Outside Economics

Oil Prices Head Higher and Higher

Posted by Wendell Brock, MBA, ChFC on Fri, Aug 19, 2016

With the last summer holiday a couple weeks away oil prices have certainly started to climb as usual. But are the prices going to stick. It certainly seems that over the summer the $40/bbl support level held. That being said now it looks like we may have higher prices heading into the fall.

As oil prices rebounded throughout May and June, drillers restarted idle rigs in hopes of catching higher prices as they evolved. Unfortunately, the upswing in production and drilling was accompanied by growing supplies and less consumption, thus resulting in a supply glut. OPEC-Production-1.jpg

As a group, OPEC represents the world’s largest producer of oil, with Saudi Arabia being the single largest producer at over 10 million barrels per day, roughly a third of total OPEC production.

The dramatic decline in prices in July alone are a testament to the commodity’s volatility, subject to supply and demand dynamics worldwide. Yet even with such an efficient market, as claimed by Saudi Arabia, producers tend to get it wrong as to what the actual demand might be. Some oil analysts believe that OPEC leaders, specifically Saudi Arabia, may have increased production knowing that additional demand was not yet there. 

Crude oil prices traded as high as $107 per barrel as recently as June 2014, and now pulling back to near $40 as of the end of July. As with any drop in commodity prices they eventually go back up, and oil is no different, see The Bounce.

What does this mean for you? Investment wise, it maybe a good time to pick up some oil stocks. Many of these stocks have been trading at less than half their highs from two years ago, so even a small increase in the price of oil can result in a nice return on your investment.

Additionally this will mean higher gas prices at the pump - so budget accordingly. Don’t get caught by surprise when gas soon hits $2.50 to $3.00 or more per gallon. Make other financial adjustments now, so you can handle the higher energy prices to come.

Sources: OPEC Monthly Production Report, OPEC Secretariat, Energy Prospectus Group

 

REMEMBER:

"One of the most important ways to manifest integrity is to be loyal to those who are not present." - Stephen R. Covey

 

Topics: Oil, oil prices

Interest Rates Dance the Limbo

Posted by Wendell Brock, MBA, ChFC on Fri, Aug 12, 2016

The yield on the 10-year U.S. Treasury fell to a record low of 1.318 percent in early July, sending bond prices higher throughout the fixed income markets. Bonds have continued their rally since the beginning of the year as the Fed has held off on raising rates, while central banks in Japan and Europe have maintained unprecedented low rates.

Repercussions from Brexit channeled money towards the perceived safety of German government bonds in July, as Germany became the first country in the EU to sell 10-year government bonds with a negative yield at auction. A negative yield means that investors are willing to essentially pay Germany in exchange for holding funds in German bonds. Germany sold  €4.8 billion ($5.3 billion) of 10-year notes at an auction, with a yield of -0.05 %. 

limbo-tropicale-small.jpg

As of this past month there has been a continuous decline in long-term interest rates for 25 years, spanning from 8.3% in 1991 to 1.36% in July for the 10-year U.S. Treasury. Some bond analysts estimate that any continued decline in yields has become much less probable. But we all know, never say never!

With the Fed and its monetary stimulus efforts at capacity, many economists believe that this leaves ample room for fiscal stimulus in the form of lower tax rates. The presidential campaign has brought about the topic of lowering taxes and perhaps at a timely juncture that would help stimulate economic growth where the Fed may not be able to any longer.

A chellenge with this thought, is that this comes at a time when the federal government needs all the money it can get its hands on. (see the article: How Interest Rates Feed the Pig.) Its a fact that lower taxes has proven to increase the the total tax revenue, however to many people lowering taxes is unfair.  

This news on the heals of all the economy has been through since the Great Recession is a clear indicator that the economy has not completely recovered. With intermediate interest rates way below the historical average of 5.5%, this becomes a very serious concern for retirees who depend on their fixed income securities to help pay for their living expenses.

What to Do

Understanding this, the rate at which a person withdraws money from their retirement accounts will have a huge impact on the longevity of that account. People will need to simply save more for retirement and or live on less than originally expected. Both are unpleasant challenges. Getting out of debt will help with both of those challenges, as it frees up cash flow for additional savings and with little to no debt, it requires much less to live on. 

One strategy would be to take out much less during the earlier years of retirement and allow your savings to continue to grow, even for an additional five to seven years. This extra seasoning of your portfolio would make a world of difference.  Those who are preretirees may want to consider to start winding down their spending and try living on much less income, this will allow you to put more in savings and or get more debt paid off. It will also start you on a road of more discipline in your finances.

 

Sources: Federal Reserve, Bloomberg

 

Remember:

Training is everything. The peach was once a bitter almond, and the cauliflower is nothing but a cabbage with a college education.  - Mark Twain

Topics: Economy, retirement, debt, Interest Rates, Fed

The Argues of the Super Macro Economic View

Posted by Wendell Brock, MBA, ChFC on Fri, Aug 05, 2016

In the United States we have enjoyed the largest economy in the world for so long that we often don't think of how events around the globe affect us. Maybe we just don't want to admit that we are suceptable to the economic occurances that take place twelve thousand miles away in some small country! But those things do affect us now that we really operate in a global economy and the macro view is not just a look at the United States any more - it is a look at the world. Maybe we will have to reference Macro as the Super Macro View for the world economy, vs. the Macro View for the U.S. Economy. Luckly we have not sneezed this year so the rest of the world has not caught a cold, but there are events that have occured that are affecting us. Maybe what we have is a case of "the argues" as old Festus from Gunsmoke use to describe his aches or pains in his body - it was when one part of the body was arguing with the other! (Wow that really dates me!)festus.jpg

Macro Overview

Macro risks are still prevalent throughout the world as the effects of Brexit and terrorism continue to be ongoing concerns. U.S. markets have been resilient to the uncertainties, as major U.S. stock indices reached new highs in July.

Some believe that the outcome of the EU vote, as well as the sentiment in Britain shortly before the vote to leave the EU, has many similarities to the U.S. presidential race. Key election issues and how they may affect the economy include: NAFTA, immigration, terrorism, and banking regulations such as Glass-Steagall and Dodd-Frank.

The presidential campaign has brought about the suggestion of reforming existing regulations, which are adversely affecting the banking and financial services industry. Some candidates argue for the repeal of Dodd-Frank, regulations put in place during the current administration to regulate banking activity.

The problem has been that the costs of the new regulations have inhibited smaller banks and credit unions. Some candidates lobbied to bring back legislation known as Glass-Steagall, put in place during the depression in order to prevent banks from combining financial services and lending simultaneously with the more risky business of investment banking.

In the last eight years since the “Great Recession” there have only been four community banks started in all 50 states, down from about 160 in 2007. Community banks are often a major economic engine for the local economies.

Economic growth, measured as GDP, was reported by the U.S. Department of Commerce to have increased at an annual rate of 1.2 % in the second quarter of 2016, below analyst’s expectations of 2.5%. The dismal GDP report was accompanied by a drop in oil prices of over 15% in July and a record low for the 10-year Treasury yield hitting 1.37%.

Upcoming economic data for the U.S. may influence the Federal Reserve to act on raising rates rather than waiting any longer. Analysts believe that a rate increase by the Fed before the end of 2016 based on U.S. economic data may be a mistake. Rates in Europe and Japan remain in negative territory due to the uncertainty of growth within the EU and the expected derogatory effects of Brexit on global business transactions. Fed members decided to leave interest rates unchanged during their July meeting, stating that it was prudent to wait for more data following the consequences of Britain leaving the EU.

Banks in Italy have become the latest of concerns in Europe as souring loans are being recognized throughout the Italian banking sector. As the third largest economy in the EU, Italy’s banking sector is prone to a crisis that could have dire consequences for the country and neighboring trading partners.

 

Stagflation On The Horizon – Monetary Policy

Former Fed Chairman Alan Greenspan said that the U.S. may be heading toward stagflation, a slow-growth economy coupled with rising inflationary pressures. Greenspan also said that there seems to be pockets of inflation even though low productivity is prevalent in the economy.

Stagflation is an economic phenomenon when there is slow or stagnant economic growth at the same time as rising inflationary pressures. The 70’s were a period when rapidly rising fuel prices coupled with dismal economic growth, led to stagflation. This same scenario occurred in the first two years of the 80’s, until both monetary and fiscal policies were enacted that halted destructive inflationary pressures and curtailed taxes to boost economic activity.

Inflation is measured by the CPI (Consumer Price Index) and economic growth is gauged by GDP (Gross Domestic Product), which are both released by the Department of Commerce each month. As a barometer of general prices throughout the country as well as current economic activity, both indices help identify any possible stagflation scenarios.

Managing your way through this current economic time can be challenging. It would seem that rates will remain low for the near future, certainly into 2017. The Fed may make minor adjustments, but I don’t think we will see any drastic increases. Wall Street needs better earnings to keep it going, I think they have had their fill of low rates. It’s a good time to review where you are at, and how your plans are shaping up for the year. Additionally, now is the time to start the final work for income tax reduction strategies, as we finish the third quarter. It much better to do this now rather than starting in December!

The current low rate environment, is no longer an effort to keep fueling Wall Street, but in an effort to keep the Federal Government afloat (they are the largest borrower in the world). If rates increase for the government, then ALL TAXES must go up to pay for the increases in interest payments. Don’t get me wrong, lower rates do help the Market, but the Market has adpted to lower rates for some time.  Now the Federal Government needs to get its borrowing under control for the rest of the economy to move forward. (See Feed the Pig Article)

Sources: EuroStat, Dept. of Commerce, BEA, Federal Reserve, ECB

Remember:

"So that the record of history is absolutely crystal clear. That there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system."  Milton Friedman

Topics: Economy, Interest Rates, Great Recession, Brexit, Stagflation

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Wendell W. Brock, MBA, ChFC

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