October 2010

October 29, 2010 12:00 p.m.
Negative Interest Rates, QE 2, and more

The most interesting news in an interesting week was the auction of Treasury Inflation-Protected Securities (TIPS). Investors bid so much for the bonds that they will earn a negative interest rate until they mature in five years. They paid over $105 for $100 of face value bonds. Some analysts have joked the last couple of years that investors are paying the Treasury to take their money, but this time investors really are earning a negative yield.

Here’s a good explanation of the deal investors agreed to.

This is another reaction to the belief the Federal Reserve will have another strong round of Quantitative Easing (QE 2). Stocks and commodities had strong runs, expecting the Fed will boost markets and the economy the way QE 1 did. The negative yield on the TIPS means these investors expect QE 2 to cause inflation. For the investors to profit from the TIPS the cumulative inflation the next five years must be at least 4.7% or about 1% annually. If inflation is even higher, the investors will do well, and they’ll do much better than investors in nominal treasuries that have no inflation protection.

The Fed has said it wants more inflation, about 2% annually, and these investors believe the Fed will be successful.

But we’re not there yet. For the second year, there won’t be a cost-of-living increase in Social Security retirement benefits. SS beneficiaries received a big jump in benefits in 2009 after a timely spike in energy prices. They won’t receive another COLA until the Consumer Price Index exceeds its peak of that year.

This also means SS beneficiaries who also are Medicare beneficiaries won’t have their premiums increase if the premiums are deducted directly from their SS benefits. Other Medicare beneficiaries will bear premium increases.

Emerging markets, both stocks and bonds, have been the hottest markets both in terms of price appreciation and cash flows. Investors, both large and small, are pouring money into these markets. The gains have been impressive, but it’s time for caution. Longtime analysts of these markets are concerned that the cash flow has been too much too soon. Also, emerging market countries are worried. They’re taking steps to reduce the flow of money into their markets. The money flows affect their currency values and local inflation, as well as the asset prices. Also, this is “hot money.” It will leave these markets at the first sign of bad news. These are good long-term investments, but this isn’t a good time to put new money in them.

Finances are not the only key to a successful retirement.

You want to stay active and healthy for as long as possible. New research indicates that, while muscles deteriorate over time, it can be delayed considerably. Some exercise to increase muscle strength and flexibility maintains mobility and reduces falls and other accidents. There are two bits of especially good news. One is that it’s not too late to start with muscleengthening exercise. The other is that small amounts of exercise make a meaningful difference.

Do you ever feel you have too much to do and can’t get it all done? The answer could be to work less? That’s the recommendation based on research on high performance and energy. To be the most productive your physical, emotional, mental, and spiritual needs are met. You also need to tackle one task at a time.

October 7, 2010 07:45 p.m.
Anticipating the Fed’s Next Move

Markets surged after the Federal Reserve hinted it would begin a new round of Quantitative Easing at some point soon. A few Fed officials object to boosting the money supply or the Fed’s balance sheet, but they appear to be in the minority. The debate within the Fed seems to be over when they’ll begin, exactly what they’ll do, and how big the effort will be.

The first quantitative easing in 2009 was a big help to investment markets. It ignited the strong stock market rally and gave the economy a boost. Already the anticipation of QE2, as its called is having an impact on asset prices.

But keep in mind what PIMCO’s Mohammed El-Erian had to say. The effort could be ineffective. The first QE2 didn’t help the economy much. It may have kept the economy from sliding into a depression, but it didn’t give the economy anything to sustain itself. Policymakers need to stop pretending that we’re in a normal economic downturn that simply needs a little pump-priming and stimulus to restore solid growth. There are structural problems that need to be addressed and are being ignored. Any benefit from QE2 is likely to be short-term for both the markets and the economy. The recent market moves are for traders only.

Jeff Gundlach of Doubleline Total Return Bond also has been in the news. Gundlach rejects the term the New Normal, because he doesn’t think we’ve settled into a trend. Like El-Erian, he believes structural problems are not being addressed. Gundlach thinks that will lead to a new crisis. He also believes people are wrong at this point to worry about inflation. Debt, he says, is deflationary. It will become inflationary only when people decide they don’t like the deflationary effects of too much debt and ask for inflation.

I don’t expect much of a benefit from QE2. It will take considerably more of an effort to generate even the modest benefits we had from QE1. I’m not the only one who thinks that way.