Outside Economics

Now What’s Floating to the Top: Oil, Gold, Equities, or Bonds

Posted by Wendell Brock, MBA, ChFC on Thu, Feb 11, 2016

Talk is, that one of the reasons the market is falling right now is because it was overpriced, which may be the case, however another part of the problem has been that when considering options, where else can you put your money?

Banks aren’t much of an option – at the continuously low rates it makes it pretty painful to leave money there. At least when rates were higher and a depositor could get 4%-6% at a bank you had a fairly good risk free option. Too much cash on the sidelines will certainly cause the market to be bid up. Maybe it’s an issue of supply and demand – there aren’t enough shares to go around, so the prices get bid up.Oil_gold.jpg

Insurance companies, which are very long-term investors, are currently running about 2-4X or more the rate banks are offering. These rates are certainly going to help folks get better returns, with little to no risk. But when chasing performance even those stable rates don’t appeal to everyone. So this week I thought we would look at one reason why the market has tanked over the past several weeks, and consider the option of putting more money in the market – after many of the stocks and bonds are clearly on sale!

Below is a look at why the markets are falling, what is up with bonds, and a check on precious metals.

Why Stocks Went Down When Oil Went Down – Domestic Equities

Equity markets descended in January alongside oil prices, while testing new lows with a visible increase in volatility. Oil’s dramatic price drop has been a catalyst for stock prices heading lower, a so-called correlation that has actually existed for years.

There are various theories as to how oil and stock prices might be correlated, yet one of the most accepted revolves around macro economic global dynamics.

Oil is the most traded and actively utilized commodity in the world whose consumption represents the economic activity worldwide. So when oil supplies grow and demand drops, markets interpret that as an economic slowdown. Such a slowdown thus migrates into the equity markets, where economic activity and growth is essential for expansion and higher equity prices.

Lower oil prices can also be beneficial for certain sectors, such as consumers, transportation and airlines, whose primary expenses are fuel. Economists expect a possible lag effect with recent low oil prices, which may eventually appear on corporate income statements. Obviously, lower oil prices are not conducive to oil industry sector companies, whose margins shrink as oil prices drop.

Some fixed income investors now view U.S. energy stocks as opportunities to earn higher yields on dividends compared to where they were months ago. Lower valuations on energy stocks have led to higher stock dividend yields as prices have fallen.

Does this mean that the markets won’t recover until oil prices go up? For that answer only time will tell…

Fixed Income – Global Bond Markets

The Fed is now at odds with nearly every other developed country central bank as others employ a rate decrease and stimulus strategies.

In its latest FOMC meeting in January, the Fed decided to leave its rate hike plans intact, disappointing markets and lifting U.S. rates slightly. The Fed did acknowledge slightly lower economic growth and volatile equity market conditions as variables to monitor.

International rates fell in January as central banks moved forward with stimulus efforts aided by lower borrowing rates. The ECB and Japan both reduced their key lending rates enough to drive markets in both regions towards risk assets. Japan’s central bank surprised markets by lowering one of its main lending rates into negative territory for the first time in order to stimulate its sagging economy.

Gold and Silver - What's Up?

Considering the markets and the downward trend, it seems that Gold and Silver (precious metals) have come off the winner over the past couple months. Both gold and silver are up, about 14% and 10% respectively. It makes sense to own some precious metals, but as with any investment how much higher will it go? Typically, people own precious metals as a balance to inflation but it can be a stabilizer to an investment portfolio.

With that news, it looks like for the time being, Gold is floating to the TOP! So does this mean we are at the bottom of the current sell off? No, perhaps but not likely. Does it mean its time to put more money in the market and buy while things are on sale? Maybe. Many of these answers are particularly personal to your current situtation that is why a good comprehensive evaluation is valuable.

Sources: Federal Reserve, Bloomberg, Economic Premise #150 World Bank, IMF Research Bulletin, Federal Reserve System Perspective

Remember:

"The hardest thing in the world to understand is income tax." - Albert Einstein

 

Topics: Gold, Oil, Silver, Bonds, equities, banks, Insurance Companies

Economic Bubbles and What to Do

Posted by Wendell Brock, MBA, ChFC on Fri, Aug 08, 2014

Is there any doubt that we are living in a bubble economy? At this moment in the United States we are simultaneously experiencing a stock market bubble, a government debt bubble, a corporate bond bubble, a bubble in San Francisco real estate, a farmland bubble, a derivatives bubble and a student loan debt bubble.

carbon bubble

Another very troubling bubble that is brewing is the massive bubble of consumer credit in the United States. According to the Wall Street Journal, consumer credit in the United States increased at a 7.4 percent annual rate in May. That might be okay if our paychecks were increasing at a 7.4% annual rate, but that is not the case at all. Instead, median household income in America has gone down for five years in a row.

This pattern of bubbles is not isolated to the United States alone. In fact, the total amount of government debt around the world has risen by about 40% just since the last recession. It is never sustainable when asset prices and debt levels increase much faster than the overall level of economic growth. At some point a massive correction will happen. History has shown us that all financial bubbles eventually burst.

You know that things are serious when even the New York Times starts pointing out financial bubbles everywhere. Their definition of a bubble is “when the price of everything blasts upwards, obliterating the previous ceilings of historical benchmarks, it's a pretty good indication that you're in a bubble.”

The bubbles in the financial markets have become so glaring that even the central bankers are starting to warn us about them. For example, just consider what the Bank for International Settlements is saying:

“There is a common element in all this. In no small measure, the causes of the post- crisis malaise are those of the crisis itself – they lie in a collective failure to get to grips with the financial cycle. Addressing this failure calls for adjustments to policy frameworks – fiscal, monetary and prudential – to ensure a more symmetrical response across booms and busts. And it calls for moving away from debt as the main engine of growth. Otherwise, the risk is that instability will entrench itself in the global economy and room for policy maneuver will run out.”

This is quite a harbinger coming from the BIS. As for the “room for policy measures running out,” according to Jim Rickards, author of Currency Wars and The Death of Money, the Fed has two options at this point, they can continue to taper off the mass printing of money, which he says will lead to another recession within this depression. Or if they don't continue to taper, perhaps have a pause in printing and they increase their asset purchases, then that will signal to the market that the Fed must keep on printing and it will trigger hyper-inflation. This will cause the dollar to collapse and gold prices to increase.

According to the minutes from the Fed's June 17-18 meeting, the Federal Reserve is leaning towards ending the economic stimulus in October. Fed policymakers have been tapering their government bond purchases in $10 billion increments at each meeting since December, cutting them to $35 billion a month from $85 billion. At that pace, the Fed would be buying $15 billion in Treasury bonds and mortgage-backed securities by its October meeting.

Yet while Fed officials are planning on halting the bond buying, closing out the program will have another side-effect. The bond purchases have held down long-term interest rates for several years, spurring purchases of homes and factory equipment. The Fed has been planning on increasing the interest rates sometime in 2015, after all, they can't stay suppressed forever.

With all the bubbles that are out there, what will happen once the interest rates increase?

Is this sustainable?

Of course not.

None of these financial bubbles are.

So, what to do?

Now is a good time to be considering other options such as precious metals. Precious metals have always been an important part of a well-rounded portfolio. But with all the economic uncertainty out there, many people are beginning to insist on having some sort of precious metal not just in their portfolio, but in their hands. There are even a few states who have recently voted to accept gold and silver as legal tender. There is a reason why these precious metals have been the currency standard since Biblical times. In short, they don't lose their value.gold vs silver

There are many naysayers out there arguing that buying gold and silver is a foolish investment. Perhaps as an investment, they are right. But as a type of insurance against the consequences of the monetary manipulations and bubbles that are within our economy, maybe having some gold or silver in your hands becomes wisdom. How much to have dependes on your personal situation, 

We really don't know what the economy will look like in the next few years. We can look at history to see what typically happens when this type of mix of bubbles and monetary manipulation come in to play. We would be foolish to think that the results that happened then could never happen to us. Common sense tells us to be prepared. What does being prepared look like for you? I believe it is far easier to be prepared than to try and predict the future.

Topics: Economy, Gold, Precious Metals, Silver, Economic Bubbles

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Wendell W. Brock, MBA, ChFC

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