Fixed Income Update – Global Bond Markets

The Fed is ready for a rate increase this summer as comments made by Fed officials in May validated their confidence in the economy’s growth and rising inflationary pressures.

Some similarities between Greece and Puerto Rico emerged in May, as Puerto Rico received a form of debt relief for about $120 billion of bonds coming due this month. The House and Senate reached a deal that would give the U.S. Territory of Puerto Rico the ability to forgo paying on some of its debt as well as not impose U.S. minimum wage rates for residents under 25. Puerto Rico has already defaulted on several of its bond payments due in May. A declining economy and migration of citizens out of the country have led to the current circumstances.

Low to negative bond yields in Europe and Japan are costing bond investors billions. Fitch, a bond rating agency, released a statement in May detailing how negative yields impact investors. It estimates that there is roughly $10 trillion of negative yielding debt worldwide, in turn costing investors about $24 billion annually. With the average negative yield being -0.24% on $10 trillion, it costs bond investors $24 billion annually. Conversely, the average yield on the same bonds five years ago were 1.23%, producing $123 billion annually. The ultra low yields are primarily impacting pension funds holding negative yielding debt because the returns earned help pay down any pension liabilities. Lower yields are also influencing investors to shift to higher yielding and more volatile bonds.

Sources: Fitch, Eurostat, Bloomberg

More American’s Working Past 65 – Labor Market Dynamics

According to data recompiled by the U.S. Bureau of Labor Statistics, almost 20% of American’s age 65 years and older are currently working. This statistic is reported as the U.S. Employment Population Ratio 65 Years Of Age & Older. It indicates the percentage of the total US working-age population aged 65 or greater that are employed. There are various reasons behind older people working longer, all of which tend to be of demographical nature.  The financial crisis of 2008/2009 and the technology bubble bursting in 2000 devastated many retirement plans for employees, as their 401k and retirement savings lost enough to postpone retirement for many workers. A recent report by the Government Accounting Office showed that nearly 60% of U.S. households have no 401k or retirement plan assets. The precursor to less retirement assets was the waning of traditional pension plans funded by and provided by companies for years. The onslaught of 401ks and self-funding retirement plans has help lead to massive shortfalls in retirement assets.

Various studies have found that employees with higher education such as college degrees, tend to work longer than those with less education. With the unemployment rate currently at 5%, employers have an incentive to keep qualified workers no matter what their age. Older workers today tend to have skills that younger workers may not, thus making it desirable for companies to keep older employees employed. Among other reasons for working past 65 include the rise in life expectancy, financial burdens, and the need to have benefits.        (Sources: U.S. Bureau of Labor Statistics, GAO)

Oil Prices Hit 7 Month High – Commodities Update

 U.S. crude oil prices, as measured by the West Texas Intermediate (WTI) benchmark reached a 7-month high in May, as prices traded over $50 per barrel, the highest levels since October 2015. The price rise came after the U.S. Energy Department released data showing that crude oil inventories had dropped in the U.S.. Inventories tend to drop as the economy uses more oil and gasoline going into the summer months.

WTI prices have almost doubled from a year ago as supply of and demand for oil worldwide have started to rebalance. Oil analysts believe that if prices move above $50 per barrel, it will spur additional production by U.S. drillers, as their profit margins increase with higher prices. As long as the extra production is consumed by an increase in demand, then prices should stay about the same if not elevate further.

Sources: U.S. Dept. of Energy

Greece Debt Crisis Re-Emerges – International Fiscal Crisis

 The debt woes of Greece of have been ongoing since 2009, when a severe recession led the country into a debt crisis. In late May, Greece was able to once again secure debt relief from its European creditors by providing short and long term relief on debt coming due. The European Union members agreed on measures that will be phased in progressively with the continued support of the IMF. The IMF had announced in early May that it was considering halting its support for Greece, which was adamantly rejected by Greece and other countries. Greece will receive a 10.3 billion euro aid disbursement in order to avoid defaulting on debt it owes this summer.

Since the initial bailout of Greece in 2010, Germany has been the architect in reforming Greece’s expenses, instituting austerity measures that reduce pension payments, increase taxes, and reduce public service pay. All of these measures have been and continue to be extremely unpopular with Greek citizens, prompting public protests and labor disputes.

Sources: EuroStat, Bloomberg, IMF

Equity Markets Overview – Domestic Stocks

U.S. equity indices were essentially flat for the month of May, as the S&P 500 and the Dow Jones Industrial Average both were up moderately for May. Analysts are starting to question earnings growth and profitability among some sectors as the term “profits recession” has been widely used. In addition to fundamental concerns such as earnings, other issues with behavioral, tightening credit conditions, and the election in the fall are leading to greater uncertainty.  Many analysts believe that the beginning of the year turmoil that followed the Fed’s rate hike in December may not be replicated, as the equity markets may have already priced in a rate increase. Energy sector earnings have hindered equity indices for months as profits dropped, but are expected to rebound as oil prices have risen.

 Sources: Bloomberg, S&P, Dow Jones, Federal Reserve

Here’s Where The Fed See’s Inflation – Monetary Policy

 The Federal Reserve operates under a dual mandate, with three key objectives for monetary policy (which the Fed sets) to accomplish: Maximum employment, moderate long-term interest rates, and stable prices. Two of these three have been validated for the most part, with unemployment at 5%, and long term bond yields above short term bond yields. Stable prices (also known as inflation control) is monitored and released by the Consumer Price Index (CPI) each month and has been fairly subdued for sometime, until now. The Bureau of Labor Statistics which tracks the CPI reported that prices, as measured by the CPI, increased at the highest rate in three years as of April 2016. This latest report showed prices increasing at annual rate of 1.1%.

A 1.1% rate may not sound like much, but the data hidden within this number reveals something that the Fed may be concerned with. When broken down, the categories with the largest price increases nationwide were medical care services, transportation, and rent. What’s amazing is that the CPI increase would have been much higher if it wasn’t for the dramatic drop in energy and oil prices. The Fed considers various aspects of the economy and the country’s demographics when drafting its monetary policy. The fact that American’s are aging and are requiring more medical attention is an inflationary threat for retirees. In addition, many younger American’s are still having a very difficult time in securing mortgage loans, thus forcing young families to rent rather than buy. Such a dynamic has increased demand for rentals nationwide, forcing rents to rise until more supply is made available.

Sources: Bureau of Labor Statistics, Federal Reserve

Europe Does Away With Its 500 Euro Note – Currency Update

Since the creation of the euro zone and the region’s common currency, the euro, there has been an incredible expansion of euro notes and circulation of the currency. Euro notes are tendered worldwide and held as a store of value by millions of people across Europe and other regions of the world. The euro has become the second most utilized currency after the U.S. dollar, with a value of over 1 trillion euros worldwide.

The most popular of the euro denominations has been the €50 note, representing 45% of all euro banknotes in circulation as of April 2016. Another popular denomination is the €500 note. Even though individual €500 notes represented about 3% of all euro notes as of April 2016, they still account for 30% of total euro banknote circulation value. This past month, the ECB decided to terminate the production of the €500 note, in a move to discourage the use of the large note for criminal and illicit purposes. Eurozone officials have found that the €500 note has been the denomination of choice for drug dealers and terrorists to carry large amounts of cash and that is readily exchangeable into other currencies.  An irony to the €500 note is the argument to keep it in place, due to negative rates in Europe. With rates below zero for various government bonds in Europe, investors would rather keep their savings in cash as opposed to paying banks to deposit their funds into. Euro’s have become a favored store of value for many, since holding onto cash costs nothing.    (Sources: ECB, Eurostat)

500% Inflation Expected For Venezuela – Emerging Markets Focus

With oil exports accounting for over 95% of Venezuela’s revenue, the 50% collapse of oil prices in the past two years has thrown the country into fiscal and political turmoil. In order to raise critical cash to keep the government operational, officials have started to sell the country’s gold reserves.

Even though the country is a major exporter of oil, it is also a major importer of essential goods for its citizens. The country’s currency, the bolivar, has collapsed to the value of one U.S. cent, creating hyperinflation which led to prices soaring over 121% in 2015, and expected to rise nearly 500% in 2016, as estimated by the IMF.

In addition to its fiscal woes, the country is also suffering from little rain, which has brought about severe electricity shortages due to its main source of power generation, a dam whose water levels have dropped to historical lows. In late April, the country’s president ordered a two-day work week for government employees, in order to stem the consumption of electricity. The government workweek now is down to Mondays and Tuesdays, affecting roughly 2.6 million employees, representing 20% of the nation’s workforce.  Economic conditions have worsened, as the economy shrank 5.7% in 2015 and is projected to shrink another 8% in 2016, as estimated by the IMF. Such dire circumstances have created concern among U.S. officials, which are increasingly worried about an unraveling socialist economy and a political meltdown. Such an occurrence could lead to social unrest, chaos and political instability, causing tensions to rise with neighboring countries in South America.

Sources: IMF

Who Owns America’s Debt – Market Fact

As of May 26, 2016, total U.S. government debt outstanding was $19.2 trillion. Not only is U.S. debt held by various countries, it is also held by various U.S. government entities.  As oddly as it sounds, the single largest holder of U.S. government debt is the U.S., through its numerous agencies and departments. Contrary to popular belief, less than a third of all U.S. government debt is owned by foreign countries, not the purported fifty percent plus. There are two basic categories of debt; public debt which includes foreign and domestic investors, and federal accounts which are also known as intergovernmental holdings. Federal accounts currently total $5.32 trillion of all government debt and made up of 230 Federal Agencies. The agencies range from the mammoth Social Security Administration with over $2.7 trillion in bonds, to the Department of Energy, Office of Personnel Management, and the Department of State.

Foreign countries holding U.S. debt total roughly $6.17 trillion, with China and Japan being the two largest owners. As of March 2016, China owns $1.2 trillion of U.S. debt, while Japan has $1.1 trillion.  For the first time ever, the U.S. debt held by Saudi Arabia was released by the Treasury Department in May. It was previously part of the “oil producing nations” category of holders, which didn’t detail the amounts for each country. Saudi Arabia currently owns about $117 billion of U.S. debt, less than India, Taiwan, Belgium, and a host of other countries. Saudi Arabia has previously claimed that it held upwards of $750 billion of U.S. debt, and had used that as a diplomatic tool in dealing with U.S. officials.    (Sources: Treasury Dept., Federal Reserve)
 

The Ticker Tape Machine – Historical Note

Known as the primary source of stock information for nearly 100 years, the ticker tape was the earliest electronic device to transmit stock price information over telegraph lines. In use from around 1870 through 1970, the ticker printed abbreviated company names as alphabetic symbols followed by numeric stock transaction price and volume information. The term “ticker” came from the sound made by the machine as it printed. Ticker tape machines started to become obsolete in the 1960s, as television and computers were increasingly used to transmit financial information.

The ticker tape was invented in 1867 by Edward A. Calahan, an employee of the American Telegraph Company, which was followed by numerous machines all performing the same basic function. Thomas Edison himself invented and patented a ticker tape machine, which he initially sold for $40,000 when he was 22 years old. He used the money, which would be closer to $1,000,000 in today’s dollars, to start a research facility at Menlo Park, and his career as a professional inventor was launched.     (Sources: Library of Congress NYSE, U.S. Patent Office)

Six Steps to Better Habits (by Bob Veres)

Chances are, you made a number of firm resolutions at the start of the year—and, if you’re normal, you failed to live up to several of them. Is there a better way to stick to your sincere resolutions to get more exercise, eat better, floss more often and lose weight?  A recent report suggests that there are actually six ways to improve your follow-through on self-improvement.

The first is to start with a keystone habit, like exercise.  A keystone habit is one that improves a variety of other habits by helping you see yourself in a different way. If you exercise, you tend to feel better about your body, eat more healthfully and procrastinate less often—a three-for-one deal.

Second, start small. If you want to floss more often, start by flossing just one tooth. Yes, that sounds silly, but eventually, if you start lazily, you’ll get in the habit of having the floss in your hand once or twice a day, and you’ll address those other teeth in your mouth. If you start off too ambitiously, meanwhile, the habit is never formed in the first place.

Third: make a plan for how you’re going to follow though on the resolution. One interesting study showed a group of students photos of what could happen to them if they failed to get a preventive tetanus shot. Another group were given a map to the clinic and were helped to put an appointment on their calendar. Guess which group showed up to get the shot? 28% of the students who left with a plan followed through on it, while only 3% of those who saw the awful consequences of contracting tetanus got the shot. Writing down your goals, and putting your times to exercise on your calendar, can improve your odds of keeping your resolution.

Fourth: bribe yourself. Pick something you want, and give it to yourself only if you follow through on your resolution. One study participant wanted to listen to the audio book of the Hunger Games, so she only allowed herself to listen to it at the gym. Suddenly, she was looking forward to sitting on the exercise bike.

Fifth: remind yourself. You can set the alarm app on your phone to encourage you to save money, reduce smoking or go to the gym. You can make a checklist of the things you want to do every day.  Finally: Get your friends to help you keep your promises to yourself. Your support network can hold you accountable.

for stopping smoking or spending more time at the gym.

They might even agree to accompany you.  And if you fail to follow through despite all these tips? The research says that you should follow the advice of the great Stoic philosopher Marcus Aurelius: forgive yourself and try again.   (Source: http://www.bakadesuyo.com/2016/05/personal-habits)

The Long Decline in Child Mortality (by Bob Veres)

If you think the world is going to hell in a handbasket, step back and look at the bigger picture. One important statistic is child mortality—the number of children who perish below 5 years of age. Over the last 50 years, the world has experienced a hundredfold decrease in this key measure of health, to the point where, in the more developed nations, it is now lower than 1%.

The chart shows the extent of the decline, and how the odds of living past the age of 5 have improved in the late 20th and early 21st centuries. The longest data-set is from Sweden, where, in 18th century, every third child died, and famines and
disasters created a whipsaw pattern of survival. But you can see that the developed countries, and one major African nation, have experienced dramatic improvements in modern times. Overall, global child mortality fell from between 300 and 500 per 1,000 live births (30-50%) to 18.2% in 1960, and further to 4.3% in 2015.   This is further evidence of a much bigger trend: that overall, the quality of life around the world is improving. You won’t see that in the headlines or in the news industry’s focus on negative events, but if you can manage to step back and see the big picture, the larger trends are encouraging.    (Sources: https://ourworldindata.org/child-mortality/)

What’s Getting Expensive – Inflation Review

The Bureau of Labor Statistics closely follows the price of thousands of goods, products, and services that consumers buy each month.  In its most recent release, the Bureau noted that prices have increased roughly 1.5% in the past year, March 2013 to March 2014. The gauge that the Bureau uses to identify price increases and decreases is the Consumer Price Index (CPI). Even though the index shows that inflation is still low relative to its 50-year annual average of 4.1%, there are certain products and services where prices have increased considerably.

Over the past year, household utilities and services have increased the most. The cost to heat homes has increased as propane and firewood costs have risen by over 18% in the past year. Gas utilities for homes and businesses have also risen over 16%.  The government does note that food and energy prices are the most volatile within the index. However, many believe that stripping out food and energy is not an accurate assessment of where prices are headed. When it comes to the heightened price of gas utilities, it’s not the actual cost of the (product) gas, but the cost of delivery. New Environmental Protection Agency (EPA) regulations have also added costs to gas distribution over the past year.

Grocery store visits have also become more expensive, as the cost of milk, eggs, meats, and citrus fruits have all increased in the past year.  Many anticipate that college fees and hospital service fees will rise further as growing demand for education and medical services continues, yet with limited availability.  Conversely, the cost of televisions and cameras have dropped over 10% in the past year, as retailers have aggressively marked down prices along with an increase of inexpensive products on the market.   (Sources: Bureau of Labor Statistics, EPA, U.S. Energy Dept., Dept. of Education, Dept. of Health)