Take the yield curve. I pointed out last December how the benchmark spread between yields on 2-year Treasuries and 10-year Treasuries spent most of 2015 contracting.
That trend has shown no sign of letting up in 2016, and in fact, the spread is now flirting with its lowest level in almost nine years. Other key spreads, such as the difference between yields on 2s and 30s or 5s and 30s, are also collapsing.
How about three-month LIBOR, the key benchmark for corporate borrowing costs? It just hit 83 basis points, a fresh high going all the way back to 2009.
I pay attention to moves like these for a very important reason … actually 300 trillion of them. That’s the estimated amount (in dollars) of global debt, derivatives, and other securities whose valuation or whose interest rates fluctuate with various LIBOR benchmarks.
Heck, if you have an adjustable-rate mortgage (ARM), your own interest rate and payment may very well be tied to LIBOR. That means these LIBOR increases are going to hit you in your wallet as soon as you hit your next adjustment date. The 1-year LIBOR benchmark rate used for many U.S. ARMs has almost tripled to 1.54% today from a low of 53 basis points two years ago.
The stock market breakout in July got a lot of coverage in the mainstream press. But major averages like the Dow Industrials and S&P 500 have basically gone nowhere since then. I don’t know if that’s going to change. No one does. But I believe the signals emanating from the credit market are a growing problem, and I’m not alone.
A Wells Fargo economist’s note from a few days ago answered the question “Where are we in the credit cycle?” by saying “late.” A separate analysis from Cumberland Advisors concluded much the same thing, warning that the rise in LIBOR isn’t just a side effect of new fund regulations. And of course, I told you earlier this month that banks are tightening the screws on many borrowers – something we haven’t seen since the last major credit cycle turn in the mid-2000s.
So keep that in mind when you’re deciding how much money to commit to stock market investments. And if you want to know more about this incredibly important topic, don’t just follow my commentaries here in Money and Markets. Join me in person to hear much more at the following two conferences:
- The MoneyShow Toronto, September 16-17: You can register online by clicking here. Or just call 800-970-4355 and mention priority code “041484.”
- The New Orleans Investment Conference, October 26-29: Online registration and more details can be found by clicking here. Or call my staff at 800-648-8411, and mention Money and Markets and/or Safe Money Report.
Lastly, don’t forget to weigh in on the potential message coming from the credit markets in our comment section here at the website.
Until next time,
Will they or won’t they? It seems like we’ve been asking and trying to answer that question with regard to Fed interest-rate hikes forever. But given the fact the Fed is in the news again, the topic needed addressing again yesterday.
In response, Reader Tom said: “All the talk about interest-rate hikes, in my opinion, is really nonsense. The only person who you should pay attention to is the Fed Chairman herself, and I think her answer to a rate hike is ‘NO’.”
Reader Kishin M. said: “It is obvious that the Fed has been procrastinating about the hike so that the markets don’t freak out again as they did after the first hike. Since then, the U.S. economy has been playing hide-and-seek with unemployment and inflation reports not being steady enough over any two consecutive months.
“If the unemployment report due this week is not good enough again, the Fed will again have an excuse for not hiking in September. The underlying factor is that the Fed wants to keep the markets high to give the impression to the world that the Fed and other central bank heads in the developed world are doing their duty to improve the global economy.”
Reader Nels added: “There are ‘Too Big To Fail’ organizations like the insurance companies and pension funds that will be destroyed if interest rates stay low. There are ‘TBTF’ organizations like federal, state and local governments, and many large companies, which will be destroyed if rates rise. Whatever the Fed does, it will end badly.”
Finally, Reader Thomas said: “Let us cut to the bottom of the Fed. What is their core function? What is their mandate? Certainly not to interfere with the free market movements, and certainly not to cause markets to spike and contract in volatility based on declarations and rumors. It is their job to create STABILITY, NOT volatility!
“Let us give them a rating on their performance, similar to any other institution. On their mission statement and on how successful they implement it, I must give them JUNK status! In fact, the sooner they are liquidated, the better the economy will do on all fronts.”
I appreciate the input. I think it’s pretty obvious by this point that the Fed has done a terrible job forecasting the economy over the past several years. They have also repeatedly helped create, then failed to rein in, massive speculative bubbles in multiple asset classes since the late 1990s.
So frankly, I have no confidence they’ll get us through this “Everything Bubble” without significant market volatility. That’s one reason why I remain fairly conservative in my investment outlook and positioning. But I’d love to hear your opinion on that in the comment section.
The European Commission handed down a landmark judgment of up to €13 billion ($14.5 billion) against U.S. tech giant Apple (AAPL) for evading years of taxes on its European profits. The EC determined Apple used a “head office” established in Ireland to dramatically reduce its tax burden over a period of several years. The penalty represents actual taxes owed, plus interest, though the exact amount Apple owes won’t be known until a lengthy appeals process plays out.
Federal Reserve Vice Chairman Stanley Fischer reiterated his recent message that the job market is “very close to full employment” in a Bloomberg interview. Those kinds of comments suggest this Friday’s jobs report is particularly important. If the U.S. economy added 180,000 or more jobs in August, as economists expect, the Fed could raise interest rates in September. But the bond market is still reluctant to fully embrace that thesis given how many times investors have been fooled by the Fed.
Food giant Mondelez International Inc. (MDLZ) abandoned its attempt to purchase Hershey Co. (HSY) after the candy maker rejected its latest offer of around $115 per share. That was up from an initial price of around $107, but below the $125 that Hershey reportedly was demanding.
Hershey has a complex corporate ownership structure, making it unlikely that anyone else will step in until certain changes are made in the next year or two. That’s leading to speculation MDLZ may make a play for another food company to boost sales and earnings growth.
What do you think of Europe’s efforts to get a significant pound of flesh from Apple? How about the Fed’s newfound hawkishness – will it actually result in a hike? Any thoughts about the Mondelez bid, and whether or not the company will have to pursue someone else now that Hershey is out of play? Share your comments below when you get a minute.
Until next time,