Archive for May, 2016:

What’s up with world interest rates?

Written on May 20th, 2016 by Jamesno shouts

It’s been another volatile week as expected. Things were holding decently until the Federal Reserve meeting minutes were released on Wednesday and then the fireworks started.  Seems the Fed has now reversed course and gotten more “hawkish” saying they could in fact raise interest rates at their June meeting.

The market did not like that and all 3 of the major assets classes: stocks, bonds and commodities sold off.  I’ll comment more on the dilemma that the Fed has been put in below, but after all the gyrations this week my general feeling is we should be nearing a turning point for a little relief rally.
No guarantees but this entire monthly process still feels corrective as the market tries to work off the move up from a few months ago.  A lot of folks started turning bullish in April and that is when the market does its best to really whipsaw the bulls that are late to the party.
So let’s talk interest rates.  Do you guys remember back a few years ago when Europe was on the brink of crumbling because of the debt load of the PIIGS?  That is Portugal, Italy, Ireland, Greece and Spain.  Interest rates were skyrocketing in those countries as NO one wanted to hold their debt.  So fast forward to 2016.  The issues in Europe have quieted down, but certainly not gone away.  Would you believe that now the US interest rates are the highest in the developed world?  This is the dilemma the Fed is faced with.  How can the US treasury note, the most “risk free” asset in the world be trading at a higher interest rate than Italy and Spain?  Below’s charts show the recent snapshot of rates and historical movement over the past 5 years.
Can the Fed really hike US rates when everywhere else in the world is going negative?  Can they really hike rates in June right in front of the British vote to exit the European Union?  I say they are just jawboning and have no intention of raising, but we shall see.
5 year chart of rates.  Can you believe it?  US 2 year bonds are yielding higher than riskier Spanish 10 year bonds (negative!)  The yield is what the market demands for risk.  This is saying you buy Spanish debt and hold for 10 years and not only is there no risk of default, but you pay the Spanish government for the privilege of owning their debt……….
Inline image 1
2 year yields  (yes more negative interest rates, US is the only positive interest rate):
Inline image 2
The negative rates mean that at the price you pay for the bond you are guaranteed to lose money by the time it matures.  Crazy.
So the US keeps hiking rates, our currency strengthens and every domestic company in the US looses the ability to sell overseas?  (stronger currency hurts our companies that export product as it becomes more expensive to foreign buyers).  I just feel the Fed is in uncharted waters here.  We are in a world of negative rates, how can the safest “financial” country in the world keep raising them?
Interesting times…..

What future returns are you counting on?

Written on May 2nd, 2016 by Jamesno shouts

McKinsey & Co have released a report entitled “Why Investors may need to lower their sights”.  In the report  which you can read here (  http://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-investors-may-need-to-lower-their-sights?cid=other-eml-alt-mgi-mgi-oth-1604%20 ), they make an argument that investors may need to lower their expectations for stock returns and the days of the 8% average  return of the S&P may be gone for awhile.  This graphic summarizes it pretty well:

 

 

 

 

 

 

 

 

 

 

 

 

 

The question becomes, will your money last throughout your retirement if this proves correct?

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