I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back). The monthly “Long Term” update will be on the fourth Thursday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.
If you lose your bookmark to the blog, google “Rich Investing Blog” and it should show up on the first page or so.
Economy:
The Case Schiller home price index (20 cities) for Nov. was up 5.4% Y-o-Y, and that is too high. Existing homes are not for sale as young homeowners cling to their 3% mortgage, and empty nesters look at selling their home which has gone up in value a lot, only to find that moving down to a smaller home with cost the same as what they have now. There is no advantage to moving down for most. Of course some homes turn over in special cases, but it is not the general case. New home builders learned the lesson of having too large of an inventory, so they manage their inventory, keep the number of new homes for sale low, and that keeps the price high. The new home builders do what good capitalists do, they maximize their profit.
The ISM manufacturing index for Jan. was 49.1, so it is still contracting a little. Non-farm jobs for Jan. were up a large 353K, while the unemployment rate held steady at 3.7%. Factory orders were up .2% in Dec. The U. of Michigan consumer sentiment index was up a tad at 79.0. US auto sales for Jan. were 15.0 million annualized, down from 16.1 million, but sales usually slow in the winter due to harsh weather.
Most of the economy is good and steady. The surprise with how strong job creation is currently. This took a March rate cut off the table, but Fed chairman Powell already told us that on Wed. Jan. 31.
Geo-Political:
The Fed meeting results were released on Wed. and they left rates unchanged again. They are talking about when to begin lowering rates, but Jerome Powell said that a rate cut in March is not their base case and he considered it unlikely. Powell said at the next Fed meeting they will begin to discuss when and how to reduce running off the Fed balance sheet, or QT. They are still running off $90 billion per month, quite a high rate of bonds that the private market must absorb.
Over the years that I have posted on this blog, I have posted about our economy, the EU and England (an important US trading partner), and China. These are the top three global economies measured by GDP, and it is important to keep an eye on our trading partners. A few weeks ago I posted about India (#5 in GDP and the fastest growing economy), and now it is time to look at Japan, the #4 economy in the world. It is pretty amazing that a nation with such a small land mass has such a large economy.
The Japanese economy was the envy of the world in the 70’s and 80’s, exerting strength in major sectors of the world economy such as steel production, autos, and consumer electronics. Their economy got overheated, people would pay any price for real estate, they got over-leveraged, and in 1989 things broke down and a major recession occurred. They have not returned to levels of stable growth since. This is a long article, but it is an important look at the impact of long term negative interest rates, which Japan has maintained since 2016.
“Why Negative Interest Rates Are Still Not Working in Japan Updated October 15, 2023
The Bank of Japan (BOJ) keeps trying to print Japan back to economic prosperity, and it is not letting more than 25 years of failed stimulus policies get in its way. The BOJ announced negative interest rates in January 2016 as an iteration in monetary experimentation. Six months later, the Japanese economy showed no growth, and its bond market was a mess. Conditions deteriorated so far that the Bank of Tokyo-Mitsubishi UFJ Ltd., Japan’s largest private bank, announced in June 2016 that it wanted to leave the Japanese bond markets because BOJ interventions had made them unstable.
While these economic woes presented major problems for then-prime minister Yoshihide Suga and then-BOJ Governor Haruhiko Kuroda, they can serve as a cautionary tale for the rest of the world. Chronically low interest rates and huge monetary expansions failed to promote real economic growth in Japan. Quantitative easing (QE) did not achieve its stated objectives in the United States or the European Union (EU), nor have chronically low interest rates been able to revive Japan’s once-thriving economy.
Why Japan Went Negative
There are two reasons why central banks impose artificially low interest rates. The first reason is to encourage borrowing, spending, and investment. Modern central banks operate under the assumption that savings are pernicious unless they immediately translate into new business investment. When interest rates drop to near zero, the central bank wants the public to take their money out of savings accounts and either spend it or invest it. This is based on the circular flow of income model and the paradox of thrift. Negative interest rate policy (NIRP) is a last-ditch attempt to generate spending, investment, and modest inflation.
The second reason for adopting low interest rates is much more practical and far less advertised. When national governments are in severe debt, low interest rates make it easier to afford interest payments. An ineffective low-rate policy from a central bank often follows years of deficit spending by a central government.
No country has proven less effective with low-interest-rate policies or high national debt than Japan. By the time the BOJ announced its NIRP, the Japanese government’s rate was well over 200% of gross domestic product (GDP).
Japan’s debt woes began in the early 1990s, after Japanese real estate and stock market bubbles burst and caused a steep recession. Over the next decade, the BOJ cut interest rates from 6% to 0.25%, and the Japanese government tried nine separate fiscal stimulus packages.
The BOJ deployed its first quantitative easing in 1997, another round between 2001 and 2004, and quantitative and qualitative monetary easing (QQE) in 2013. Despite these efforts, Japan had almost no economic growth for more than 25 years.
Why Negative Interest Rates Do Not Work
The Bank of Japan is not alone. Central banks have tried negative rates on reserve deposits in Sweden, Switzerland, Denmark, and the EU.5 As of July 2016, none had measurably improved economic performance.
The World Bank. “Policy Research Working Paper 7791, Negative Interest Rate Policies Sources and Implications 2016.“
The U.S. later followed suit, bringing interest rates to the 0% to 0.25% range in March 2020 in response to the pandemic, but rapidly hiking them again once the crisis was over.
Globally, there was more than $12 trillion in government bonds trading at negative rates as of 2020.
Low interest rates are designed to warm up the economy, increase spending and investing, and encourage borrowing. But super-low interest rates do little for indebted governments, and even less to make businesses more productive or to help low-income households afford more goods and services. Super-low interest rates do not improve the capital stock or improve education and training for labor. Negative interest rates might incentivize banks to withdraw reserve deposits, but they do not create any more creditworthy borrowers or attractive business investments.
Japan’s NIRP certainly did not make asset markets more rational. By May 2016, the BOJ was a top 10 shareholder in 90% of the stocks listed on the Nikkei 225.8
Does Japan Still Have Negative Interest Rates?
Japan was still operating with negative interest rates as of September 2023, but most economists predict that could end in 2024, according to a Reuters poll.
Why Didn’t QE Work In Japan?
Some experts consider Japan’s over-reliance on interest rates as a monetary tool and the fact that QE did not put more money into the hands of its residents and non-bank companies as two reasons why QE failed to juice economic growth as desired.
Why Isn’t Japan Increasing Interest Rates?
Even as the U.S. and other countries raised their interest rates beginning in March 2022, the Bank of Japan decided to stay the course, keeping rates below zero throughout 2022 and 2023. Japan’s thinking for this decision was that for such a fragile economy, with weak demand to begin with, raising rates would only endanger any hard-won growth and make it more difficult for the country to service its debt.
The Bottom Line
There appears to be a disconnect between standard macroeconomic theory, by which borrowers, investors, and business managers react fluidly to monetary policy, and the real world. The historical record does not kindly reflect governments and banks that have tried to print and manipulate money into prosperity. This may be because currency, as a commodity, does not generate an increased standard of living. Only more and better goods and services can do this, and it’s clear that circulating more bills is not the best way to make more or better things.”
Donald Trump tried to pressure our Federal Reserve to drop to negative interest rates in 2019, while Europe and Japan used that policy. It would have been wrong for the US, and thankfully Jerome Powell as Fed Chairman did not listen to Trump. The value of an independent Fed, beyond the control of politicians is apparent.
“Nov. 18, 2019 – Presidents often meet with Fed chairs to discuss the economy. But the stakes are much higher when the backdrop is Trump’s blunt personal attacks on the Fed and its chairman — a step no previous president has taken. The independence of the Fed has long been considered vital to its mandate of keeping prices stable and maximizing employment.
Trump has complained that negative rates, which have been put in place by the European Central Bank and the Bank of Japan, have left the United States at a competitive disadvantage. The Fed’s benchmark rate is currently in a range of 1.5% to 1.75%, an extremely low level by historic standards, particularly given that the unemployment rate is near a 50-year low of 3.6%.
In a speech last week, Trump said, referring to negative interest, “Give me some of that…. I want some of that money. Our Federal Reserve doesn’t let us do it.”
The Fed’s relatively high benchmark rate, compared with the negative rates overseas, probably does keep the dollar at a higher value compared with the euro and yen. That, in turn, can make U.S. exports more expensive overseas.
Still, the vast majority of mainstream economists oppose the notion of deploying negative rates for the U.S. economy, which is healthier and is growing faster than its European and Japanese counterparts.
Negative rates are typically a sign that an economy is struggling. Many U.S. economists have expressed skepticism that negative rates help accelerate growth and argue that they would cause problems unique to the U.S. financial markets.”
Trump tried to pressure Powell to adopt an unwise policy that has failed in Japan for the long term, it was ineffective in Europe over the last decade, the US was out-performing both of those economies and it still is to this day. Thankfully Powell had the independence of the Fed and he rejected Trump’s desire to implement negative interest rates.
Technical Analysis:
For the week ending 2/02/2024, the S&P 500 was up about 1.2%.
Technically (see chart below) the market looks positive, and over extended. RSI at the top of the chart is overbought and rising at 70. Momentum shown by MACD at the bottom of the chart is rising slightly. The price action is positive, but extended well above the top of the channel and the 50 day moving average.
Last week was great with Big Tech beating earnings estimates and showing impressive year over year growth rates. Now we get to regular companies, not in the Mag 6, and it will be interesting to see how their earnings are.
Here is the latest read on earnings for Q4:
“NEW YORK, Feb 2 (Reuters) – The U.S. fourth-quarter earnings estimate is improving sharply, with about 80% of reports so far beating analysts’ expectations including ones this week from Meta Platforms and Amazon.com, according to LSEG data on Friday.
Overall S&P 500 earnings now are expected to have increased 7.8% in the fourth quarter from the year-ago quarter.
That is up from a 6.4% estimate on Thursday and 4.7% at the start of the year, the data showed.”
What will be interesting to watch is whether the rest of the S&P yet to report can keep pace with the MAG 6.
Click THIS LINK to open the chart in a separate window.
What am I doing? With stocks at record highs, it’s a good time to sell covered calls. I had bought a “little” bit of the Mag 6 stocks and I sold them after the earnings pop. MRNA is down so I will look at selling a Put.
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I would like to call your attention to a page of my blog called “CLASSICS”. It is located at the top of the blog, on the banner just under the title. The banner has links to “Home”, “About”, and now “Classics”. These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors. I will announce in the weekly blog when I add a new classic.
There are currently 3 Classic topics posted:
- Is it a bull market or a bear market?
- Why does healthcare cost so much?
- Implications of a large national debt. (posted August 2022)
Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.
You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window. The reader who suggested this wants to look at the chart side-by-side with the blog text. If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones. The picture in this post is a static .jpg so it does not update.
I am a retired person and preserving capital and seeking income are important objectives for me. I also want a growth component to my portfolio, while minimizing major risk. My style of investing will not suit everyone. I like to sleep well at night. Investing involves risk, including the risk of loss.
Rich Comeau, Rich Investing
Rich Investing 