m not so sure you can compare things with how they were in 2000 and 2007. Today’s market is awash in cash, but there’s not really anything to buy.
“Companies are reluctant to increase capital spending because there’s just not that much demand out there. If that’s the case, you can either increase the dividend, let cash pile up, or buy back stock. You can’t earn anything on cash, and I don’t understand markets well enough to understand the pros and cons of increasing the dividend. So perhaps buying back stock works better for you than increasing the dividend?”
In response, Reader Chuck B. offered this view on share repurchases: “Stock buybacks are fine, when the money comes from earnings. When it is borrowed, maybe even to pay dividends (some companies are doing that), it makes management look good. They collect big bonuses. But the companies’ financial positions are certainly harmed, not helped.”
Lastly, Reader John E. said: “In the interest of full disclosure, I’m shorting this market. I got killed yesterday – unrealized – for reasons that are beyond my comprehension. The only explanation I can imagine is there is too much liquidity thanks to QE (and folks and their money managers don’t know where to put the money) or the Fed (conspiracy theory granted) is propping up prices similar to what bankers attempted in 1929. It didn’t work then, it won’t work now.”
Thanks for weighing in. I’ve been skeptical of this market for the past several months. I was very right in July, August and September … but obviously wrong in October.
That said, I’ve seen many of the same divergences and potential yellow flags that Mike highlighted — as well as additional ones I’ve discussed here. So I still think a cautious and skeptical stance makes sense outside of a few exceptional, highly-rated stocks that can buck the trend.
If you’ve already weighed in, great. If not, now’s your chance. Just head over to the website and add your thoughts when you have time.
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What brought down a Russian Airbus airplane over the Sinai Peninsula in Egypt? Officials have offered conflicting reports, with everything from terrorism to mechanical failure potentially responsible for the 224 deaths on board. The Metrojet flight was mostly carrying vacationing Russian passengers.
Candy Crush and Call of Duty are two wildly different gaming franchises. But they’re going to be under the same corporate roof now, thanks to a new M&A transaction. Activision Blizzard (ATVI) is buying King Digital Entertainment (KING) for $5.9 billion, a move that unites those and several other console and smartphone games.
European banks continue to fire workers, cut dividends, exit certain businesses, sell billions of dollars worth of new shares to boost capital levels, and otherwise screw things up. Standard Chartered Plc () of the U.K. is just the latest, swinging to a loss of $139 million from a profit of $1.5 billion in the year-earlier period. It plans to slash 15,000 jobs, raise $5.1 billion through share issuance, and shed or restructure assets to the tune of $100 billion.
Momentum continues to ebb and flow in the Republican nomination race. New polling data from the Wall Street Journal and NBC suggest Ben Carson is overtaking Donald Trump as the presumed front runner. Carson is the favorite, with 29% of GOP primary voters. Trump is next at 23%, followed by Marco Rubio at 11%.
Any thoughts on why Europe’s banks are such a mess? The deeper expansion into online gaming by Activision? Or the Russian air disaster? Let me hear about it over at the website.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Low interest rate have certainly hurt a lot of seniors. I suspect many have gone for junk and other high interest investments. I wonder how many have lost much of their retirement.
ZIRP has dramtically widened wealth inequality and I suspect many bitterly resent this. ZIRP also hurts the economy by encouraging huge malinvestments in marginal enterprises.
Trump is the only candidate who has come out decisively against ZIRP. The others are pretty much owned by the banks and Wall Street.
It is apparent that that the President is having all his department heads stone walling anything that could reflect negatively on his legacy such as Middle East conflict needing troops on ground for intelligence purposes, artificially low interest rates that are producing a huge bubble to pop wrecking the stock market, immigration and health care issues and the IRS investigation of conservative suppression until the next President must deal with them. Pity the next President whether Republican or Democrat.
Ya, but you see it takes a lot of easing to turn the country around after another Republican Administration Stock Market Crash…. Unless the GOP is willing to really truly begin to return manufacturing and jobs back to the U.S. we are screwed…
Personally, I think it is a joke that someone would actually think that a Republican can turn around the country because it has NEVER happened before… Of course, I suppose it “could be different” this time, right? I’l take bets on that one!… :(
Just out of curiosity. What would we do that would return manufacturing and jobs to this country? Jim
Have the President and the Congress get on board a Made In America movement….. Actually, that is beginning to happen around the country as more and more of us are rejecting Chinese and Mexican made
What about onerous taxes and regulations that drove them overseas in the first place? Jim
some think it was cheap labor that got them to leave.
hey Eagle 495 or should I call you Mike S. ……………….WASNT IT REAGAN a republican that pushed the made in America movement way……….back in the 80s
Pass fair trade laws that would work in favor of the Majority of the American workers.
This would be so simple we don’t buy 1 dollar more from any country on the earth then they buy from us.Countries that sell us more then they buy would have to get other countries that don’t sell us much, to buy more American goods. It could work the same as The Carbon Credits Between Countries.When America Eventually looses the World Curency we are not going to keep up the rediculous trade imbalance we have anyway.
Its too late. If anything comes back it will be to robo plants. Prepare yourself for very few jobs. You can head for the hills as I have or send your kids out to work in government service jobs or licensed tech jobs. Look for cash flow industries and stay away from anything that smacks of having to wait for regulatory bodies. The regulations is the final straw in our collapse.
Eagle495
Mr. Obama promised he would reduce debt and instead he has added to it. The longer we focus on past politics the harder it will be for anyone to turn this mess around. Other than GOP bashing, what is your realistic solution to our problems in this country?
I’m with you Howard. I don’t care who did what to who and I don’t think we have the luxury of waiting to see if Keynes or Von Mises was right. I want to know what WE do next to get out from under $18 trillion in debt and get 94 million people back to productive lives. I’m a fairly well educated and experienced business man and I will be the first to admit I have no idea what to do next. Jim
Amen Jim!! Could not have said it better.
I like that eagle. “Added to”. Whew! It shows that no amount of money can fix it. you must restructure your own community and make things work from the bottom up again. Forget the politicians and participate in a working community even it is just planting a garden. Things aren’t working because they don’t work! Make it work. Its down to you and your neighbors.
ROFLMAO,,, Yeah Egglett, go dig up Lynden “Looney Bird” Johnson, put him back in the Whitehouse, he could fix all this. Oh wait, you don’t ever talk about what actually happened do ya,,, ROFLMAO.!!
Mule
the fed should raise rates to slow down an overheating economy. no other reason.
The Fed should get out of the way and allow the free market to determine where interest rates should be..
The Fed is going to Bankrupt this country ..
Rates set by central planners that deviate from market rates are always disruptive to the economy. They tend to cause miss-allocation of capital that creates speculative bubbles and crashes. The purpose of the artificially low rates set by the current Fed is to encourage more credit ( read debt) but unless you can produce real growth, more debt just makes you even more vulnerable.
all rates set by central planning,
You appear to be unable to accept that low interest rates saved the economy. All you can seem to do is bash Keynes and I will wager you have never read his General Theory of Employment.
A lot of “history re writers on this site… :( The GOP screws thing up and the Democrats repair their messes… 1929 and 2007… 1932 and 2009… :(
More like you have not been exposed to the Austrian School of Economics; along with the members of the Fed, who have no apparent exposure either.
Hi Mike
With free markets, investors can follow the ebb and flow of all the variables and calculate a level of risk. When the Fed takes it upon itself to manipulate markets, how can you plan anything other than to keep higher levels of liquidity? Who knows what the Fed may do next. How does it help an economy to create mountains of unrepayable debt and then kick the can year after year?
Bill Gross is correct now but I recall his opinion when the first QE-1 was announced. He stated is was the right move but the amount was not nearly enough. Eventually along came QE-2 and QE-3 and I suspect we’ll now see QE-4. Now we see the effects of flooding the banks with easy money instead of letting the free market make corrections. Yes, many big banks would have failed but they would have been quickly replaced with more prudent ones. Better we’d swallowed the medicine then than now having to deal with a central bank manipulated economy recovery. Six years later we’re up against the wall and this is more likely to cause even greater pain.
PROTECTION OR DECEPTION ?
When TBTF Banks become insolvent and fail (close) the Federal Government won’t have the money to bail them out again and FDIC may require massive infusions of money to pay-off insolvent banks depositors, up to the full legal limit per customer account. A Republican Congress probably would be unwilling or unable to ante-up again. Hamstrung in 2022 ?
So, lengthy delays in settling FDIC insurance claims should be expected. Better have some cash reserves handy just in case of any unforeseen emergency. Don’t depend on the “bankrupt” Federal Government or even your neighbors. Instead, strive to be as independent as possible.
Not only is he correct but he misses 2 salient points. First it takes away the spending power of the middle class and seniors and anyone else that relies on fixed income. These are the sectors that will actually spend and create demand instead of buying back stock and investing overseas. Second, it allows other countries such as Saudi Arabia and China to prop up their economies by selling their foreign currencies at ridiculously high valuations. The Saudi’s might just ease up on the pouring of oil into the market if they had to sell 2 or 3 times the amount, and China’s fast dwindling foreign currency reserves would deplete so fast they would have to stop devaluing the yuan.
Bill Gross is right on target with his comments. ZIRP is placing a huge drag on the economy by changing the normal economic incentives to borrow and lend. Money must have a time component (i.e. an interest rate return) to function properly. I am afraid the long term consequences of the current Fed Policy have not yet manifest themselves.
He is wrong
All previous plans to prevent inflation and spur the economy have had the result of terrible inflation as in the Jimmy carter Economy. With 18% interest rates quotes were only good for two weeks maximum.
I was trying to buy a furnace for 68000 butt by the time the approvals came it was 160000.
With the banks refusing to loan many they should be broken up to realistic size.
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ROAD TO RUIN: A CLINTON VICTORY
A Hillary Clinton victory in 2016 means the odds of a bear market markedly increase. Many investors will sell off accumulated positions (gains) to lock-in a lower Federal capital gains rate. Investor confidence in free markets would also take a hit globally, as well, and possibly cause markets to sell-off around the world. The economy and voters would suffer if Hillary became president and caused a recession, which may be starting right now. Taxes, spending and debt will increase even more under a President Hillary Clinton.
Absolutely BS….. Since 1929 the Democratic Administrations have performed 167 TIMES better than the Republican Administrations… Get a life and do your own homework!… :(
Prove it! Lets see your facts. Back it up Mr. B.S. Bet you can not. Only a dumb liberal like you fails to support opinion. I was speculating. Nobody knows the future with any certainty, including you. Wise up.
Please gentlemen,495&graig,everyone is entitled to his or her own opinion,right or wrong without abuse,You guys seem to be argueing over bloody history.Should we be discussing history or present,I prefer the present,most Libs and dems have not got a clue what to do.As for President(the world is laughing)is this a family affair,it sure looks like it.As for interest rates its great,if your a large company,buying other companies,but all things will come to past.
Low interest rates helps usa government borrow money from other contries at low interest and there are savings when social security payments (also other linked pensions) do not increase because of the government’s formulas that indicate no cost of living increases. Actually, my basic cost of living cost food, utilities, etc have significantly increased.
Nan…my expenses have gone up dramatically too…not to mention outrageous increases in health insurance premiums under the…what do they call it?…”affordable healthcare plan”…..!!
It’s a good thing (they say) we don’t have any inflation, isn’t it??
And Social Security has turned into nothing but a government-sanctioned Ponzi scheme!
Maybe they should let Maddoff out so he could run for President……
Good idea. Madoff for president – Obama for Prisoner-In-Chief.
good idea,Chuck
Hillery Clinton for PRISONdent IN 2016
I suppose it’s the welfare state that is the under lying reason for printing so much funny money. And now they have killed a world wide system that used to make and sell things as the excuse for doing business. The excuse now is to rape and pillage the middle class, in rich the 1%, starve the lower class, all this to satisfy their greed. That’s it, good old fashioned need and greed. They have gamed the system to DEATH, that’s right, the ships of state have been torpedoed, we only await her sinking. What a bunch of greedy jerks. What does it profit a man to gain the whole world and lose his own soul?
We have in the process become fools.
I believe that the Fed’s keeping the interest rates at near zero are a boon to our government which owes enormous debts, but is totally counter-productive to the many of US citizens who are now retired and counting on bond interest to keep us in the economy.
My family, and I assume many others, have had to change our investment strategies to adapt to this changed environment.
Looking at the situation logically and in context to the American dream; adapt or perish.
My family has not panicked, just adapted. Not doing terrible, not great.
Zero interest rates are just another element of The Welfare State. This allows the “too big to fail banks” to save tens of billions a year in interest on the money they borrow from the Fed, at the taxpayers actual expense. Another overlooked scheme is the massive corporate welfare that’s handed to the big companies every year, again at our expense. Why should any big S&P companies be receiving major taxpayer dollars? It’s a taxpayer rip off of epic proportions. We can only imagine how much of it is kicked back to campaign funds. That these crony corporate pigs prosper at our expense is disgraceful. This whole rotten system deserves to be taken down.
Jim
Maybe two outsiders working together could make it happen.
I think that I have been saying all along that the Fed’s policies are actually retarding the Global Economy. I also think that this is by design, since I can not accept that they are too dumb to know what they are doing!
Mike, it is so so obvious the FED has painted itself into a corner. The National Debt and the Big Banks have had much to do with this and I highly recommend Nomi Prin’s All the President’s Bankers. However in its massive efforts to shore up the big banks the FED will be hard pressed to do much this time, when this bubble collapses. Finally it is sad and ironic that our leaders set up a system so much in our favor (USA) and yet still managed to send it on a collision course once again. Let us hope the neocons do not finish us off first.
Mike
I am about 99% with Bill Gross’s opinions. The stock market and the economy don’t really ride on the same tracks. Today is a great example stocks going up while millions are not employed and off the unemployment records. The healthcare industry is doing great this month because of open season and premiums on government and private sector health care insurances by 3-1/2% to 15% with an average of 7-14%. Last year, Coventry healthcare raised their premiums by 53%, this year Aetna purchased Coventry and also in the process of purchasing Humana and their 2016 comparable plan with Coventry’s 2015 Premiums is 50% less for now. So they put two companies out of business and will be cutting people. Of course there are a lot of others in their market.
SOCIAL MEDIA (Internet) DEJA VU’ ?
A recent article said Facebook stock is immune to economic downturns. I know for a fact that Mortuaries are not recession-proof. Forest Lawn laid off staff and restructured after 2008.
So, some investors may believe what they read. Another words, Social Media is a necessity, right along with taxes, rent, transportation and utilities. Have we heard any of this financial booster-ism before (“New Economy”)?
Sounds to me somewhat the same as was said about .coms in 1999-2000 at their decade long peaks and right before their price collapse. The similarity makes me real cautious about high P/E stocks with tiny EPS, to say the least.
I agree with bill Gross primarily because I can see that these low rates are leading to a false picture of the economy. It is also hurting the retired population and the near retired because of poor returns. The Fed should be fired but politicians have no guts to do the right thing.
RETROGRADE CANDIDATE
I am afraid the system is too corrupted. Hillary Clinton has been a dishonest person all her life. Look at the choices and trade-offs she has already made for evidence. She was fired in 1974 as a staff attorney for dishonesty and lying while on the Watergate Investigation Team. Apparently, with the latest e-mail snaffoo, she has shown to have emulated Richard Dick Nixon in his worst habits.
pertaining to russian aircraft disaster, i believe apiece of space junk struck the plane that caused it to breakup, long odds for that to happen but it is a plausible theory
LITTLE GREEN MEN
Maybe Martians retaliated for us sending the Mariner to Mars (JPL) to study the Red Planet. Perhaps what happened is they sent one in return to study the Blue Planet (Earth) and it accidentally hit the Russian plane. As in politics, ANYTHING seems possible.
Low interest rates and loose money mask an economy that is based upon deficits of half trillion dollar-trade deficits, half trillion dollar- fiscal deficits year in and year out just to keep people employed or on the public dole. This policy will result in disaster for our nation and many nations around the globe because our currency is the world’s currency. When our currency loses that status, we will learn how Argentina experienced bankruptcy and ruin.
BETTER DAYS AHEAD ONLY IF WE WISE UP AND DO RIGHT
The global bond market will cut us all off from cheap credit some day in the future and force Congress and the rest to live within our means. This means instant austerity for the many, equally, of course. It would also likely cause a bad depression and devalue everyone in the process.
After that, its only pay-as-you-go and we would never rise back to the level we once felt entitled to by birth. Life would become a struggle for survival and those without skills or an education would starve. No body will take care of them anymore. No Nanny State either. So, its cut-back a bit voluntarily or put it off a bit longer and lose control to others, who care little for us as it is. Either way, its a national choice. For better days, we must have discipline and stamina to do what needs to be done now, not next year.
With all the borrowing, low rates, while not a good policy, low rates are enabling heavy borrowers to stay afloat. If market set rates were allowed, a lot of people as well as a lot of governments would not be able to function. In some cases, that could be very good.
Like Mr. Gross, I think that keeping the interest rates low for a long period is counter-productive, but I do not find his arguments to be convincing. For example, he claims that investors have “…little incentive to invest for the long run”, but does not explain why lower interest rates tend to do that. I would argue that lower interest rates would provide an incentive for investors to switch money from the bond market to the equity market, which currently provides higher income (dividends and capital gains) than the bond market. If I am right, then investors who make the switch would be thinking this as part of a long-term investment project.
Mr. Gross complains that the lower interest rate reduces the banks profitability. This makes sense, but why is this a problem for the economy? It seems that he claims that this leads the bank to lend less to businesses. Why reducing lending is a better alternative than increasing lending? Will that increase the banks profit? Mr. Gross does not provide data that the banks reduced lending. Finally, if my previous point, that investors will shift money to the equity market, is correct, businesses will be able to sell more shares and will not need to borrow from the banks anyway!
Mr. Gross also complains that pension funds cut benefits [any data that this happens?] because they do not earn enough return. The pension funds , like other investors, probably adjust to the situation like other investor by increasing their investments in the equity (stock) market to earn the higher dividends.
Contrary to Mr. Gross arguments, I think that keeping interest rates low for so long after the Big Recession of 2008-9 has ended, is the likely to lead to INEFFICIENT investments and misallocation of resources; this leads to a lower long – term growth of the economy. The low interest rates enables companies to obtain funding (by borrowing or selling shares) for projects that yield low returns. Had the interest rates been higher, it is likely that those projects would have not been financed, and other projects that promise higher return (that have been crowded-out) would have been financed instead.
When the Fed repudiates the dollar the dollar becomes Monopoly money, and the Monopoly game becomes a high stakes gamble that all players, save one, eventually walk away from empty handed; the one player left standing being gold.
Have you ever heard of the “Jackson Linkage” Mike?
http://www.gold-eagle.com/arti…
In the 1940s Gilbert Jackson came up with the K-wave by studying just two economic indicators (the price level and the rate of interest). Additionally he found that price level and rate of interest were linked … that they have to move together.
As Antal Fekete quoted Jackson in the above article: “Sometimes the price level leads and the rate of interest lags; at other times, the other way around. In his [Jackson’s] own words just like two hounds on a leash holding them together, while one can get a little bit ahead, they cannot come apart, the leash obliging them to follow the same path, uphill or down.”
So what does this mean (assuming its true)? It means that trying to create higher prices while holding the interest rate constant (and at zero no less) is crazy. No reputable economist could possibly think that … at least according to Jackson and Fekete. Because “prices” can’t go higher unless “interest rates” do too. Because they are connected/linked … that connection is called “Jackson’s linkage”. So why would it be a surprise that the FED wants to raise interest rates if they want to have inflation? How can there be inflation without higher prices? And how can you have higher prices and not have a higher interest rate (per Jackson’s Linkage)? So Gross is right … though he may not actually know why himself.
The interesting thing is … they evidently think they can make interest rates lead this march. But since historically which one leads is not a constant (sometimes price leads and sometimes interest rates lead). I wonder if it is actually possible to dictate which one will lead? Because if its not, and if in the present economic circumstances it is price that must lead, then they will end up being in the position of pushing on a string.
I think European banks are in trouble for several reasons. Growth isn’t there, which means unemployment remains high and getting higher. Several countries are having problems paying back national loans, Greece is borrowing money to pay interest on borrowed money. Governments have cut spending, especially on social programs. The refugee crisis from Africa and Syria, some point out that the influx or refugees will help much later because most of Europe has aging populations and the refugees are mostly younger people. But right now the cost is staggering on already weak economies and many have no marketable skills, so more social program spending. This is also the perfect way for terrorists to infiltrate and launch more terror attacks raising security costs and the costs of the attacks, a further drain, This is what can also happen here, and with the current misadministration very likely. Also notice that outside of Turkey whose borders are being overrun by refugees, none of the other Arab/Islamic countries are taking in refugees. What do they know that we don’t?
Its O.K.
Its
These low rates have stifled business. Seniors can’t make anything on their life savings and are having to cut back on essentials. Banks are having to turn to alternative programs to make their numbers, rather than making money through loans. Its certainly time for the Fed to let interest rise.
i’m still waiting for that interest rate hike you predicted would happen early this year with the price of metals sky rocketing after. you and edelson…pieces of work.
Yes, low interest rates hurts the economy. It takes the money out of the middle class who would spend the money on consumer goods and gives it to the bankers and Wallstreet. Time for it to stop.
Randy,once again I state,Dont listen to anyone ANYONE,watch the charts,even if its just the MACD
Note to Craig Bradley: Since 1929 the averaged annual rate of return from the stock market under Democratic Administrations (40 years) has been 10%.. During the same time period, the annual rate of return under Republican Administrations (36 years) has been 0.04%. This site will not allow me to post the studies that prove those figures…. Using 6th grade math, that means the Democrats have done 167 times better than the GOP…. That is over 80 years of financial history…. Do you now understand why I believe the election of a GOP President will NOT be good for America? Of course, it “could be different this time”, right? Ya, could be, but, ya see, past financial history leaves that in doubt… :(
Again, do your own research and quit taking as gospel, the misleading information coming from the Right Wing Screamers, aye? Try asking yourself, who pays those guys?!… :(
I think investors are in the same quandary as businesses. Flush with cash but no idea where to invest it. Real estate is solid but scary as things seem over valued. Bonds are dead. Anybody’s guess on the stock market. Gold or Silver? Who knows. Maybe a good time to put it under my mattress or in a buried can in the back yard.
Hi Mike, the crash of the Russian jet liner was a tragedy but it seems no country is immune to this sadness. From listening to news reports it is possible this incident was a terrorist attack. Within the debris strange items were found that did not belong to an airplane. It is possible someone boarded the plane with an explosive or it was planted on the plane at the airport. Time will tell as the investigation moves forward.
ahhhh yes was it a missile a bomb ? who knows time will tell it seems , but what bothers me is millions of Syrians are flocking to the European nations and hundreds of thousands are headed here to the usa what bothers me the most is they are mostly men not women and children , think of it like this if you were trying to escape a war torn region would you leave your children behind to face the ravages of a war created by the Obama administration
Dear Mike: Low interest rates are hurting the economy. As you well know, money always goes where it is treated the best. Since QE started investors have taken their capital out of our country in search for higher yields all over the world. QE has punished savers. We have lost 2.5 Trillion dollars of interest on our CD’s, passbook savings accounts and money market funds. Pension funds and insurance companies who rely on stable interest rates are hard pressed to find safe securities who pay a decent rate of interest. At the beginning of QE, consumer debt was 13.7 Trillion dollars. At the beginning of the first quarter, consumer debt has been reduced by 400 billion dollars or 3%. Business investment is 570 billion dollars, which it was in 2000. Once again it has been proven that no Central Bank can know what 320 million people will do with their money! QE 4 should be put on the back burner. It is time to address the structural problems of our economy; fiat money excessive taxation, regulation and litigation. The number 1 threat to our National Security is our national debt, which not been addressed! The former chairman of the Joint Chief of Staff, Admiral Mullens warned us at the time of his retirement that our National debt is the number 1 threat to our National Security. Regards, Robert Calabro.
Dear Mike,
You ask what we your readers think of the prolonged, preposterously low interest rates that Mr. Gross comments on. I’ll tell you what one long retired senior believes: Since at least Ben Franklin, it has always been said that young, active citizens should save their money so that in their old age they can live off the interest of the savings and not be a burden on anyone. Well, our elected leaders and principal leaders of institutions of interest in this matter, may I call them the “Insiders”, have over the last 20-30 years willfully betrayed the trust we placed in them. The rest of us in our active lives have dutifully carried out trust, serving all in our own specialties whether lofty or as mere laborers. We expected that those who controlled economic and related conditions would serve equally so. Instead they, working in and through their specialties, have taken care primarily of themselves, and left those of us who faithfully saved some of the fruits of our labor, gather unprecedented, pitifully small interest from our savings. So much for trust. Shame on all of them.
BILL GROSS’ COMMENTARY IN INTEREST RATES:
Bill is a very smart guy, but that does not mean he has a good understanding of the countless moving parts of the national or global economies. For starters the idea that “it” (fixing the economy) boils down to a few simple things like interest rates one way or the other is the kind of simplistic thinking that probably makes a good essay but has no actual utility in the real world. But for starters I’d like to comment in his reasoning, as follows:
1) “After nearly six years of such policies producing only anemic real and nominal GDP growth…” While a lot of talking heads sound like this, there is a fundamental problem with this statement. That is the policies of the gov’t and the Fed do not drive the economy. Bill (and others) would like to think of Fed policy as causal to the overall nature of economic activity – but it is not. The economy is driven more by free market activities of participates that anything or anyone else – including the mighty governments of the world. And if gov’ts can’t be the cause, they can’t be the cure either. Therefore blaming the gov’t for a weak economy is just as foolish as crediting it for a strong one. Keep in mind the world had both good and bad economic activity long before there was a Federal Reserve.
Gross’ statement that the Fed policy is to blame for an anemic economy is just as foolish as his follow up that changes in such policy will “fix it”. Everyone wants to find “Mr. Fix-It” for the economy, like a child crying out for daddy to fix a broken tricycle. While the latter may well happen, the former won’t.
2) “That provides investors wealth little incentive to invest for the long term.” That is not true. The incentive for investors to grow their wealth is always there, and it never changes. Investors want more money – and they don’t stop wanting that just because interest rates are down. The only change in this low interest rate environment is that debt in general, and bonds in particular just don’t seem like a good way to go for investors. In fact with debt returns running at or less than the rate of inflation, those who invest in them are actually losing, not making money. It is not a coincidence that Bill Gross is a bond guy who lives and dies by the attractiveness of his product. It may be that investors have little incentive to invest with him, but not to invest in general. Ask anyone who’s been in stocks over the last 5 years and see if they feel they should have been in bonds instead.
3) “Pension funds are forced to cut benefits because they can’t earn adequate returns to cover past promises.” There are a lot of reasons that pension funds struggle, and many of those reasons (benefits offered are too high, underfunding by the company, raiding by all sorts of shady entities, and lousy investment choices) contribute to underfunding more than low interest rates. And it should be kept in mind that pension funds don’t just invest in bonds. They are also heavily in equities and funds that have done that have done pretty well. And I don’t think it’s likely that pension funds would jump at the chance to get rid of the 10-12% per year gaining part of their portfolio low return debt even if interest rates were to go up to 4% or 6% as Bill suggests.
(continued next post)
4) (Mike says) “Gross proposes a solution whereby the Fed and its foreign counterparts would abandon six-plus years of ineffectual policy.” Bill Gross can propose anything he wants because talk is cheap. But if you sit on the FOMC talk is not cheap, and you are mindful (if not fearful) that what you do could have an adverse effect on an economy that has been looking somewhat fragile for some time. THEY need to keep a delicate balance, and there is no guarantee that their decisions will not blow up in their face. Therefore they tread carefully – which Bill Gross and any of the many other critics of the Fed don’t have to worry about. They can say any damn thing they want – knowing nobody is going to actually do what they recommend.
But the economic reality on the ground is that the US economy, which could be thought of as “lukewarm” at best, has continued to move forward since 2008-09, and thus far it’s also avoided imploding. These are the concerns of the FOMC, not what Bill Gross or any of the other chirping birds have to say about it. You cannot deny that we did NOT have a 1929 like meltdown in 2008-09, and you cannot deny that our economic malaise we have now may be unpleasant but it is nothing like the pain of the great depression. And that being the case I think it’s more accurate to say that the Fed has played what few cards it has fairly well under the circumstances. But if you don’t agree with that – you may agree they could have played them worse. That’s about what you should expect from the Fed – not that they can “fix everything”; they can’t.
AND the last major thing Bill Gross omitted in this narrative is that when interest rates go up then longer duration bonds resale value will go down. This will trigger a bloodbath of losses in the bond market, and that itself is a massive threat to the nation’s economic well being. (Weiss Research has correctly projected this view this many times) Even Bill Gross himself predicted this in the past and even though that may have gotten him fired at PIMCO, it is a correct application of bond pricing theory. So the sooner we have interest rates rising the faster the melt down in the bond market will occur – and Bill knows this. So I find it curious that Bill Gross, of all people, is coming out in favor of raising interest rates significantly at this time to boost the economy. Considering that the global bond markets are about 350% bigger than the global stock markets it is hard to envision this as being a good thing.
My explanation for that, for lack of better one, is that Bill Gross has stated that there are two things he wants. One of them is “… to be famous”. He loves the attention of the media and kicking ideas like this around is a good way to get your name into the media. Needless to say this is not a good foundation for establishing monetary policy.
John
The stock market is only a reliable indicator of the economy’s real health when the interest rate is set by the unadulterated supply and demand decisions of all the individuals, institutions and businesses who create the demand for money. No one really knows what the stock market is worth today because every time the fed makes an arbitrary decision to lower the rate the market increases, and every time the fed indicates it may raise the rate, the market drops. That has nothing to do with the fundamentals of real supply and demand so its impossible to invest rationally based on productivity and value creation.
Lets get to the basics. All the highly intellectual talk in the world is not going to change the FACT that everything that consumers buy be it homes, cars, boats or everyday must have things to live are priced in at “0”% rates now. Add to this that the average Joe is just living from check to check and raise’s have no where near kept up with inflation the economy is just going to limp along. If the policy makers really want to get the rates back up they are going to have to write down/off debt (a lot of it) world wide. This would let the consumer base start borrowing at higher rates again and start the cycle all over. But we know this is not likely to happen, because there is too much greed at the top.
DC
What effect has it really had?…. The whole world is beginning to ditch the dollar….. banks have been recording record profits….while the middle class is struggling…US and worldwide debt has surged to astronomical figures….. asset prices across the board have reached record highs…..Everything, from home prices, stocks, bond prices and collectibles is simultaneously at all time highs. This is NOT normal…and all this has no sustenance…the Fed is the reason the economy is in the toilet for so long… its destructive programs of QE,is the reasons behind it…and are completely screwed up.. .whether the economy is healthy starts from a wrong premise….Their analysis and any judgment on that part is bogus.,,everyone knows this to be true ..and never the powers that be….call them out on it… and never will until their elite pockets feel it..
I said years ago that the banks will borrow at zero and buy Treasuries at 3% and make their spread with no risk. They will stop lending. Seems I was right. RWM
Giving away candy to children does not reduce cavities! (QE’s do not reduce debt addiction)
Suffer the root canal to keep your tooth. (Same with deleveraging losses to reset economy or the bubble burst will)
Demograhics do not support lending/spending as an economic cure.
FormerUS TREASURY SECRETARY Paul Oneil said QE was waaay overdone. According to him, they should have stopped after QE1. KAREN HUDES: A former Attorney at The World Bank recognized from way back that the global financial markets were being manipulated from The Bank for International Settlement in Switzerland. According to her this is where the Central Bankers from around the globe meet to rig the financial markets – she was under the impression that they were rigging gold prices but we now know that they were rigging interest rates. All this she claims was being done for personal gains, remember Central Banks are NON GOVERNMENTAL ENTITIES. When Hudes took her finding to her bosses at The World Bank, She was terminated. I, on the other hand long before I read the Hudes interview, recognized that QE in particular was concocted at The BANK for International Settlement (BIS). In essence QE is a global conspiracy, moving from Japan to The USA, to Britian to The EU. QE and its sibling ZERO INTEREST RATE POLICY(ZIRP) destabilize economies and throw datas into chaos so making monetary policies DATA DEPENDENT is a scam. They know that with ZIRP there will always be a data out of place that they could point to as a reason to keep rates low. Recognize that Yellen and her associates at The FED, DRAGHI, CARNEY, The Bank of Japan, etc all sound like they are reading from a script. Also Ben Bernanke always use his status as a Former FED Chairman to talk down interest rates, even Christine Lagaarde from The IMF is mentioning the concept of Data Dependent. It is crystal clear that QE and ZIRP are counter productive and we are now seeing diminshing returns from their effects, We must now ask if Central Banks are capabe of msnaging our money supply with open market operation or should Central Banks be reduced to being just a Clearing House for banks.