Let’s have a look at a long-term perspective on Treasury yields. The chart below shows the 10-Year Constant Maturity yield since 1962 along with the Federal Funds Rate (FFR) and inflation. The range has been astonishing. The stagflation that set in after the 1973 Oil Embargo was finally ended after Paul Volcker raised the FFR to 20.06%.
Here’s the same chart with the S&P 500 adjusted for inflation and the annualized inflation rate subtracted from the yields. The impact of stagflation becomes much clearer. We can better understand the severity of the decline in equities from the mid-1960s to the bottom in 1982. And we can also see why high yields can be deceptive in periods of double-digit inflation.
The most interesting series in the charts is the FFR red line. We can see how the Fed has used rate to control inflation, accelerate growth and, when needed, apply the brakes. Unfortunately, the FFR has been virtually zero since December 2008, so it is no longer available as a tool to stimulate the economy. Incidentally, I annotated the top chart with the tenures of the last three Fed chairmen so we can see who was managing the various FFR cycles since the summer of 1979.
The next chart is based on daily data and adds some additional Treasuries for a close look at yields since 2007.
The word ‘RISK’ is a simple four- letter word; yet, the management of risk is critical in any investment or income generating strategy. When historical norms no longer hold, and markets can make moves within a span of days, or just a few weeks what used to take a whole year or years to make, it becomes critical for trading and investment practitioners to rethink old models and adjust given new information or market realities. Whilst increased volatility increases market risk as a whole, it also provides tremendous opportunities to make an abnormal return if you are on the right side of the market trend. For market participants, the question is – are you prepared to assume the increased risk that can provide the environment to make huge returns, and at the same time, if your thinking is wrong, assume huge losses. Or, is it wise in a period of high volatility to disengage and get back in when sanity returns to the financial markets? This is a critical question that market participants have to answer and honestly face up to the conclusions they come up with. For most people detached from the market and not involved in any trade, there is always the false assumption with the knowledge of hindsight that they are prone to being risk takers. And given the choice, they will definitely take more risk rather than less and that somehow they harbor the wrongful notion that they would have been on the right side of the trade. Taking calculated and limited risk where the risk reward structure is favorable is always preferable to assuming tremendous amounts of risk in the hope of being right.
In an era of investment where crisis, whether real or imagined hit the market with such frequency, and cause extreme market moves within a compressed timeframe, what should one do? Should we totally disengage, call it quits and look for new avenues? Or, should we take cognizance of such realities and design our investment strategy for such markets? The market, it seems is so structured in a way that now a tsunami or an earthquake or a plane crash is no longer a real event that
Having retraced almost 61.8% of the September drop, Gold’s recent run up – as the USD strengthens no less (from 10/28) – suggests some demand for safety is back (or more simply is the demand for German Gold making the German’s hoard a little more?). Silver is actually outperforming from Friday’s close but remains below Friday’s highs for now.
As China ‘threatens/promises’ liquidity injections to its banks, Greek politicians argue over premium parking spaces, US brokers/exchanges squabble over the MF capital leftovers, and global liquidity goes from bad to worse – perhaps it is time to take a step back and focus on what really hasn’t seemed to matter – the economy. Ray Dalio published his Template For Understanding back in October of 2008 and has recently updated it (as of October 2011). For your Sunday evening reading pleasure – “How the Economic Machine Works and How It Is Reflected Now”. Critically, the hedge fund manager provides a framework for considering what he believes are the critical Three Big Forces: trend line productivity growth, the long-term debt cycle, and the business/market cycle.
When I imagined this I was thinking of three things, the hopeless tragedy embodied of last week’s EURO Freak Show, zombie bankers marching across Europe like the fascist armies of WWII and who will benefit most from the explosion when it finally occurs.
Three of the smartest strategists at Goldman, Huw Pill, Francesco Garzarelli, and Peter Oppenheimer, have released what one could tentatively call a white paper on the “next steps” for Europe. Far from being the traditional permabullish sellside drivel, this is a must read note, as it cleanly lays out the risks for the Eurozone from this point. The note focuses on three key aces: 1) fiscal consolidation and the ongoing role of the ECB in the future of a Eurozone which still has no fiscal cohesion (which makes sense: just like in the US, the Fed is aggressively putting the ball in Congress’ court, as neither the monetary nor fiscal apparatus has any interest in being blamed for ongoing economic deterioration, so in Europe the ECB wants a federal union, complete with Eurobond issuance powers, so it is not in the cross hairs: alas, European politicians realize this is career suicide and the question remains: when push comes to shove, and saving the Euro requires career harakiri from politicians, will they step up to the plate?); 2) Italy, of course, as the country under the spotlight now and going forward; and 3) what the above two mean for BTPs and thus the European (and Global) equity markets. The sense we get from the Goldman trio is that while the company which has just spawned Europe’s latest central banking head, while cautiously neutral is pushing for a downside case: after all what better way to unlock the Heidelberger Druckmaschinen true potential, than with a full blown crisis…
From Goldman Sachs
1. Fiscal consolidation is a precondition for further support
Over the past week, the pace of events in the European crisis has again picked up, amidst increasing sovereign bond market tensions, particularly in the case of Italy. After a week of drama, we are likely to see the formation of a government of national unity in Greece, mandated to approve and oversee the financial adjustment package agreed with the EU ahead of national elections next Spring. Meanwhile, a routine vote on last year’s public accounts to be held this Tuesday in the Italian Lower House will be a test of how much support the government can still rely upon and may lead to political change there too. Finally, the much anticipated Cannes G-20 summit – which…
The Federal Reserve officially announced Operation Twist on September 21 with the stated purpose of lowering longer-term interest rates. The yield on the 10-year note had been hovering around 2.19 prior to the much-rumored announcement, which was 47 basis points above the historic closing low of 1.72 set a month earlier on September 22.
The Fed Funds Rate has been essentially at zero for three years. What has the 10-year note done since the “Twist” announcement? The interim high daily close was 2.42 on October 27th. The interim low was 2.01 on November 1st.
It’s too soon, of course, to tell how successful the “Twist” strategy will be for lowering interest rates; the program is barely off the ground. According to the Freddie Mac survey, the 30-year mortgage rate has fluctuated between 3.94% and 4.18% since the first week in September, and the most recent average (as of November 3rd) is 4.00%. But we will watch Treasury yields and mortgage rates in the weeks ahead to see if Operation Twist lives up to the Fed’s expectations.
Background Perspective on Yields
The first chart shows the daily performance of several Treasuries and the Fed Funds Rate (FFR) since 2007. The source for the yields is the Daily Treasury Yield Curve Rates from the US Department of the Treasury and the New York Fed’s website for the FFR.
Even as the EURUSD is surging because of, uh, we are not quite sure – HFTs hitting all stops most likely, it is only 9 short hours until BTPs, that one and only fulcrum security for the entire European continent reopens. And while for Greece getting a new government, even if one headed by a former Fed member is somehow good news (we wonder how the people will react knowing that their fate as debt slaves repaying European banks has just been sealed for a few more months), in Italy government “stability” (we realize the comic value of this statement) is the key to prevent a blow out to the 10 Year BTP, and the launch of a domnino cascade that will stop only with French OATs, and potentially rip through through that final firewall: Germany (with or without BuBa’s billions in gold reserves… which we can only hope are not parked with the New York Fed). So back to Italian government “stability” which according to France 24 is not doing that hot. “Tens of thousands of Italians gathered in Rome on Saturday to protest Prime Minister Silvio Berlusconi’s tackling of the country’s sovereign debt crisis. “Silvio out” was the rallying cry for the large crowd that took part in the rally organised by the Democratic Party, the country’s main opposition movement. Some demonstrators poured scorn on the prime minister after G-20 leaders humiliatingly put Italy’s struggling economy under surveillance, amid a lack of trust in Berlusconi’s reform pledges. At the summit in Cannes, the billionaire prime minister played down the gravity of the economic crisis with a trademark quip, claiming that “restaurants are full and the planes fully booked.” “I go to restaurants… to do the washing up,” read one banner at Saturday’s mass demonstration.” And the kicker is that over the weekend enough defections from his party have taken place which according to many, but not Silvio, are enough to lose him his majority: “There is growing concern Berlusconi no longer commands enough loyalty among MPs to ensure the quick passage that European and international financial officials say Rome must achieve to avoid falling victim to a dramatic debt crisis like that bringing Greece to its knees… “We don’t want elections. We want to govern,” Berlusconi added.” So much for democracy in yet…
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at email@example.com with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
Investing in the stock market can be quite stressful, especially during periods of volatility…but investing doesn’t have to be nerve-racking. Investing legend T. Rowe price captured the beneficial sentiments of growth investing beautifully when he stated the following:
“The growth stock theory of investing requires patience, but is less stressful than trading, generally has less risk, and reduces brokerage commissions and income taxes.”
What I’ve learned over my investing career is that fretting over such things as downgrades, management changes, macroeconomic data, earnings misses, geopolitical h...
James Risen is not just a phenomenal reporter, he is also an extremely courageous and honorable American patriot. His case is a very disturbing one, and it has justifiably received a great deal of national attention. In a nutshell, the Obama Administration is threatening the pulitzer prize winning journalist with prison unless he reveals the source behind one of his stories. This is something no journalist worth his salt would ever do, but the fact our own government would reso...
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Note: I’ve updated my periodic look at the Consumer Price Index (CPI) versus the Big Mac Index to coincide with The Economist’s bi-annual update of the Big Mac Index used for currency values and the most recent CPI for August 2014.
What are we to believe? The change in the price of the Big Mac says one thing while the Bureau of Labor Statistics is telling us another.
On Tuesday, August 19, the Consumer Price Index (CPI) was released by the Bureau of Labor Statistics, stating that “Over the last 12 months, all the items in the index increased 2.0 percent before seasonal adjustment.”
It’s an ugly day for investors in Elizabeth Arden, with shares in the name losing roughly one-quarter of its value overnight after the retailer of beauty products and fragrances reported a wider than expected loss and sales that were lower than analysts anticipated. Shares in the name are down more than 23% in the final hour of trading to stand at $14.95.
On Friday of last week we wrote a short note about put option activity on the stock...
As many investors enjoy the final weeks of summer, some optimistic bulls seem to be positioning themselves well ahead of Labor Day in anticipation of a fall rally. Indeed, last week’s action was impressive. After only a mere 4% correction, investors continued to brush off the disturbing violence both at home and abroad, and they took the minor pullback as their next buying opportunity. But was that really all the pullback we’re going to get this year? I doubt it. But I also believe that nothing short of a major Black Swan event can send this market into a deep correction.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then ...
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Author Helen Davis Chaitman is a nationally recognized litigator with a diverse trial practice in the areas of lender liability, bankruptcy, bank fraud, RICO, professional malpractice, trusts and estates, and white collar defense. In 1995, Ms. Chaitman was named one of the nation's top ten litigators by the National Law Journal for a jury verdict she obtained in an accountants' malpractice case. Ms. Chaitman is the author of The Law of Lender Liability (Warren, Gorham & Lamont 1990)... Since early 2009, Ms. Chaitman has been an outspoken advocate for investors in Bernard L. Madoff Investment Securities LLC (more here).
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
I just wanted to be sure you saw this. There’s a ‘live’ training webinar this Thursday, March 27th at Noon or 9:00 pm ET.
If GOOGLE, the NSA, and Steve Jobs all got together in a room with the task of building a tremendously accurate trading algorithm… it wouldn’t just be any ordinary system… it’d be the greatest trading algorithm in the world.
Well, I hate to break it to you though… they never got around to building it, but my friends at Market Tamer did.
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