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Are Negative Interest Rates A Supernova Waiting To Explode?

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Are Negative Interest Rates A Supernova Waiting To Explode

Several worldwide central banks, most recently the Bank of Japan, have moved to negative interest rates in an attempt to stimulate the economy. 

The reasoning is that by making it effectively cost money to hoard money, they will incentivize banks to invest in the economy and make loans. 

Bill Gross, of the Janus Global Unconstrained Bond Fund, warns that this may prove to be one of the worst ideas in the history of ideas.

Central Banks Have Been Trending Toward the Low and Even Negative Interest Rates in Recent Years

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As the above graph illustrates, interest rates have plunged since the beginning of 2009, and for some banks, have even dipped into negative territory.  There is no sign of this trend reversing in the near future. 

Even in the United States the rates remain at a low 0.5%, with almost no chance of going up in June.

While one would assume that this is a great environment for credit, the situation is not without its downsides and has occasionally pushed into the territory of the ridiculous. 

The WSJ reported on one couple in Denmark that received interest payments on their mortgage. 

Meanwhile, MarketWatch refers to negative interest rates as a stealth tax, pointing out that the government now charges a fee to keep money in its bank.

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Bill Gross Warns That This Trend Cannot Continue Indefinitely Without Serious and Violent Negative Repercussions.

He points out that there are currently trillions of dollars of negative-rate bonds in the world. 

This graph from February shows how many trillions it was just a few months ago:

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That’s more than 6 trillion dollars of negative-yield bonds back in February. 

Each of those bondholders was effectively paying their respective government for the privilege of being borrowed from. 

And of course, the number has only grown in recent months.

In a Recent Tweet, Gross Touched on the Following:

  • There are now $10 trillion of negative rate bonds in the world.
  • Global yields are the lowest they have been in 5 centuries.
  • The word he uses to describe this situation is – supernova.
  • Supernova references the end stage of a star’s life when it becomes incredibly bright as it explodes and loses the vast majority of its mass.

In simple terms, he believes the current negative-rate situation is a disaster waiting to happen.

This is Not the First Time That Gross Has Spoken on the Matter

He continues to assert that we are in a cycle of expanding credit that has lasted for decades and is now reaching its logical conclusion of negative interest rates. 

He also asserts that this situation cannot keep going on indefinitely.

He does not believe that low rates are stimulating the economy, but that they instead are causing bubbles in various assets because investors want to make decent yields and are willing to accept the risks involved. 

Meanwhile—he asserts—banks, individuals looking for a safe place for their savings, and insurance companies are paying the price for the low to negative rates.

Gross Sees Taking Positions as the Only Solution to the Changing Climate:

  • He says that annualized investment gains are a thing of the past.
  • He also says that investors of sense will have to admit that the market works differently now and take new actions as a result.
  • Shorting corporate credit is one of his suggestions as is buying volatility, or keeping it liquid with cash.

He believes that the market is fundamentally changing, and to maintain principal or make capital gains, the investor will have to change tack as well.

Meanwhile, Gross’s Fund is Doing Quite Well For Itself

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As the graph above shows, Gross’s Janus Global Unconstrained Bond Fund (JUCIX) has been growing all year. 

According to Bloomberg, it has beaten out 72% of Bloomberg peers by going up 3.2% in the last six months.

Gross’s Management Has Brought Returns

The bond fund has achieved a 2.2% return since Gross’s takeover in October of 2014.

Inflow Has Been Strong as Well

In the biggest inflow since the end of 2014, investors contributed $144 million to the fund this May.

Conclusion

In today’s global market, negative interest rates are a reality, and wherever they strike they turn everything topsy-turvy. 

Suddenly, like the couple in Denmark, people are paid to borrow, and bondholders are charged to loan. 

Simply parking money in the bank can cause it to depreciate.

Does this mean, then, that everyone will pull their money out of the banks and go back to that old standby, the mattress? 

It hasn’t happened yet, but Gross raises some valid points. 

If the central banks do not find a better solution than negative interest rates, the market may well be fundamentally changed.

So don’t go stuffing all your money in the mattress just yet, but do pay attention to interest rates and the effect they have on you and your investments. 

You don’t want to be caught off-guard if and when the supernova hits.

 

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Economy

STUDY: Number of Billionaires Doubles in Last Decade

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Number of Billionaires Doubles in Last Decade
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The number of billionaires has doubled in the past decade and the world’s wealthiest 2,153 people controlled more money than the poorest 4.6 billion combined last year, the charity Oxfam said Monday.

Meanwhile, unpaid or underpaid work by women and girls adds three times more to the world’s economy each year at least $10.8 trillion than the technology industry, the Nairobi-based charity said in its “Time to Care” report.

Women around the world work 12.5 billion hours combined each day without any pay or recognition, while the world’s 22 richest men have more wealth than all the women in Africa.

“It is important for us to underscore that the hidden engine of the economy that we see is really the unpaid care work of women. And that needs to change,” Amitabh Behar, CEO of Oxfam India, told Reuters.

“Our broken economies are lining the pockets of billionaires and big business at the expense of ordinary men and women. No wonder people are starting to question whether billionaires should even exist,” Behar said ahead of the annual World Economic Forum in Davos, where he will represent Oxfam beginning Tuesday.

“Women and girls are among those who benefit least from today’s economic system,” he added.

There will be at least 119 billionaires worth about $500 billion attending Davos this year, according to Bloomberg, with the highest contingents coming from the US, India and Russia.

“The very top of the economic pyramid sees trillions of dollars of wealth in the hands of a very small group of people, predominantly men,” the Oxfam report said.

“Their wealth is already extreme, and our broken economy concentrates more and more wealth into these few hands,” it said.

To highlight the inequality, Behar cited the case of a woman called Buchu Devi in India who spends up to 17 hours a day walking almost two miles to fetch water, cooking, preparing her kids for school and working in a poorly paid job.

“And on the one hand you see the billionaires who are all assembling at Davos with their personal planes, personal jets, super rich lifestyles,” he said.

“This Buchu Devi is not one person. I in India encounter these women on a daily basis, and this is the story across the world. We need to change this, and certainly end this billionaire boom.”

Behar said that to remedy the problem, governments should make sure above all that the rich pay their taxes, which should be used to pay for amenities such as clean water, health care and better schools.

“If you just look around the world, more than 30 countries are seeing protests. People are on the street and what are they saying? That they are not to accept this inequality, they are not going to live with these kind of conditions,” he said.

Source: New York Post
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(c) 2020 2019 Vanguard Media Limited, Nigeria Provided by SyndiGate Media Inc. (Syndigate.info).

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Automobiles

Pump Prices to Edge up After Attack on Iranian General, but Long-Term Effect Unclear

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By Jeff Ostrowski, The Palm Beach Post, Fla.

Motorists soon will see the effects of President Donald Trump’s decision to kill a prominent Iranian general. Whether pump prices rise a little or a lot depends on how quickly international tensions intensify.

Florida gas prices climbed an average of 7 cents a gallon in the past three days and could increase an additional 5 cents, AAA – The Auto Club Group said Monday.

The 7-cent increase was coming even before the U.S. air strike Thursday that killed Iranian Maj. Gen. Qassem Soleimani. That hike was a result of a rise in the price of crude oil in December.

News of the targeted killing of Soleimani sent crude oil surging nearly $2 per barrel on Friday. An increase of that magnitude typically translates to a 5-cent hike at the pump, AAA said.

The U.S. benchmark for crude oil traded Monday just above $63 per barrel, the highest level since May 2019. The price of oil makes up about half the price of a gallon of gas.

“What happens in the Middle East can have a direct impact on Americans’ daily lives by influencing what they pay at the pump,” said AAA spokesman Mark Jenkins. “Crude prices rise when there’s a threat of war, because of concerns over how the conflict could hamper supply and demand.”

Oil analyst Tom Kloza of energy firm OPIS agreed that pump prices in Florida likely will rise about 5 cents a gallon in the coming days.

“Then I have a hunch that things are going to calm down,” Kloza said Monday. “I don’t think we’re looking at $3 gas.”

The national average pump price Sunday was $2.585, while the Florida average was $2.526, AAA said.

Kloza expects only modest increases in part because of the timing of the attack. January is always a slow month for gas consumption in the United States.

There’s also the reality that sanctions leave Iran unable to export oil. Complicating the calculus is Iraq’s response to the U.S. attack. The drone strike on Soleimani took place in Baghdad, and some Iraqi politicians considered the assault an affront to Iraqi sovereignty.

While there’s no Iranian oil supply to be disrupted by a war, Iraq is an important producer.

Trump keenly watches oil prices and realizes that a price spike might erode his support in this year’s presidential election, Kloza said.

At the same time, Kloza added, “This president has proven to be unpredictable.”

Trump’s response has been typically uneven. Delivering an official statement at the Mar-a-Lago Club in Palm Beach, Trump’s tone was measured. He said the targeted killing was designed to pre-empt Soleimani’s planned attacks on American diplomats and soldiers.

“We took action last night to stop a war,” Trump said Friday. “We did not take action to start a war.”

However, over the weekend, Trump took to Twitter to threaten attacks on Iranian cultural sites.

“The United States just spent Two Trillion Dollars on Military Equipment,” Trump wrote Sunday on Twitter. “We are the biggest and by far the BEST in the World! If Iran attacks an American Base, or any American, we will be sending some of that brand new beautiful equipment their way…and without hesitation!”

##IFRAME_1##Iran has vowed vengeance, but military experts say the nation isn’t powerful enough to wage a direct war against the U.S.

“It’s still far too early to know how much of an impact this conflict will have overall on prices at the pump,” AAA’s Jenkins said.

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Economy

Stocks Rally Despite Impeachment News

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Stocks rose on Thursday as investors looked past the news of President Donald Trump’s impeachment as well as mixed U.S. economic data.

The Dow Jones Industrials advanced 53.85 points to begin trading at 28.293.13

The S&P 500 recovered 4.93 points to 3,196.07

The NASDAQ added 19.39 points to Wednesday’s all-time record, at 8,847.12.

The S&P 500 is up nearly 7% since House Speaker Nancy Pelosi launched a formal impeachment inquiry in September.

Cisco Systems was the best-performing Dow component, rising 1.6%. The consumer staples and real estate sectors led the S&P 500 higher, gaining 0.4% each. Micron Technology shares also contributed to Thursday’s move higher. Conagra shares surged more than 14% and were on pace for their biggest one-day gain since Oct. 16, 1989.

Micron shares climbed 3.5% on the back of strong quarterly results. The chipmaker posted earnings per share and revenue that topped analyst expectations.

On the economic data front, weekly jobless claims fell to 234,000 from 252,000 the week before. However, economists expected claims to fall to 225,000.

Meanwhile, the Philadelphia Federal Reserve’s business conditions index fell to 0.3 in December from 10.4 in the previous month. Economists expected the index to slip to 8.

The Democrat-led House of Representatives voted Wednesday to impeach Trump for abuse of power and obstruction of Congress. Trump became only the third president to be charged with high crimes and misdemeanors and will now face a trial in the Republican-controlled Senate.

Prices for the 10-Year U.S. Treasury were lower, raising yields to 1.94% from Wednesday’s 1.93%. Treasury prices and yields move in opposite directions.

Oil prices gained seven cents to $61.00 U.S. a barrel.

Gold prices moved forward $1.80 at $1,480.50 U.S. an ounce. Copyright © 2019 Baystreet.ca Media Corp. All rights reserved.

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