The bond market consists of the transaction of various debt instruments among investors. This can be corporate debt or government debt. The issuance of debt is called the “primary market.” The re-sale of this debt is called the “secondary market.” Parties raise debt for a variety of reasons, but primarily to fund growth through expansion. U.S. government bond market is among the largest and most liquid debt instruments to trade.
As most readers know, I have been calling for a reduction in the Federal Reserve’s quantitative easing (QE) program for some time. My worry has been that the current level of quantitative easing is not doing much to help Main Street, and it is building potentially dangerous risks to our economy over the long term.
I’m worried about the future of this country, and yes, even my investments. I don’t want my hard-earned wealth to disappear due to mistakes made by the Federal Reserve in continuing to pump quantitative easing.
And I’m obviously not alone in this sentiment, as recently the CEO of BlackRock, Inc. (NYSE/BLK), Laurence Fink, stated that the Federal Reserve’s current quantitative easing policy is creating bubbles in various markets. (Source: Bloomberg, October 29, 2013.)
Fink’s opinion that the Federal Reserve should begin tapering quantitative easing immediately comes from the long-term viewpoint of the overall economy and the damage that is being done. Even though money managers like Fink might benefit from quantitative easing over the short term from the boost in asset prices, if bubbles get bigger, the damage over the long term could be extremely serious.
This has been my viewpoint for some time. Sure, it’s great that the market has gone up recently, but if it’s not sustainable, what’s the point?
Much like real estate a decade ago, we all enjoyed the party on the way up, but the hangover has taken years to work off.
Because the Federal Reserve has been so aggressive in its quantitative easing policy, it’s not just the stock market that is going up. Investors who are desperate for … Read More
The last Federal Reserve meeting on September 17 and 18 was one of the most shocking in recent memory. It wasn’t shocking what the Fed did; rather, it was what the Fed didn’t do that was shocking.
After such a long period of quantitative easing, the market was expecting the Federal Reserve to begin reducing its bond purchases totaling $85.0 billion per month.
However, the Federal Reserve stated that it believed the U.S. economy was not strong enough, so the central bank kept the quantitative easing policy in place for the time being.
The minutes from this Federal Reserve meeting were released recently, and it’s interesting to note that it held off on tapering, even though there was a lot of debate over the economy and the status of the quantitative easing program.
It appears that the majority of the members do believe that the Federal Reserve will begin reducing its asset purchase program shortly, with this particular part of the quantitative easing program coming to completion by mid-2014.
Remember: this inaction happened before the government shutdown. Now, with uncertainty rising and the politicians still fighting, it appears that the Federal Reserve was right in thinking that uncertainty would increase on the federal level and in keeping the quantitative easing program in place.
With a new leader soon to take the helm of the Federal Reserve, the question is: how will the Fed reduce quantitative easing going forward and what does this mean for your investments?
Already we’ve seen interest rates rise just on the discussion of the beginning phase of quantitative easing reduction. Imagine what will happen when the … Read More
One of the facts that people still have a hard time dealing with is that all nations are part of the global economy. While we like to discuss our circumstances here in America, we have to remember that for a strong economic recovery to emerge, we need to become more attractive relative to other nations in the global economy.
Here’s a perfect example of what not to do:
Recently, France-based Alcatel-Lucent (NYSE/ALU) reported it needed to cut 10,000 jobs in an attempt to try and turn the company around.
Obviously, no one likes to see a company cut jobs, but if the firm is unprofitable and it can’t raise revenues, then there is little choice.
What really surprised me was the response by French Prime Minister Ayrault, who stated that unless the unions agree to the company’s plan, the government won’t allow these cuts. (Source: “Alcatel plan won’t be accepted if no union deal,” Reuters, October 9, 2013.)
How can the government “force” a firm to keep all of its workers when the company is losing money?
While neither the company nor the government wants to see job cuts, if an economic recovery is to take hold, then the firms that are left functioning need to have the flexibility to both expand and contract operations in accordance with how both the domestic economy and global economy are functioning.
By preventing a company from taking action to try and improve its profitability, the government is essentially telling the global economy, “Don’t do business in our nation.”
And while you might assume all the job cuts will occur in France, only 900 … Read More
There are some signs the stock market is developing some froth. Besides a growing disconnect between the record levels of the stock market and the underlying economic and business fundamentals, we are witnessing predictions that remind me of the froth in 2000.
The latest comments on the stock market emerged from Jeremy Siegel from the Wharton School of business; in an interview on CNBC, Siegel said that the long-term upward trend remains in place, and he confidently predicted the Dow Jones Industrial Average will hit 17,000 this year. (Source: Navarro, B.J., “Jeremy Siegel Still Sees Dow 17,000,” CNBC web site, May 31, 2013.)
While I respect the work of Mr. Siegel, I really don’t agree with his prediction on the stock market. I actually think that while the Dow will likely trade at 17,000 at some point in the future, it’s not going to be this year. Maybe that will happen in 2014, but there are currently too many fundamental uncertainties to ascertain that. Siegel is projecting 18,000 by 2014, which is more plausible, as long as the status quo remains intact with the economy and interest rates.
Let’s take a look at Siegel’s estimate for this year, and let’s assume that it will be achievable in this type of momentum stock market—you never know; reasoning is often pushed aside.
If the Dow reaches 17,000, the advance would be 29.73%—nearly twice the current gain of around 15.35% at the end of May. Reaching that advance will not be easy, though. Since 1975, there have only been two years out of the 38 years (5.36% of the time) when the Dow … Read More
One of the most dangerous situations is when an investor attains a false sense of confidence. With the Federal Reserve enacting such an aggressive monetary policy stance, this has led to reduced levels of volatility and an uncanny calm in the financial markets.
Because the Federal Reserve has stepped into the financial markets with such a large level of support through their monetary policy program, this has led to bond prices that remain elevated and yields that are at very low levels. Not much has occurred over the past few years in terms of shocks to the system.
The danger occurs when investors believe this situation will remain in place forever. Nothing lasts forever and one should always prepare for the future.
So far, the net result from the monetary policy action by the Federal Reserve has been higher home prices, an increase in car sales, higher asset prices in general, such as stocks, and a general calm in the financial system.
What happens when the Federal Reserve starts to reduce its monetary policy stance? I think it will hit many sectors, but it will especially affect the bond market.
The President of the Federal Reserve Bank of New York, William Dudley, recently stated that the accommodative monetary policy stance needs to remain for the time being, due to continued weakness in employment growth. However, he did add that the Federal Reserve should begin adjusting monetary policy as the economy improves. (Source: Zumbrun, J., “Dudley Sees ‘Very Accommodative’ Policy on Weak Job Market,” Bloomberg, March 25, 2013.)
The U.S. economy still has not employed all those who lost their jobs … Read More