Out of the Box: With Them or Without Them

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It’s time we stop, hey, what’s that sound
Everybody look what’s going down
-For What It’s Worth, Buffalo Springfield

One way, another way, we are heading for lower yields. The only real question left is whether it will be good for America, and Americans, or whether the Europeans will get all of the benefits. The pendulum is swinging, and it all depends on what the Fed decides.

There’s heads. There’s tails. There’s win and lose. What’s it going to be?

This point is vital to the economic growth, and success, of the United States. Nowhere, have I seen any member of the Fed discuss this, or admit it, but that has not excluded my notice of what may actually take place, or not. With more than 50% of all European sovereign debt trading at negative yields, the U.S. is about the last man standing, and certainly the last safe haven standing, with positive yields. In fact, the Bloomberg Euro Aggregate Index now stands at -0.076% while the Bloomberg American Aggregate is at 2.215%. Please note the spread.

If the Fed does nothing, if it just sits there and fails to respond to the European threat, then the Europeans will drive American yields down over time. It will take some months, but it will happen, and “they” will benefit from our positive yields. They will “arb” our yields, to their benefit.

If the Fed cuts rates, which they should do, then American borrowers will reap the rewards all across the spectrum. It will be a positive for Real Estate, REIT’s, margin debt, mortgages, corporate debt, equity lines of credit, student loan debt, stock-buy-backs, corporate earnings, high yield debt, that gets re-financed, and on and on. Virtually all debtors will benefit from the Fed lowering American interest rates.

It will be lousy for retirees, savers, people, and institutions, living off of fixed income, and cash flows. Also, it will be bad for banks, mortgage companies, Wall Street investment banks and other companies in the financial sector. I have said this many times, and I am not disputing it now. However, since it is going to be tough for these folks, one way or another, at least one class of Americans, borrowers, should benefit because if the Fed doesn’t move, no class of Americans will benefit.

The nations controlling the European Central Bank, the ECB has NO independence, learned a little trick, a graft, if you will, after the financial debacle of 2008/2009. They learned that they could rig the game and get away with it. The countries in the European Union cannot afford their budgets, or their social programs, and they can’t afford to raise taxes, politically, so they make money from nothing, but blinks, at the ECB, to pay for their national budgets. Then they turn around and buy bonds, with the “Pixie Dust” money, and they have forced European yields below the fault line of Zero. It is Berlin, Brussels, and Paris that are running the show. Get it?

This is all coming to America, as I have said, and the Fed, to protect American interests, has to react, or we are going to get taken. The nations in Europe are just going to “arb” our yields until ours come within a hair’s breadth of theirs. The Dollar against the Euro is at a ridiculous level and that is hurting many of our multinational corporations and this will also change if the Fed does what it needs to do.

“Remember, boys, no points for second place.”
-Top Gun

The Fed also needs to move quickly. Some sort of “Shock and Awe” ECB meeting is coming on September 12. With Germany, teetering on recession, and Italy, teetering on snap elections, the European Union is looking less stable by the day. I believe it is highly likely that the ECB is going to start a new round of Quantitative Easing and perhaps expand their bond buying program. There have even been suggestions that they should head into the Swiss and Japanese territory and start buying equities and Exchange Traded Funds.

“Stimulus is needed to ensure that financial conditions remain very favorable and to support Euro area growth and domestic price pressures,” Rehn explained. “The Governing Council is determined to act if the medium-term inflation outlook continues to fall short of the ECB’s aim.”
-Olli Rehn of the ECB

We are on the brink of it here and I just hope the Fed does something before their next scheduled meeting which follows the ECB meeting. Waiting until after their meeting would be a mistake, in my view. The Fed needs to act and act now.

Go Now!
-The Moody Blues

Mark J. Grant
Chief Global Strategist, Fixed Income
Managing Director
B. Riley FBR Inc.
Mgrant69@Bloomberg.net
U.S. 954-468-2366

Information herein is for general use; is not unbiased/impartial; is current at publication date, subject to change; may be from third parties; and may not be accurate or complete. Opinions are the Author’s, not B. Riley FBR, Inc., or their respective affiliates or subsidiaries. This is not a research report or solicitation or recommendation to buy/sell the subject securities. Investment factors are not fully addressed herein. B. Riley FBR Inc. and their affiliates may have a proprietary position in the subject securities. Redistribution/reproduction of this material is prohibited. See additional disclosures at: http://brileyfbr.com/legal/legal_disclosures

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