Stampede into Bonds 12/1/2011

by Sergio Mariaca on Dec 1, 2011 12:55:00 AM |Share:

Economic recap economic rebound economic recovery economic growth bond market bonds

U.S. Treasury debt had its best quarter since the first quarter of 2008. Treasuries maturing in 10 years or more returned 23% during the quarter, according to Barclay’s Capital index data. Not since 1995 have investors done so well owning longer-dated U.S. government debt. However, according to the Fed economists, expectations for interest rates, growth and inflation indicates 10-year notes are the most overvalued on record. (Source: WSJ, October 1, 2011 – Stocks Log Worst Quarter)

Yields on the U.S. Treasury 10-year note fell to 1.71%, the lowest yield since the 1940s. With overall inflation running around 3.6%, that indicates that many investors were effectively accepting a loss. And, in the case of U.S. Treasury bills, investors at times throughout the quarter bought securities that offered no yield at all. Essentially, investors were parking money with the U.S. Treasury, at least expecting to get back the same amount in 3 months. For many investors, all that mattered was certainty. (Source: WSJ, October 3, 2011 – Spooked Investors)

The Federal Reserve has promised to keep short-term rates low for another 2 years and it keeps the rate on 10-year bonds down by printing money and using that to buy the bonds. Artificially low interest rates may stimulate people to buy homes and use their credit cards, but they have the opposite effect on people with money in the bank. For example, widows used to live off the interest on their bank deposits. How can you do that when the yield is only about 0%? Many investors have their money in Treasury bonds because they are considered “safe.” They are safe only in the sense that you know what is going to happen. You know they’re going to make you slightly poorer.

The National Deficit 11/30/2011

by Sergio Mariaca on Nov 30, 2011 2:00:00 PM |Share:

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American national debt held steady in the $2-3 trillion range for 3 decades until the early 1980s. It began to rise rapidly at that point, reached the $7 trillion mark in the late 1990s, and then took off again after 2000. In recent years, public debt growth has accelerated further, climbing up to $14.3 trillion by the spring of 2011. We are now dealing with the third-biggest deficit in U.S. history, after the deficits in 2009 and 2010. This staggering amount:

  • is nearly equal to our current dollar GDP
  • represents about 25% of all goods and services produced annually by the entire world
  • increased from around $20,000 per head (every man, woman and child in America) to $46,000 (while the median household income is around $50,000 before taxes)
  • reflects $0.56 in federal government borrowing for every dollar Americans paid in federal taxes
  •  is projected to equal 71.2% of the size of our economy in 2012 (Source: BTN, October 3, 2011)

During the last quarter one of the major debates was about raising our debt ceiling. Many Americans were strongly opposed to the idea and didn’t want to pass the debt burden down to their children. (Source: – Deferred Liability)

The fiscal year of 2012 (10/1/11-9/30/12) and the most recent projection (released on 8/24/11) for the fiscal year by the government estimates about $2.6 trillion of revenue, $3.6 trillion of spending and a record deficit of $973 billion, a shortfall of 38%. (Source: BTN, October 3, 2011)

As the chart shows, 2011 will be almost $900 billion more spending than in 2007. Total federal outlays will have increased by roughly one-third in only 4 years. This hasn’t happened since World War II. The government is trying to spend their way out of a recession, but where is the promised economic growth? (Source: WSJ, August 25, 2011 – What Austerity)

This is the real cause of our current deficit and debt woes. The 2011 deficit did not come from extraordinary spending to fight the recession; these expenses are due to increases in business-as-usual spending, mostly on Medicare, Medicaid and defense, as well as a variety of entitlements. (Source: Barron’s, October 3, 2011 – The Books Are Closed)

The main problem is that consumers aren’t spending, and consumer spending makes up about 70% of GDP in the U.S. Why aren’t they spending? Answers include:

  • They’re unemployed, or at least worried about it.
  • They’ve lost access to their “home equity ATM” (household equity is down about $8 trillion since 2006).
  • They feel less wealthy, less secure, due to the poor performance of the stock market over the past decade.

Recovery from these economic conditions is estimated to take a very long time.

Admiral Michael Molen, the chairman of the Joint Chiefs of Staff, claims our ever-expanding national debt is the biggest threat to our nation’s freedom. (Source: American Spectator, September 2011 – Biggest Threat) Many economists believe that real spending cuts, not small reductions and proposed increases, are needed to solve this national crisis.

The Economic Rebound

by Sergio Mariaca on Jul 1, 2011 4:25:00 PM |Share:

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Although the U.S. economic recovery began in June 2009, many investors and business owners still don’t feel the full rebound from the recession, and a range of indicators show that the economic recovery has been the worst, or one of the worst, since the government began tracking such data after World War II:  

•    The only time unemployment was higher than May’s 9.2% rate at this point in a recovery was 2 years after the 1980 recovery during the 1982 recession.
•    The inflation-adjusted after-tax incomes of America are up only 2% since June 2009 and haven’t grown so meagerly in the early stages of any other post-WWII upturn.
•    The nation’s annual inflation-adjusted economic output is up 5.5% from where it stood at the recession’s end and has advanced by less only one time in the first 2 years of a recovery—the 1980 recovery.
•    Home prices were down 8.8% 18 months into the recovery, adjusting for inflation, and are much worse than they were during the 1991 recovery.
•    Bank lending to businesses and households is down 4% since the recovery started, which is also the worst on record.

Another problem is that, for the first time in decades, America is losing and not attracting net growth capital. That may be the single most important explanation for our persistently high unemployment and stagnant wages.

In addition to this, many Americans are taking their investment dollars abroad at a faster pace than foreigners are bringing capital to the U.S.  In 2010, for example, U.S. investment abroad was $351 billion—$115 billion higher than foreign investment here.  (Source: WSJ July 5, 2011)

One of the other reasons that we have had a lack of economic recovery is due to our U.S. tax system, with its high rates and global reach. Many savvy investors and entrepreneurs constantly search for ways to minimize the impact of U.S. taxes, and some private-equity firms have relocated U.S. companies or divisions to tax-friendly countries. Some U.S. start-ups are even beginning life offshore. As other countries have reduced corporate taxes, the U.S. has one of the world’s highest tax rates, at 35%. The U.S. is also one of the few developed countries that still seeks to tax their companies’ global earnings; most countries tax only profits earned inside their borders.  (Source:  WSJ, June 24, 2011)

However, as mentioned earlier in this report, the news isn’t all bad. Corporate profits, manufacturing employment and exports are performing at least as well as they have in several other recoveries. Profits, for example, were up 47% over the first 21 months of the recovery. On average since WWII they have risen about 35% over that stretch. (Source:  WSJ July 5, 2011,)

Many corporations around the world responded aggressively to the global recession, clamping down on spending and hoarding massive piles of cash. In the United States, where cost-cutting was especially dramatic, non-financial firms hold close to $2 trillion in cash, equal to a record 7% of total assets. (Source:  WSJ July 5, 2011)  Much of this excess cash will be used to increase dividends or be channeled into acquisitions and other capital investments aimed at improving competitiveness and productivity. There is also a good possibility that they may rehire some of the employees that were laid off during the recession. Many investors believe these corporate actions could be a major catalyst driving stock prices higher.

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