Two little red flags went up this week. One is the national flag of Switzerland, whose central bank threw turmoil into the currency markets after it decided to let go of the Swiss franc’s artificial peg to the euro. That got everybody’s attention.
But let’s turn our attention to the second red flag first. Check out this quote from Barron’s during the week pondering the downtrend in US stocks:
‘Shares of KB Home and other homebuilders dropped violently, now down 18%, starting midday as the company’s chief executive said in a conference call that margins could “drop significantly” in its current quarter as the company struggles with rising costs and heavier use of incentives and price reductions.’
Looks like there’s a pause coming to US markets. You might have noticed there’s been a reasonable amount of good news about US housing lately. Such is the way of markets. They’re always out to fool us. US stocks are likely to continue to come off the boil as they price in a slowdown.
Yields on US Treasuries are still falling too. They aren’t behaving the way everybody expected. Certainly, last year the expectation was that US bond prices would fall as higher interest rates were priced in. A lot of hedge funds went short bonds on this expectation — and are now being wrung out with losses.
The US Federal Reserve is unlikely to raise interest rates anytime soon because commodity prices are way down, the US dollar is strong, and demand out of China and Europe is soft. Bond king Bill Gross said as much a couple of weeks ago.
Yields on the 10-year US Treasury were 2.05% when he said that. They’re around 1.788% now. They could stay low for a lot longer than most people think possible.
Low inflation and low interest rates, despite whatever else you may hear, are actually very good for the economy in general. They allow business to take a much longer view of the world. This means they can put more effort into innovation and invention, which then feeds off itself, as innovation lowers prices.
Banks don’t like it, however. Very low inflation, tending to either disinflation or outright deflation, makes it harder to pay off debts. And the banksters don’t like that.
The central banks fear it too. If prices are lower tomorrow than today, then consumers might hold off spending.
Anyway, the US Fed has now missed its 2% inflation target for 31 months. One way to get inflation expectations up is with a weaker dollar, but the Fed now has the greenback trading at an 11 year high against the euro.
That brings us back to red flag number one.
The market has taken the news about the Swiss unpegging the franc to the euro as a signal that the European Central Bank (ECB) is all but guaranteed to print money and buy government bonds. That sent the franc rocketing in value and the euro down.
Swiss National Bank (SNB) Vice President Jean-Pierre Danthine had said a couple of days before the move that the peg would ‘remain the pillar of our monetary policy’. Jeez, too bad if you staked your money on what he said, hey?
The ECB meets on January 22. One little spanner in the works is that the Greek election comes a couple of days later. It’s likely the ECB will signal its intention on January 22 but won’t act until the Greek situation is settled.
Hmm. 2015 sure is keeping all of us on our toes already. Markets are volatile, and it’s likely to continue. Mind you, subscribers to Cycles, Trends and Forecasts were told to prepare for this — in the middle of last year.
For now, let’s step back and look at the broader picture. What’s the best way to build wealth in the first place? One man whose writing on this I admire is Mark Ford. I own a several of his books. I’m glad I do.
You may not recognise the name, but for a decade Mark wrote on these very topics for an e-letter he founded in 2000 called Early to Rise. This was after he built a million dollar fortune in business and real estate after starting with nothing. Today he’s worth more than US$60 million.
To be clear, Mark’s a gifted writer who is not out to bamboozle you with a bunch of lectures on stocks and bonds. In fact, Mark doesn’t have a lot of time for financial assets like stocks and bonds in the first place. His take isn’t a pitch you’re likely to hear from your broker or finance industry. And these are habits anyone can begin with.
for Markets and Money