Federal Reserve Chair Janet Yellen has confirmed what most already knew. The recovery in the U.S. jobs market is far from complete. Yellen noted that the unemployment rate has improved since the Federal Reserve initiated its last round of quantitative easing in late 2012, falling from 8.1% to 6.6%. Curiously, in 2013, the U.S. economy grew just two percent.
That said, against the backdrop of a so-called improving U.S. economy, the numbers of the long-term unemployed and part-time workers are far too high. In fact, 3.6 million Americans, or 35.8% of the country’s unemployed, fall under the “long-term unemployed” umbrella—that is, those who have been out of work for more than 27 weeks. The underemployment rate (which includes those who have part-time jobs but want full-time jobs and those who have given up looking for work) remains stubbornly high at 12.7%.
The improving unemployment numbers come on the heels of two straight months of weak jobs numbers. In January, economists were expecting the U.S. to add 180,000 new jobs to the U.S. economy; instead, just 113,000 new jobs were added. In December, economists were projecting 200,000 new jobs would be added—instead, the number was an anemic 74,000.
For the head of the Federal Reserve, this translates into more money being dumped into the bond market ($65.0 billion per month) and a continuation of artificially low interest rates.
Once again, bad news for Main Street is good news for Wall Street. After Yellen’s speech, the S&P 500, NYSE, and NASDAQ responded by surging higher. Again, the Federal Reserve’s ongoing bond buying program and open-ended artificially low interest rate environment is great … Read More
The central bank of Japan has taken center stage when it comes to using extraordinary measures to revive growth in an economy. In an effort to boost the Japanese economy, the central bank has resorted to quantitative easing. And unlike the U.S. Federal Reserve, Japan is also involved in buying exchange-traded funds (ETFs) and real estate investment trusts (REITs), not just government bonds and mortgage securities.
Unfortunately, the central bank is outright failing. One of the main goals of the Bank of Japan is to inject inflation into the Japanese economy through money printing, aiming for an inflation rate of two percent. Sadly, this isn’t happening; inflation in the Japanese economy is running far below the targeted level, and there may not even be light at the end of the tunnel.
“A 1 percent inflation rate may be possible, but that’s different to the Bank of Japan target,” said Takahiro Mitani, manager of the Government Pension Investment Fund of Japan (GPIF), the world’s largest pension fund. “We haven’t seen real demand to pull prices up yet. Whether inflation will be stable is questionable.” (Source: Winkler, M., “World’s Biggest Pension Fund Sees Japan Fail on 2% Inflation,” Bloomberg web site, December 4, 2013.)
Consumption is one of the factors that can help bring inflation into an economy. Sadly, the Japanese economy is seeing hardships here as well, as consumer confidence, one of the best indicators of where consumer spending will go, is declining. Between September and November, consumer confidence in the Japanese economy declined more than eight percent. The index tracking consumer confidence stood at 45.7 in September and 41.9 in … Read More
While quantitative easing (QE) may have been put in place to kick-start the economy, it also had the added benefit of kicking income investors to the curb. Since implementing QE1 in November 2008, the Federal Reserve has printed over $3.0 trillion to snap up government bonds.
This has translated into artificially low interest rates, which are supposed to spur borrowing. A low-interest-rate environment has also helped fuel the stock market and put a smoldering spark in the housing market and auto industry. Those same record-low interest rates have also sucked the income out of America’s retirement portfolio.
In a high-interest environment, fixed income assets like Treasuries, bonds, and certificates of deposit are an important part of most retirement portfolios. In theory, they provide regular investors with a stable place to park their retirement money and a means to anticipate a reliable income stream.
In 1980, Treasury bonds peaked at an eye-watering 14%. Today, a 30-year Treasury bond provides a yield of just 3.67%, a far cry from 1980 and a long way from the 5.3% yield in late 2007—before the financial crisis began.
In order to diversify risk, invest in multiple asset classes, and take advantage of growing dividend yields, many investors have turned to exchange-traded funds (ETFs). ETFs are a great option for broad-based investing, especially for those who do not have deep pockets. In fact, with a simple ETF strategy, investors can build a well-diversified portfolio made up of small-, medium-, and large-cap stocks.
While ETFs continue to grow in popularity, investors looking for more options might want to consider exchange-traded notes (ETNs). On the surface, ETNs are … Read More
After a serious pullback in May, is it time for income-starved investors to reconsider real estate investment trusts (REITs)? Or will America’s favorite sugar daddy, Federal Reserve Chairman Ben Bernanke, tease investors with ongoing threats of tapering?
The North American REIT bull market was stopped dead in its tracks on May 22, after Bernanke hinted the central bank might begin tapering its massive $85.0-billion-per-month government bond-buying program.
By being the major purchaser of U.S. government bonds, the Federal Reserve has been able to keep interest rates artificially low. Tapering its bond-buying program would mean, in theory, that interest rates head higher. In an effort to protect their retirement portfolio, investors are selling stocks they see as being vulnerable to rising interest rates.
REITs are at the top of the list. That’s because REITs are in the business of purchasing property and higher interest rates on the heels of financing translates into lower profitability.
While artificially low interest rates are a godsend to REITs, they’re a nightmare for average Americans looking to generate retirement income on their long-term bonds.
Interestingly, since May and the ensuing market volatility, the Federal Reserve has said that inevitable tapering would not necessarily result in higher interest rates. That’s more good news for REITs—and more bad news for income-dependent investors.
Unfortunately, many REITs have failed to fully recover from the Federal Reserve’s May 22 comments. Those depressed prices have opened up a door of opportunity for savvy investors. That’s because, when prices for REITs (and dividend stocks) fall, yields rise. The volatility means investors can pick up quality REITs at depressed prices with higher returns.
REIT … Read More
The housing market in the U.S. economy has gained a significant amount of attention. Even my old friend, Mr. Speculator, who likes to make big bets for bigger gains, told me it’s a good time to buy a house, saying “the prices are cheap, and they are only going higher from here.”
What’s certain is that the U.S. housing market has seen an uptick since the home prices hit bottom in early 2012; but is it on the path to real recovery, or is what we are seeing just a minor bounce?
Consider the chart below of the S&P/Case-Shiller Home Price Index:
Chart courtesy of www.StockCharts.com
Looking at home prices alone, they are nowhere close to being at the same level they were in 2006 and 2007. The S&P/Case-Shiller Home Price Index suggests the U.S. housing market is still down roughly 26% from its peak.
Going forward, the very factors that can drive the housing market higher are under stress, and may just divert its path to the undesired direction.
The number of first-time home buyers in the housing market has been decreasing. This shouldn’t be taken lightly, because they essentially provide liquidity to the housing market. In May 2012, they accounted for 34% of all existing home sales in the U.S. housing market; by May 2013, they had declined almost 28%. (Source: “Existing-Home Sales Rise in May with Strong Price Increases,” National Association of Realtors web site, June 20, 2013.)
Unemployment in the country is staggering. Almost 12 million Americans are out of work, and a significant portion—37.3% of them to be exact—have been unemployed for more than six … Read More
One of the biggest mistakes an investor can make is trying to predict where the stock market will make a top or a bottom. This can cause severe damage to their portfolio, because they might be faced with losses if things don’t turn out as they had anticipated.
On Wednesday, May 22, the key stock indices showed interesting price action, to say the very least. Look at the chart of the Dow Jones Industrial Average below, paying close attention to the circled area.
Chart courtesy of www.StockCharts.com
While testifying in front of the Joint Economic Committee to provide insight on monetary policy and the outlook of the U.S. economy, Federal Reserve chairman Ben Bernanke suggested that the central bank will continue with its quantitative easing—printing $85.0 billion a month and buying long-term government bonds and mortgage-backed securities (MBS). (Source: Chairman Bernanke, B.S., “The Economic Outlook,” Board of Governors of the Federal Reserve System web site, May 22, 2013, last accessed May 27, 2013.) As a result, the key stock indices rallied; the Dow Jones Industrial Average reached a new record-high of 15,542. The reason for this increase is that more money printed means a higher stock market due to the decline in value of the U.S. dollar.
Sadly, later that same day, the meeting minutes of the Federal Open Market Committee (FOMC) were released, with some of the members of the committee suggesting that quantitative easing should start to taper off as early as the next meeting, which is scheduled for June. (Source: Fontevecchia, A., “A Divided Fed: FOMC Minutes Reveal Hawks Calling For QE Taper In June,” Forbes, May … Read More