Tag Archives: asset bubbles

The Impact Of Rising Interest Rates

With the recent increase in interest rates, perhaps the paramount question is what impact a rising interest rate environment will have on the economy.

First, for reference, here is a long-term chart of interest rates from 1962, as seen in Doug Short’s post of August 17 titled “Treasury Yields In Perspective” :

(click on chart to enlarge image)

Dshort 8-17-13 - treasuries-FFR-since-1962

As one can see, the overall trend in interest rates has been declining, dating back to the peak seen in the early-80s.

The impacts that these falling interest rates have had is extensive, and many of the impacts lack (full) recognition.  As I have previously commented, most recently in my February 6, 2013 post, “Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.”

While the list of ways in which lower interest rates have acted as a benevolent factor to the economy is exceedingly lengthy, one such notable area is the impact lower interest rates have had on corporate earnings.  I highlighted two estimates concerning the positive impact of declining interest rates on corporate profitability in my July 29 ProfitabilityIssues.com post titled “Impact Of Low Interest Rates On Corporate Profitability.”

Although there are various areas which benefit from increased interest rates, from an “all-things-considered” basis rising interest rates have many problematic aspects for our current-era economy.  While 10-Year Treasury Yields were above 5% as recently as 2007 – with no seeming adverse economic impact – I believe that the economy will have difficulties “absorbing” higher yields far before that 5%+ rate on the 10-Year Treasury is again reached.

The impact of the recent rising interest rate environment is particularly noteworthy, not only because of the historically-rapid speed of its ascent, but also because, as I have commented before, my analyses indicate that interest rates can rise to levels much higher than generally expected.  I have written extensively about my belief that there is an exceedingly large bond bubble; if one believes that such is the case, the implications concerning the level of future interest rates is disconcerting.  A “deflating” or “bursting” of such a large bubble will have widespread negative impacts on the economy and markets.

For reference, below is a chart depicting the recent movements of various (3-month, 2-Year, 5-Year, 7-Year and 10-Year) Treasury yields:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 8-21-13 interest rates

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1642.80 as this post is written

The Bond Bubble – February 2013 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last post on the Bond Bubble (the July 25, 2012 post titled “The Bond Bubble – July 2012 Update“) yields of various Treasury maturities have started to increase.

Here is a chart depicting the recent movements of various (3-month, 2-Year, 5-Year, 7-Year and 10-Year) Treasury yields:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

EconomicGreenfield 2-6-13 Treasury Yields since 2011

It should be noted that current rates on 10-Year Treasury Yields, from a long-term historical view, remain extremely depressed.  This can be seen in the following chart of 10-Year Treasury Yields:

EconomicGreenfield 2-6-13 DGS10_2-5-13 2.00 Percent

In fact, even if one takes a view of interest rates from 1790-2011, one can see that the current era of ultra-low interest rates is very much anomalous.  While this era’s ultra-low rates are not necessarily “proof” of an asset bubble in bonds, other characteristics, including those discussed in previous posts, very much indicate that a truly enormous bond bubble exists.

While the duration of this “bull market” in bonds is outsized – and thus gives the appearance that ultra-low rates are not only normal – but such yields will remain depressed indefinitely – as with any asset bubble such seeming stability will prove illusory.  In fact, there are already various indications that the bond market bubble has seen its zenith.

What is particularly fearsome with regard to the bond bubble is its potential for damage once it “pops.”

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

As well, there remains the critical question that I mentioned in the October 4, 2010 post (titled “Thoughts On The Bond Bubble“) with regard to what the “natural” interest rate is:

Another critical issue with regard to the bond bubble is the following:  If one believes that there is a bond bubble that is serving to unduly depress interest rates, what might be the “natural” interest rate – i.e. one that may endure after the bond bubble pops?

While I have not spent considerable effort trying to ascertain the level of this “natural” interest rate, I have little doubt that such a “natural” rate on the 10-Year Treasury would be at least 5%-10% and most likely considerably higher (possibly multiples thereof).  Of course, such rates would have massive implications on a number of fronts.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 1511.10 as this post is written

The Bond Bubble – July 2012 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last post on the Bond Bubble (the February 21 post titled “The Bond Bubble – February 2012 Update“) yields of various Treasury maturities have continued to decline and many have been establishing all-time lows in the last few days.

Here is a chart depicting various Treasury yields from 2007 as seen in Doug Short’s blog post of  July 24 titled “Treasuries Update:  More Historic Low Yields” :

It should be noted that current rates on 10-Year Treasury Yields are, from a long-term historical view, extremely depressed.  This can be seen in a monthly chart of 10-Year Treasury Yields dating back to 1994, on a LOG-basis, with a red trendline shown:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

Many investors, including those very prominent, currently believe that the biggest threat to the future value of bonds is inflation.  While I believe that the threat of inflation is a concern, there are various other factors that pose immense threats as well.

As I wrote in the August 15, 2011 post (“The Bond Bubble – Update“) :

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1337.88 as this post is written

The Bond Bubble – February 2012 Update

In previous posts I have discussed the Bond Bubble and its many facets.

Since my last update on August 15, 2011 (“The Bond Bubble – Update“), the yield on the 10-Year Treasury has roughly been in the 1.7%-2.4% range.  This is seen in the 3-year daily chart, LOG-basis, as shown below:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

It should be noted that current rates on 10-Year Treasury Yields are, from a long-term historical view, extremely depressed.  This can be seen in a monthly chart of 10-Year Treasury Yields dating back to 1994, on a LOG-basis, with a red trendline :

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

From an even longer-term perspective, looking at a 222-year chart of long-term interest rates, which uses the 30-year bond when available, one can also gain a perspective on today’s abnormally low yields.  As seen on that chart, current yields on long-term interest rates have only been lower in one other time period in the 222-year history, with that other period being roughly 1940-1955.

Many investors, including those very prominent, currently believe that the biggest threat to the future value of bonds is inflation.  While I believe that the threat of inflation is a concern, there are various other factors that pose immense threats as well.

As I wrote in the aforementioned August 15, 2011 post:

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

The perils of this bond bubble and its future “bursting” can hardly be overstated.  As I mentioned in the April 6, 2010 post (“The Threat Of Rising Interest Rates“) :

Falling interest rates over the last 20 years have been an “enabler” of much of our current day economy.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1361.23 as this post is written

A Note On Asset Bubbles

I would like to highlight the topic of asset bubbles and the numerous past posts I have written concerning them.  This topic is particularly apropos given that my analysis indicates that various asset bubbles are very “mature,” i.e. very close to ending or “popping.”   As well, I have been writing of my analysis concerning the building financial danger in the financial system, which also poses a grave danger to the sustenance of these asset bubbles. Among these mature asset bubbles are those in both the stock and bond markets.

There are two aspects of asset bubbles that are of great importance.  The first is the impact such bubbles have on investors.  The second is what impact these bubbles have on the overall economy.

It should be noted that asset bubbles are often widely seen as attractive and/or beneficial during their expansion phase.  For instance, during the housing bubble, few people were wary of the “bubble” trend; in fact, the vast majority – including professional economists and policy makers – thought such price appreciation was “great” (i.e. highly beneficial), and such appreciation was “natural” as opposed to constituting a “bubble.”  The vast majority also believed such house price appreciation would last indefinitely, with few risks posed.  Exceedingly few (especially on a percentage basis) predicted the “top” of the bubble or the economic ramifications of its aftermath.

My analysis continues to indicate that the peril presented by the current asset bubbles can’t be overstated.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1314.53 as this post is written

The Bond Bubble – Update

In previous posts I have discussed the Bond Bubble and its many facets.  In particular, I would like to highlight my post of October 4 2010, “Thoughts On The Bond Bubble.”

During the recent market tumult, bond yields have once again dropped sharply to very low levels, as seen by the yield on the 10-Year Treasury.  A couple of charts illustrate this.  First, a weekly long-term chart from 1962 as seen in Doug Short’s August 12 blog post titled “Treasury Yields in Perspective“, with 10-Year Treasury Yields shown in blue:

(click on chart to enlarge image)

Next, a 3-year daily chart of the 10-Year Treasury Yield:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

While this Bond Bubble may have a little more “upside” left to it, I am of the belief that attempting to derive gains from bonds at this point is akin to “picking up pennies in front of a steamroller” – i.e. there is little to be gained, and much to be lost.

While the Bond Bubble continues, its risks to investors, financial markets and the economy in general has in no way diminished.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1194.20 as this post is written

Janet Yellen’s Speech of June 2 2011 – Notable Excerpts

On June 2, Janet Yellen, Vice Chair of the Board of Governors of the Federal Reserve System, gave a speech titled “Assessing Potential Financial Imbalances in an Era of Accomodative Monetary Policy” (pdf)

While I don’t agree with many of her points and assertions, I nonetheless think the topic is very important.  As such, here are a few excerpts that I think are notable:

page 1 :

Monetary policy in the United States has been highly accommodative now for a number of years.  Since late 2008, the Federal Open Market Committee (FOMC) has kept the target federal funds rate close to zero and has purchased a substantial amount of longer-term Treasury and agency securities.  My reading of the evidence is that those securities purchases have proven effective in easing financial conditions, thereby promoting a stronger pace of economic recovery and checking undesirable disinflationary pressures.  Moreover, I believe that the current accommodative stance of U.S. monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run.

page 2:

In the aftermath of the crisis, the primary objective of U.S. monetary policy was to promote financial conditions likely to spur spending on goods and services through a number of channels.  To this end, the Federal Reserve first lowered the federal funds rate and other rates at the short end of the yield curve and, once the zero lower bound was binding, sought to push down yields at the longer end through large-scale purchases of longer-term Treasury and agency securities.  We anticipated that lowering rates on these securities would place downward pressure on a range of private yields as well, in turn supporting home values, equity prices, and other asset prices.  After all, this is the primary mechanism through which monetary policy in its conventional form stimulates the economy.  But a sustained period of very low and stable yields may incent a phenomenon commonly referred to as “reaching for yield,” in which investors seek higher returns by purchasing assets with greater duration or increased credit risk.

page 4:

Misaligned asset prices are notoriously difficult to detect in a timely fashion, and no single metric or set of metrics can consistently and reliably identify stretched valuations.  Nonetheless, it is clearly worthwhile to track a wide range of metrics and to view them in the context of their historical norms.  Current conditions can be evaluated against a baseline of past experience, and then assessed in light of the various institutional and market factors that could conceivably account for deviations from historical ranges.  The Federal Reserve tracks a large number of indicators, and I will highlight a few examples.  Overall, these indicators do not obviously point to significant excesses or imbalances in the United States.

page 8:

Therefore, the risk of a rapid and disorderly deleveraging in the event of a swift change in market sentiment seems to be limited at this point.

page 8:

First, important classes of generally unlevered investors (for example, pension funds) are reportedly finding it difficult in the present low interest rate environment to meet nominal return targets and may be reaching for yield by assuming greater interest-rate and credit risk in their portfolios.

page 10:

If substantial evidence of financial imbalances on a broader scale were to develop, particularly if accompanied by significant use of leverage, I believe that supervision and regulation should constitute our first line of defense.  Indeed, in the wake of the crisis, our supervisory process has been significantly modified to take more explicitly into account possible financial stability implications and effects on the broader economy, a perspective that is frequently described as “macroprudential.”  Our concerns now extend beyond the capacity of individual institutions to protect their capital and balance sheets.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1279.56 as this post is written

The Groupon & LinkedIn IPOs – Broader Significance

On March 1 I wrote a post titled “The Stock Market Bubble – Various Aspects.”

In that post I highlighted a variety of factors that support my conclusion that the entire stock market is experiencing a bubble.

One of the factors listed was “Extremely rapid valuation increases seen in a variety of private (tech) companies to high valuations, despite any clear indication that fundamentals have changed proportionately.”

Since the writing of that post, we have had one very notable IPO, LinkedIn, as well as another pending IPO, Groupon, that serve to illustrate that point.  What is notable in many of the private tech companies’ valuations includes the current size of the valuations; the size of the valuation increases; and the rates at which the valuations are increasing.  All three of these aspects are (very much) outsized.

LinkedIn’s first day of trading, May 19, likely reminded some of the type of manic price action seen during tech IPOs of the late ’90s.  Here is the chart from May 19 in 1-minute increments:

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

As seen in Barron’s, May 23, in an article titled “Is LinkedIn Already Tapped Out?” at a price of $93 the Market Capitalization was $8.7 Billion and 2010 Revenue was $243 million, with 2010 Profits of $15 million.  As seen in the article, “Twenty-seven months ago, LinkedIn was issuing options with an exercise price of just $2.32 – less than 1/40th of what investors paid last week.”

The Groupon jump in valuation is starkly illustrated by the following, as seen in a Wall Street Journal June 3 article titled “Groupon to Gauge Limits of IPO Mania.” From that article: “As of March 31, Groupon’s shares traded among institutional investors in private secondary trading at an implied valuation of $5.6 billion, according to Nyppex LLC, an intermediary in the secondary market.”

While Groupon has yet to go public, various sources have been predicting a resulting post-IPO Market Capitalization in the $20-$30 Billion range.  One revenue projection indicated 2011 revenue of $2.6 Billion.

I could write extensively about my thoughts concerning the fundamentals of both LinkedIn and Groupon; for now I will highlight one item (among many) that deserves particular attention – that of the outsized Price-To-Sales ratios.

Of course, there are many other private tech companies experiencing similar dynamics.  In aggregate, these huge, fast jumps in valuations – to (very) high valuations – should serve as a “red flag” that there is wildly excessive positive sentiment.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 1283.31 as this post is written

The Stock Market – Two Other Notes

There are two other aspects I would like to highlight with regard to the stock market.

First, per my last two posts, my analysis indicates the entire stock market is currently a bubble.   Given that conclusion, as well as my opinion that there are various other asset bubbles in existence right now, I would like to highlight a post I wrote on May 27, 2010 titled “Bubble Investing.”

Second, I view the stock market as exhibiting characteristics of a “crowded trade.”  I recently wrote of this condition on February 28 in “The Stock Market as a ‘Crowded Trade’.”

A Special Note concerning our economic situation is found here
SPX at 1308.44 as this post is written

 

The Stock Market Bubble – Various Aspects

(This post is made in conjunction with the last post, “The Stock Market Bubble – General Comments“)

There are various aspects of the stock market that lead me to conclude that the stock market is experiencing a bubble.

First, for reference purposes, here is a 1-year daily chart of the S&P500 updated through February 28, 2011:

(click on chart to enlarge)(chart courtesy of StockCharts.com)

Here is a list of various general areas that, in total, I believe support the conclusion that the stock market is a bubble :

  • Exceedingly strong price action; by many measures this rally is among – if not – the strongest in history
    • This is seen in the price chart of the S&P500 – as well as many individual stocks – as an increasingly “parabolic” trajectory, especially viewed from September 2010 to present
  • A high degree of “froth” – Although difficult to prove, “froth” is often seen during the terminal stages of asset bubbles
  • Excessively high sentiment – Among established, quantifiable sentiment measures, this stock market has been displaying prolonged periods of excessive sentiment readings
  • Extremely rapid valuation increases seen in a variety of private (tech) companies to high valuations, despite any clear indication that fundamentals have changed proportionately
  • The stock market seems to have the “feel” of a self-feeding mania, which was seen in other recent bubbles such as the NASDAQ and Internet bubbles of the late-90s, as well as the housing bubble
  • Proprietary measures that I keep that show vast overvaluation
  • A general attitude of “nothing bad can happen” – often the low interest rate environment and strong intervention policies such as QE2 are quoted as “guarantees” precluding any substantial adversity

I have repeatedly stated, since my June 2, 2010 post, that I believe the stock market will continue to rise despite highly problematical future conditions in both the stock market and overall economy.  While I still think it will continue to rise, at this point I feel that it is becoming an increasingly (very) high-risk proposition to hold long equity positions.  This is especially so given my certainty that there will be an exceedingly large stock market “crash” in the future, of which I have previously commented upon.

A Special Note concerning our economic situation is found here
SPX at 1327.22 as this post is written