12 Aug 2016 Highlights From the Week
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Highlights From the Week
Negative Rates don’t seem to be working in Germany and other countries in Europe as reported by the Wall Street Journal. The unintended consequences seem to be that consumers, reading the banks’ actions as dire, are saving more, even though it costs them to do so. Seems their fears about the future are greater than their negative savings rates.
The two presidential candidates unveiled their economic policy plans. One offers more regulations and taxes while the other offers a freeze on regulations and reduction in taxes. On these issues the candidates remain trillions apart.
One of the most important measures of the underlying strength of the economy and future living standards is productivity and it has been moving in the wrong direction for the longest period since 1979, according to the WSJ. Goods and services produced each hour by American workers decreased at a 0.5% seasonally adjusted annual rate in the second quarter as hours worked increased faster than output, according to the Labor Department. Productivity in the second quarter was down 0.4% from a year earlier, the first annual decline in three years and took average annual productivity growth of 1.3% from 2007 through 2015, half the pace seen in 2000 through 2007. The trend shows little sign of reversing.
Some continue to claim that bonds are perilously high in value. High yes, perilously high – no. Bonds are contra-indicators of economic strength. As economic strength declines, the demand for money declines, and along with it, the price of money – interest rates decline. When interest rates decline, bond prices rise. Lets say you buy a brand new $1,000 10-year bond yielding 2%. A month later you want to sell your bond, market rates have moved to 1.5% on 10 year bonds. Your bond is paying .5% more than the market, so to be fairly compensated for your higher yielding bond, you will demand a higher price than $1,000. In fact a buyer would be willing to pay you a market value of $1,120. He will continue to receive the $20 coupon each year, but because he paid an extra $120 his yield would be 1.5%.
Our 7-10 year US Treasurys are currently trading at $112.64, or 12.6% above their offering prices. In short, bond buyers do not think the economy will grow at such a rate to cause inflation to be a problem, nor do they believe the Federal Reserve is going to start raising rates aggressively. They also continue to bounce when stocks drop more than in recent typical declines.
Yesterday, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite each closed at record highs. It was the first time since Dec. 31, 1999 all three major indexes reached records on the same day. The rises, despite the lackluster economy, are not surprising given the Fed has forced more and more savers (typically those who buy CDs and bonds) into the stock market in search of returns.