More Stimulus Less Results – Negative Interest Rates & Yields

(May 2015 Update) by Fulton Sheen

The first quarter didn’t finish the way the Federal Reserve expected, causing them to lower their own growth projections for 2015 from 2.8% to 2%.  The Dow Jones News wrote, “The nation’s central bank pointed to cooling economic activity and reduced job-market gains in its policy statement Wednesday, underscoring uncertainty among officials about when the economy will rebound and clouding the timing of when they will begin to raise interest rates. Now it looks highly unlikely.”  The dollar is strong, but its value has continued drop against its peers, since its first quarter high, especially in the last four weeks.  The Wall Street Journal reported on April 5th, “The dollars downshift reflects heightened concerns that the US economy is cooling, which was reinforced on Friday by a much-weaker-than-expected jobs report.”

On March 21st the WSJ said, “For the week, the dollar is down 35 against the euro posting its biggest loss since October 2011.”  In an updated WSJ article on April 5th it was reported, “Some investors say U.S. currency’s biggest gains are over, as weaker data raise doubts about a Fed rate increase.  The dollar’s record rally, which rattled everything from the oil market to U.S. corporate earnings, is running out of gas.  Before the Fed met Reuters reported, “The dollar fell on Tuesday to a two-year low against a basket of major currencies after soft data on housing and consumer confidence underscored a trend of slowing U.S. economic growth.” The article went on to say the Fed will probably have to cut interest rates instead of raise them if things don’t improve.

Slowing Growth Muddles Fed Plans (4-30-15) John Hilsenrath | http://uk.advfn.com/news/DJN/2015/article/66634007

Dollar Sputters After Surge (4-5-15) http://www.wsj.com/articles/dollar-sputters-after-surge-abreast-of-the-market-1428258744

Speeding Dollar Begins to Sputter (4-7-15) By Ira Iosebashvili | http://vladimirbrody.com/2015/04/07/the-speeding-dollar-begins-to-sputter/

Dollar Slumps as Data Points to Slowing U.S. Growth (4-24-15)
http://www.reuters.com/article/2007/04/24/us-markets-forex-idUSN2445451420070424

Global Economic Growth
The US is not the only nation not meeting their expectations.  The WSJ reported, “The world’s top finance leaders warned Friday that currency volatility, low inflation and high debt levels threaten to undermine an already uneven global economic recovery.”  The G-20 Nations stated, “In many advanced economies, accommodative monetary policies are needed to anchor inflation expectations and support recovery.”

Both Japan and EU nations are “accommodatively” printing money, but are not experiencing the desired economic results.

The IMF said, “Global economic growth will accelerate only marginally this year as slowing output in major emerging markets and a feeble expansion in wealthier countries drag down near-term prospects.” Those competing pressures are putting authorities in policy binds and could “trigger a cascade of disruptive adjustments,” according to the IMF.  In a nutshell, central banks are continuing to intervene, but those interventions are creating an artificial environment which can’t be sustained without continued stimulus.  Just like a drug addict who needs more and more, there will come a point where the drug/stimulus will not be enough and the only choice will be a cold-turkey withdrawal, which will be difficult and very unpleasant.

G-20 Sees Mounting Threats to Recovery (4-17-15) By Ian Talley
http://www.wsj.com/articles/g-20-warns-of-threats-to-global-economic-recovery-1429295405

IMF: Slowing Emerging-Market Growth Is Sapping Global Economic Prospects (4-14-15) WSJ
http://www.wsj.com/articles/imf-slowing-emerging-market-growth-is-sapping-global-economic-prospects-1429016407

Mounting Debt Bridles Asia (4-22-15) By: Tom Wright
http://online.wsj.com/public/resources/documents/print/WSJ_-C001-20150422.pdf

Negative Interest Rates & Bond Yields
Until the first week in April, the WSJ reported that, “no country had ever sold 10-year debt that gives investors a yield of below 0%. And no country had ever issued a 100-year bond denominated in euros.  But in the latest stark sign of how easy the era of easy money has become, Switzerland on Wednesday sold 10-year bonds that investors are actually paying to hold, while Mexico lined up a rare transaction to borrow euros it promised to repay a century from now.”  This trend is expanding rapidly, especially in the EU, Franck Dixmier, CIO for Allianz Global Investors in Paris said:

“Only six weeks into the European Central Bank’s €1 trillion-plus ($1.07 trillion-plus) bond-buying program, more than half of the eurozone government-debt market now offers investors a negative yield.”  Investors buying negative-yielding bonds can make money only if inflation consistently remains below zero, or someone else agrees to buy the bond from them at an even higher price.… There is a complete disconnect with economic fundamentals and nominal GDP growth.”

Over half the Euro zone now offers negative yields.  When artificially low interest rates were not enough central banks began setting negative interest rates, so far these rates range between -.1% and -1%.  These new unprecedented rates raise the following questions: How low can the rates go, how long can they stay there, and what effect will this have on international markets?

Chances for Positive Return on Eurozone Government Debt Diminish (4-23-15) Christopher Whittall
http://www.wsj.com/articles/chances-for-positive-returns-on-eurozone-government-debt-diminish-1429720411

Swiss, Mexican Bond Deals Represent Milestones for Debt (4-8-15)
http://www.wsj.com/articles/switzerland-first-with-10-year-bond-at-negative-yield-1428489209

Germany Sells Five-Year Debt at Negative Yield for First Time (2-25-15) WSJ
http://www.wsj.com/articles/germany-sells-five-year-debt-at-negative-yield-for-first-time-on-record-1424871074

Negative Interest Rates Threaten the Banking System (3-5-15) By Paul H. Kupiec
http://www.wsj.com/articles/paul-h-kupiec-negative-interest-rates-threaten-the-banking-system-1425600889

The Negative Yield Matrix: Red Pill or Blue Pill? (4-24-15) by Charlie Bilello | http://davidstockmanscontracorner.com/the-negative-yield-matrix-red-pill-or-blue-pill/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Friday

Too Much of Everything
Most commodities are down right now because there is too much of everything.  The WSJ said:

“The global economy is awash as never before in commodities like oil, cotton and iron ore, but also with capital and labor-a glut that presents several challenges for policy makers struggle to stroke demand.

The backlog is causing a scramble in many markets to find storage for excess supplies, clobbering commodity prices across the board, and foreshadowing painful output cuts down the road for many producers. In some cases, producers even increase their output to make up for the revenue losses due to lower prices, exacerbating the problem of oversupply.  An article from David Stockman’s Contra Corner states, “This lack of “demand” for global goods flies in the face of all expectations about the “dollar” and how that is supposed to transmit US strength globally.  Instead, it is clear that US strength is as absent as the expected “dollar” effects.  US exports to the rest of the world fell for the third consecutive month, and the fourth time in the past five. Worse yet, the decline in March was 6%.”

This is also something that’s never happened before to the degree it has at this moment, but nobody is slowing production as the above article states.

Glut of Capital and Labor Challenge Policy Makers (4-25-15) WSJ
http://www.wsj.com/articles/global-glut-challenges-policy-makers-1429867807

Inside The March Trade Report US Economy Clearly Weakening (5-5-15) by Jeffrey P. Snider | http://davidstockmanscontracorner.com/inside-the-march-trade-report-us-economy-clearly-weakening/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Tuesday

Oil
The WSJ reported, “American oilmen have seized on one solution to their financial woes in the face of low oil prices: They want to export U.S. crude oil, soon. This would require overturning a decades-old federal ban on selling American crude abroad.”  The US is one of the largest producers of oil in the world, unlike the rest of the world we have a law which prohibits the sale of unrefined oil to other nations.   This law originated from a deal President Nixon made with Saudi Arabia and the establishment of the petro-dollar in which they agreed to sell oil only in dollars and we agreed, among other things, not sell unrefined oil.  Since the Obama administration has already angered Saudi Arabia with their focus on Iran and the Saudi’s have already said publicly they will no longer sell oil exclusively in dollars, we should change this law and change it quickly.  It is estimated that the US is currently, about four weeks away from its maximum oil storage capacity, at which point oil drilling businesses would shut down.

In Pain, U.S. Oilmen Plead For Exports (WSJ, 4/23)
http://www.ilfb.org/e-media-publications/ag-news-review/agbites-for-april-23.aspx?alttemplate=Print

The Oil Expert Ban: A Relic of the 1970s (4-24-2015) By: John Hess
http://www.wsj.com/articles/the-oil-export-ban-a-relic-of-the-1970s-1429913717

New Asian Infrastructure Investment Bank (AIIB)
The most significant event of the 1st quarter happened in the final weeks of March when the UK signed on as a founding member of the new World Bank giving it complete legitimacy.  In the next two weeks most of the EU, Japan, New Zealand, Australia and almost every major nation in the world except the US, became a founding member.  The US has been in unchallengeable control of the current World Bank and the world banking system since 1944, and has criticized the AIIB, the UK and every other nation for becoming members of the new World Bank.  The new bank will greatly reduce US control of world banking.  Previously all funds had to be wired through the US-controlled banking system, but now the world has another option for international wiring, and cannot be pressured by the US with a threat of their wiring privileges being taken away, if they don’t do what the US wants.

This is a clear sign that the world no longer views the US as the dominant economic super power and has had enough of the US refusal to yield some of their control of the IMF and the current World Bank.  The world now has another option and the signers don’t care what the US thinks about it.  The enrollment window closed April 1, 2015.  In an editorial published in the Financial Times, former US Treasury Secretary Larry Summers summed it up plainly saying that this “may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”

U.K. to Join China-Backed Development Bank (3-13-15) WSJ
http://www.wsj.com/articles/u-k-to-join-china-backed-development-bank-1426211662

UK support for China Backed Asia Bank Prompts US Concern (3-13-15) BBC
http://www.bbc.co.uk/news/worYld-australia-31864877

Conclusion
The world is still waiting for Greece to default, and as soon as they do, the focus will fall on another nation, most likely Italy.  Bill Gross says the bull market super cycle is almost over.  The IMF is about to approve China’s Yuan as one of the world’s eight reserve currencies recognized by the IMF. Many of the large international banks are pushing the limits to turn a profit in our almost 0% interest rate environment and paying record fines to regulators.

Anyone that tells you to “stay the course, what’s happening now has happened before,” has no idea what’s going on in the international financial world.  Never before have the primary central banks of the world set negative interest rates which cause people and businesses to pay interest to keep their money in the bank, instead of receive it.  Never before have nations, and now private corporations, ever sold bonds with negative yields which cost people and businesses to invest in them.  Never before have there been two world banks and another option to the US controlled World Bank.  There is no outline, no 1-yr, 5yr or 10yr analysis to look at, so the nations, the international markets, the fund managers and investors really have no idea what to expect.  The only thing that is certain is uncertainty; so stay tuned, come up with a plan B and start to implement and reposition yourself now.

Here Are the Most Important Dates Ahead in the Greek Crisis (3-26-15)
http://www.bloomberg.com/news/articles/2015-03-26/here-are-the-most-important-dates-ahead-in-the-greek-crisis

Greek Markets Show All at Risk Should Mistake Trigger a Default (3-30-15)
http://www.bloomberg.com/news/articles/2015-03-30/greek-markets-show-all-at-risk-should-mistake-trigger-a-default

The Bull Market Super Cycle Is Nearing Its End Says Bill Gross (5-4-15) Bloomberg Interview
http://www.bloomberg.com/news/articles/2015-05-04/gross-calls-bull-market-end-again-as-oxygen-running-out

China’s Yuan Set for IMF Win (5-3-15) WSJ | http://www.wsj.com/articles/imf-to-brighten-view-of-chinas-yuan-1430697814

Deutsche to Pay Record Fine on Libor (4-23-15) By Eyk Henning
http://www.wsj.com/articles/deutsche-bank-expects-1q-profit-despite-litigation-costs-1429724845

Banks Feel the Heat From Lawsuits (4-28-15) WSJ http://www.wsj.com/articles/banks-feel-the-heat-from-lawsuits-1430259260

Wells Fargo Warms Up to Risk (4-12-15) WSJ | http://www.wsj.com/articles/wells-fargo-warms-up-to-risk-1428877356

Fulton Sheen

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