But in a fascinating just-released research piece, “Bond King” Bill Gross goes even further. He says ultra-low rates aren’t just failing to stimulate the economy. They’re actually hurting it.
I’m sure heads are exploding amid the Paul Krugman/Keynesian crowd today. After all, they believe low rates are exactly what you need to spur home and car buying, corporate borrowing, and so on.
But former Pimco and current Janus executive Gross issued this indictment in his thinkpiece:
|Janus executive Bill Gross.|
“After nearly six years of such policies producing only anemic real and nominal GDP growth … it is appropriate to question not only the effectiveness of these historical conceptual models, but entertain the increasing probability that they may, counter-intuitively, be hazardous to an economy’s health.”
His thesis, in a nutshell and trying to use as little econ-jargon as possible:
Zero or negative rates cause the traditional lending and savings process to break down, while also causing the yield curve to flatten dramatically.
That provides investors with little incentive to invest for the long term. It also crushes bank profit margins. That hurts overall corporate profitability and yanks the rug out from under the very same banks the Federal Reserve wants to get out there and loan money like mad.
Pension funds are forced to cut benefits because they can’t earn adequate returns to cover past promises. Consumers and companies are forced to squirrel away more money because the yields on their savings collapse. That, in turn, saps disposable income, reduces corporate spending, and helps “Japan-ify” the economy.
Gross proposes a solution whereby the Fed and its foreign counterparts would abandon six-plus years of ineffectual policy. They should instead dump long-term bonds to steepen the yield curve and/or adopt a higher inflation target. But in the same breath, he basically said that won’t happen because they are too “stubborn, and reluctant to adapt to a significantly changed finance based economy.”
|“Gross’ solution: The Fed and its counterparts abandon six-plus years of ineffectual policy.”|
My take? Gross’ comments won’t help explain or predict what stocks will do tomorrow, or over the next few days. But they seem right on target considering the news we’ve gotten about weakening corporate profits, slumping manufacturing activity, lousy wage growth, and widespread market divergences. So while many of the analysts on CNBC say everything is hunky-dory again, Gross’ comments probably serve as a nice reality check.
So what do you think of his comments? Are low rates actually bad for the economy? Helpful? Somewhere in between? Why is that? Should we even care about the fundamentals in an environment where stocks have been rallying for five weeks? Let me know your thoughts over at the Money and Markets website.
I’m back from my trip to Europe, with stops in Germany and Amsterdam. Everything went smoothly, and I enjoyed presenting to and speaking with subscribers to our German Safe Money publication. I noticed that stocks took a nasty spill late on Friday, only to rebound yesterday.
Mike Burnick pointed out some of the headwinds for this market, and several of you weighed in on whether you thought they would hold stocks back or if they would just keep running.
Reader Greg said: “Don’t overlook the foolish low interest rates causing folks to dabble into equities. Maybe they’ll lose their shirts or maybe double their money — time will tell. Balance is the key. I like some cheap biotechs, some cheap lithium shares, some undervalued gold shares, and some cheap semiconductor share companies.”
Reader Broomy said: “You mention that stock buybacks are one factor that is keeping the market up. But I’m not so sure you can compare things with how they were in 2000 and 2007. Today’s market is awash in cash, but there’s not really anything to buy.
“Companies are reluctant to increase capital spending because there’s just not that much demand out there. If that’s the case, you can either increase the dividend, let cash pile up, or buy back stock. You can’t earn anything on cash, and I don’t understand markets well enough to understand the pros and cons of increasing the dividend. So perhaps buying back stock works better for you than increasing the dividend?”
In response, Reader Chuck B. offered this view on share repurchases: “Stock buybacks are fine, when the money comes from earnings. When it is borrowed, maybe even to pay dividends (some companies are doing that), it makes management look good. They collect big bonuses. But the companies’ financial positions are certainly harmed, not helped.”
Lastly, Reader John E. said: “In the interest of full disclosure, I’m shorting this market. I got killed yesterday – unrealized – for reasons that are beyond my comprehension. The only explanation I can imagine is there is too much liquidity thanks to QE (and folks and their money managers don’t know where to put the money) or the Fed (conspiracy theory granted) is propping up prices similar to what bankers attempted in 1929. It didn’t work then, it won’t work now.”
Thanks for weighing in. I’ve been skeptical of this market for the past several months. I was very right in July, August and September … but obviously wrong in October.
That said, I’ve seen many of the same divergences and potential yellow flags that Mike highlighted — as well as additional ones I’ve discussed here. So I still think a cautious and skeptical stance makes sense outside of a few exceptional, highly-rated stocks that can buck the trend.
If you’ve already weighed in, great. If not, now’s your chance. Just head over to the website and add your thoughts when you have time.
What brought down a Russian Airbus airplane over the Sinai Peninsula in Egypt? Officials have offered conflicting reports, with everything from terrorism to mechanical failure potentially responsible for the 224 deaths on board. The Metrojet flight was mostly carrying vacationing Russian passengers.
Candy Crush and Call of Duty are two wildly different gaming franchises. But they’re going to be under the same corporate roof now, thanks to a new M&A transaction. Activision Blizzard (ATVI) is buying King Digital Entertainment (KING) for $5.9 billion, a move that unites those and several other console and smartphone games.
European banks continue to fire workers, cut dividends, exit certain businesses, sell billions of dollars worth of new shares to boost capital levels, and otherwise screw things up. Standard Chartered Plc () of the U.K. is just the latest, swinging to a loss of $139 million from a profit of $1.5 billion in the year-earlier period. It plans to slash 15,000 jobs, raise $5.1 billion through share issuance, and shed or restructure assets to the tune of $100 billion.
Momentum continues to ebb and flow in the Republican nomination race. New polling data from the Wall Street Journal and NBC suggest Ben Carson is overtaking Donald Trump as the presumed front runner. Carson is the favorite, with 29% of GOP primary voters. Trump is next at 23%, followed by Marco Rubio at 11%.
Any thoughts on why Europe’s banks are such a mess? The deeper expansion into online gaming by Activision? Or the Russian air disaster? Let me hear about it over at the website.
Until next time,