interest rates – Page 2

interest rates, retirement, risk management

Feb Jobs Day… “Buckle Up”

February 14, 2022July 12, 2022 James Cox

It has been a turbulent week…

Price of gasoline rose to the highest since 2014 at $3.43/gallon. Brent crude is at $93 per barrel.

Inflation number to be released next week is expected to rise to 7.3%, from 7.1% in January

On Thursday, the ECB announced it would pull back from QE faster than expected after their meeting on 2/3/22. ECB pivoted away from their policy of “lower rates for longer”. As a result, Italian yields are up dramatically. Yields of Italian bonds started the week at 1.2%… by Friday yields were over 1.7%. Negative yielding debt is at lowest level since 2018.

At a meeting in the UK, Bank of England Governor Bailey called on unions to hold off on demands for pay increases. Union officials called it “a sick joke”.

In equity markets Facebook (Meta) fell 25% and lost over $200billion in value overnight due to slower growth. The next day Amazon rose 15% and gained over $150billion in value on earnings and price hikes. These are massive flows of capital.

On Wednesday, ADP released numbers this week showed a decline of 301,000 jobs due to Omicron and a worsening in economic conditions due to rising bond yields. The question is how much of the drop is due to Omicron which is fading, and how much is due to a slowdown in the economy which could worsen as the Fed raises rates starting in March.

The White House warned “the January jobs number will be ugly”.

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interest rates, retirement, risk management

What do rising rates mean for investors? In 2018, in 2020… and today in 2022

February 11, 2022July 12, 2022 James Cox

In January of 2022 markets sold off as investors came to grips with the realization that the Fed was committed to end Quantitative Easing (QE), raise rates by March of 2022, and begin selling assets from its balance sheet. After years of “easy money” monetary policy, the Fed had been forced to change direction due to rising inflation worries. (1)

“The market is significantly overvalued, which works okay when interest rates are at record lows,” said Mark Zandi, chief economist at Moody’s Analytics. “But when rates rise, valuations become a real issue, so the market is adjusting to the new interest rate reality.”

To understand how this affects your portfolio and retirement savings a bit of historical context can be helpful.

So first… a history lesson…

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interest rates, retirement, risk management

Jobs Friday: December 2021

December 10, 2021July 12, 2022 James Cox

As a financial advisor and someone who loves the study of economics, “Jobs Friday” is the highlight of my month. It is a signpost of where the economy has been for the past month or two, as well as giving clues about where it is headed in the coming month. Information derived from the Jobs Report posted by the US Dept of Labor is used by the Federal Reserve to judge, manage, and adjust monetary policy. Politicians on both sides use the information to justify and drive fiscal policy.

For this month’s report the expectation was for the economy to have created 550,000 new jobs. One factor going into the jobs report that is a concern is ‘how many people are going to come back into the labor market?’ Currently, economists estimate that nearly 8 million people are still out of the labor force, having left at the beginning of the COVID pandemic in February 2020. (3)

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interest rates, retirement, risk management

Economic Fears and Managing Risks

November 2, 2021July 12, 2022 James Cox

In the Fall of 2021, the economy continues to slow, and it is having an effect on markets.

I wrote this article originally just before COVID hit… some of the observations were in 2019, as you will see.

In 2019, the economy was already slowing…

It is interesting how the comments in the original article are appropriate for today’s economic environment.

In 2019, incoming ECB President Christine Lagarde stated the US trade war with China had “dented global economic growth.”

“You can’t adjust to the unknown. So, what do you do? You build buffers. You build savings. You wonder what comes next. That’s not propitious to economic development,” said Lagarde.

“It means less investment, less jobs, more unemployment, reduced growth. So of course, it has an impact,” she said. Lagarde led the International Monetary Fund for 8 years prior to moving on to the ECB. (1)

Recent surveys by the NFIB strike a similar note by US businesses that in 2021 are constrained by supply chain delays, increasing prices, and labor difficulties. (2)

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interest rates, retirement, risk management

Negative Yielding Bonds and Risk

October 22, 2021July 12, 2022 James Cox

Bonds are traditionally used within investment portfolios to reduce equity risk and generate income through the yields they carry. For example, a 10-year bond with a face value of $10,000 with a 5% yield generates $500 in income. Most recently the US 10-year yield was 1.5%.

However, over the past few years central banks in Europe and Japan have experimented with Quantitative Easing and driven rates below zero%. In August 2021, the amount of negative yielding bonds reached over $16.5 trillion. In May 2019 that amount stood at $12 trillion. Yields in Europe continue to fall as the ECB in June indicated its plans to set up a new bond buying program in upcoming meetings. A slow-down in the European economy, spiking energy prices and rising inflation has left businesses and economists frustrated. (1)(2)

What is a negative yielding bond? It is a bond with an inflated value and a yield of less than zero%. An example of a negative yielding bond is one with a face value of $10,000 but a market value $11,000. The purchaser of such a bond literally pays more than the bond worth for the right to own the bond. As bond yields move down the value of a bond increases. As bond yields move up the value of a bond decreases.

As energy prices and inflation has risen, bond yields have quickly moved higher. As a result, the amount of negative yielding debt has decreased, and the value of bonds held by central banks and institutional investors has plummeted.

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interest rates, retirement, risk management

How to Guarantee Retirement?

October 15, 2021July 12, 2022 James Cox

Several years ago, I read a post on LinkedIn which sounded the alarm bells that the “time is running out” for your retirement account.

I found it offensive and in poor taste, playing on the fears of the public at large. Throughout most of 2021 there has been a palatable undercurrent of fear in the market… on the part of investors, on the part of money managers, on the part of economists… Inflation rocketing higher, talk of asset bubbles left and right, issues around hiring and employment, falling consumer sentiment, and all of these leading to a slowing in the economy

The 5% pullback in September 2021 in the market reinforced that fear for some.

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interest rates, retirement, risk management, Taxes

Trick or Treat? Revisiting The Potential Downside of Tax Reform for Investors

October 6, 2021July 12, 2022 James Cox

There is an old story that goes “beware what you wish for…” Things don’t always turn out as expected. In 2017, President Trump proposed and Congress approved a huge tax cut plan… the Tax Cuts and Jobs Act (TCJA). The results have been controversial.

Along those lines I watched a fascinating interview of Tom Lee, head of research at Fundstrat, on Bloomberg four years ago. His insight proved very valuable and accurate. (1)

His feeling is that a Tax cut, as it was being discussed, could be negative for investors long term. “There’s two reasons; First, when cutting tax rate you raise the after tax cost of debt. Leverage becomes a problem for a lot of businesses. Second, because you are cutting tax rates you are effectively giving cash to all businesses, even businesses where you want to reduce allocation.“

His observation was that companies that are currently struggling with cash flow will have a temporary life preserver tossed to them, but it will not change the fundamental issues facing a lot of industries. It will distort markets.

In fact, that is exactly what happened. Companies that were not profitable and not healthy continued to borrow and live off of debt instead of reforming their business models.

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interest rates, retirement, risk management

2021 Inflation and Parallels to the Seventies

June 17, 2021July 12, 2022 James Cox

My most vivid memory of the Seventies is sitting in the car with my siblings and parents in a mall parking lot the week before Christmas and my mother crying because they couldn’t afford presents and had to file bankruptcy. For a 12 year old it made the challenges of real life… real.

The seventies were a traumatic time for many Americans… the end of the Vietnam war, the political chaos of Watergate and Nixon, the oil embargo, gas rationing throughout the decade, the suffocation of unions, the loss of jobs and industries as Japan and South Korea became exporters. Economic instability was an ever-present cloud.

Moving in waves through the decade, the economy suffered from bouts of inflation and deflation. It made policy decision-making challenging at best… boost the economy to keep it from slowing down, or is the economy running too hot?

When you drill down one sees many similarities between conditions that led to the “stagflation of the 1970s” and the situation we find ourselves in post COVID.

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interest rates, retirement, risk management

“Rising Prices in the Economy”: Inflation Post COVID

June 1, 2021July 12, 2022 James Cox

In September 2020 Jay Powell announced that the Federal Reserve would adjust how it reacts to inflation, one of its chief mandates, and allow inflation to run hotter for longer. The expectation is that it will be several years before the Fed raises interest rates. Traditionally, elevated rates of inflation indicate the economy is operating at full capacity and may be in danger overheating. Following the COVID recession of 2020 the Fed is trying to create a positive environment for the recovery.

In the Spring of 2021 signs of inflation are abundant. Since the fall of 2020 commodity prices had risen dramatically. Lumber prices had soared as supply constraints limited what was available, especially as housing prices went up and building accelerated. Copper surged to new record highs. Wheat, corn and other food commodities went up as the economy reopened and supply couldn’t keep up with demand.

Among tech businesses a shortage of computer chips affected the building of everything from cars to exercise equipment. “Just in time” supply chains showed increasing strain.

To top things off, a gasoline pipeline was held hostage by a ransomware attack in early May 2021. The result was gasoline shortages and higher prices throughout the east coast US.

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interest rates, retirement, risk management

The Impact of Financial Euphoria

May 18, 2021July 12, 2022 James Cox

On a recent rereading of John Kenneth Galbraith’s “A Short History of Financial Euphoria”, he outlines common characteristics from past financial bubbles including the Tulip mania of 1637, the South Seas bubble of 1720, the various booms and busts of 19^th century America, the market crash of 1929, and the October 1987 market crash. While the financial instruments vary, the behavior of investors has many elements in common. Bubbles in financial markets have several characteristics in common.

One of the elements Galbraith cites in the financial bubbles he analyzes is the introduction of new financial instruments. Such new instruments offer the “investment opportunity rich in imagined prospects…” (p51) Added to these new instruments is the element of leverage. Leverage allows investors to capture more profit than is normally possible. However, leverage also introduces fragility into the financial system when the value of investments start to fall and leverage needs to be unwound. The unwinding of leverage leads to additional sales and additional losses. The collapse of bubbles has an “inevitable and depressive aftereffect.” (p67) Such a depressive aftereffect is manifested in weakened consumer goods demand, shaken business confidence, a fall in business investment, and a rise in business failures. The bursting of bubbles has a “substantial and ultimately devastating economic effect.” (p89)

Another critical element in the development of bubbles is psychological. “Individuals were dangerously captured by belief in their own financial acumen and intelligence and conveyed this error to others.” (p51) In this aspect, bubbles not only develop from financial innovation but especially because of psychological behaviors and characteristics.

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