Wednesday, June 8, 2016

All Things Are Connected

I wrote a book and the meme within it is, "All things are connected." Because I don't have a name like Paris Hilton, Kim K. among others, agents have declined my work. This is why I write a blog - to get a name or possibly some recognition. It might lead to representation and then, publication.
Among the important indicators that I watch is the bond market because it will not only reflect the strength and direction of the US economy, but also the cost of financing - interest rates.
Prior to last Friday's job report, the media talk and general consensus is that the Federal Reserve will raise rates by a quarter point in June or July. The bond market says...
This caught my attention. Have you checked the global market? The bond market is echoing the global trend which is down and negative in many nations.
10-Year T-Bill
rate is low at 1.70%, but that ridiculous low return is high compared to central banks elsewhere. In Germany, you only get 0.12% and a growing number of central banks are turning to negative rates. These idiots say they seek inflation for growth, but they enact a deflationary concept to achieve it.
Real Life
You have a business. To preserve cash for a rainy day, you borrow for a short term need. Now, your central bank lowers the cost of loans. You save on this cost. However, this does not mean that consumers will buy your product or if competition from State funded businesses can out-price your product through currency manipulation to win market niche. The Fed's actions have only reduced costs for businesses which gave a spark to stock prices. They have hurt all citizens through devaluation of currency and, especially savers, pension plans and mutual funds.
Accept Responsibility
Will they ever admit that their policy is wrong? For example, the Organization for Economic Cooperation and Development(OECD)just changed their projection for US growth in 2016. At least, they made an announcement. Anyway, originally, they said US growth would be 2.4%. Then, they lowered it to 2%, and now, 1.8%. Hey, they are not alone. You can add President Obama, the IMF and the Fed among others. By the way, I predicted GDP would be 0.5% in the first quarter and I was spot on until the latest government revision. Don't they always make things look better?
Mathew Mish, credit strategist at UBS is also looking at bonds, especially high risk issues. His analysts projects a rise in default rates from 2.6% last year, to 4.3% in 2016. I like to add that the market has resulted in four straight quarters of profit declines. We both realize that companies will have a harder time to cover costs and debt. For those who will seek further funding to make ends meet, they will face tougher lending standards as debt is getting more expensive, regardless of what central banks do with rates.
In addition, I see the low price for oil negatively effecting one of the strongest sectors in the US economy. I see retail continue to suffer. Together, they will effect the bond market. Mish estimates default rates for non-energy firms will rise to 3.5% in 2016 from 1.5% in 2015. We both see the default rates adding stress to the market.
Higher Rates?
If rates are raised, many pension and mutual funds will drop "old" bonds for higher returns. This action could cause a liquidity crunch and another reason why the drastic actions of the Fed is so dangerous. In any event, lending standards will strengthen along with the rate of return.
Not only does the cost of doing business climb, but higher interest rates will disqualify tens of thousands of home buyers.
The staircase, ladder climb model
We already have a serious flaw in housing - builders have by-passed affordable housing for the upscale market. The staircase model and the American dream in housing has crumbled in many regions of the country. And now, the return of Flippers! In the first quarter of 2016, flippers accounted for 20% of all home sales. They are everywhere! From cable TV in Nashville to LA. If they can't sell, then we all know what happens.
As I wrote in my unpublished work, The Evolution of Democracy: The Book of Multiple Ideas and Predictions, all things are connected.