At the end of a busy day of study and action, I’m looking at overall debt loads and interest rates. I’m wondering if, perhaps, the US government might seek to “accidentally” create runaway inflation for a short period to reduce the real cost of their soaring debt load. Otherwise, when interest rates go up, it’s going to be very difficult to repay. It worked for Germany in the 1920’s. No, wait, it didn’t work, did it? Still, it will be tempting when the bills come due.
We have largely exited our energy holdings. Most of these were profitable. We have cut our gold exposure in half after a very successful run. Our overall holdings in technology and health care remain in place. Now we are newly invested in bank stocks, both foreign and domestic. The challenge of financial stocks currently is that they are a very uncertain and high-risk position, dependent upon both interest rates rising and economies not stalling. We can’t really guess what will happen. For example European bank stocks…of which we own a dollop…were hammered today with bad Euro-economic news (Is there any other kind?) I’m thinking that patience and humility may help us produce outsized gains in this unloved, ignored sector. Meanwhile billionaire bond trader Jeff Gundlach says sell everything, even the kids. I’m inclined to keep the kids. Stay patient.
If it feels like it’s harder and harder to successfully finance retirement, you’re right. Here’s an article by one of our fund providers, PIMCO, about the numbers behind retiring, and why they’ve changed.
That would be at least a decade of slow growth. The article is attached. As I read this, I’m struck by how fortunate we are that we didn’t go to cash back when it seemed that cash was best. I’m interpreting this article as a prediction (and you know how well those work) that index funds won’t uniformly perform optimally. (That’s investment-speak for “They might lag.”). There will still be very attractive sectors, if we have the wisdom to see them and the courage to invest in them.
On Wednesday, the government auctioned off $12 billion in U.S. Treasury 30 year bonds for the astoundingly low interest rate of 2.172%. These are taxable bonds. This means that the investors in these bonds expect essentially no economic growth in the U.S. in the next thirty years.
Consider what 30 years of “steady state” economic growth would mean.
The Great Capitulation. That’s a great description of what appears to be happening. Low interest rates are now being accepted as the inevitable environment for the near and distant future. It feels like the stock markets of the world will benefit from central bank support now and forever.
Capitulation is what market bottoms and tops feel like. The contrarian in me is creating an urge to go out and short the bond market. Had I done that in the past seven years I’d be totally wrong. But now…I’m wondering. And watching.
The LIBOR interest rate (London Inter-Bank Offered Rate) is the international interest rate which is used for many international loans and mortgages, including adjustable rate mortgages. The concept behind its creation and application was to create an international securitized mortgage and debt market.
At present, in some currencies the LIBOR rate is negative! With the Euro LIBOR set at -0.39% and the Swiss Franc LIBOR at -0.72%, a few adjustable rate mortgage holders in Euope are getting PAID for having mortgages!!! The banks behind those mortgages got hammered by their own fine print because they couldn’t perceive of a world with negative rates.
Negative interest rates are extremely unsustainable. They forecast a recession if not a depression for Europe, and they will possibly eventually destroy the European financial institutions caught up in this situation. They depress business growth in many sectors of the economy by taxing cash reserves. And, as suggested by those negative mortgages, they may be fueling an asset bubble in real estate and stocks. Imagine: it is actually less expensive in some places in Europe to load up on debt and buy something than it is to save. Astonishing.
Meanwhile the stock markets are rising, possibly fueled in part by those lower and negative rates. We are making money in our portfolios, and the world seems balmy. We are mere spectators to this negative interest rate insanity. We might as well watch and savor, as though observing the phenomena of the moment: a comet, an unusual rainbow, or an exotic wine. This season will pass, and one way or the other we will want to remember that we were here when the financial system inverted upon itself.
Bill Gross is one of the most successful fixed income investors in the 20th and 21st Century. His words are worth reading, for insight into what negative interest rates may be creating in the financial world. My own thought is that negative interest rates must be KILLING the international money market fund industry. Also negative interest rates are favoring non-bank share repurchases and other self-absorbed non-productive behavior. Note also the push to criminalize cash which Bill Gross discusses. Strange days indeed.