FED meeting

[rbmrtn]

So now they are saying no rate increases till end of 2014. Are we slowly turning into Japan ? Seems like they are running out of bullets as far as interest rates, a cut from say 10% to 5% is a big deal, cut from 0.5 to 0.25 no one cares.

 

[REWahoo]

This post links a paper making a case that rates could remain very low for many years to come...

 

[rbmrtn]

That report is consistent with others I have read. Generally seem to be the issue of excessive debt, credit bubble, real estate collapse etc. Another item is the change in demographics of the population. Harry Dent talks about this a lot, makes some sense. The big wave of boomers moved through the '80s,'90s spent/borrowed like mad, now are slowing down.

FED is pumping money in, should lead to inflation but nobody is taking it so they are pushing on a string. couple with high unemployment and no wage inflation pressure...

Could be setting up for a long time of low interest rates and deflation instead of inflation.

 

[audreyh1]

FED is pumping money in, should lead to inflation but nobody is taking it so they are pushing on a string. couple with high unemployment and no wage inflation pressure...

Could be setting up for a long time of low interest rates and deflation instead of inflation.

Yes, rbmrtn, I've pretty much come to that conclusion. Inflation may not remain as low as we might like, but interest rates will stay low anyway, and with the global economy and employment in a funk, there is no reason to expect a runaway inflation scenario for a long, long time.

So, I hold longer duration bonds than I used to as I am not worried about interest rate risk. We are in a period of "financial repression" which in practice means the "safe" bonds like treasuries don't keep up with inflation and if you are trying to live off interest income alone, you will be forced to move to corporate and/or high yield bonds to have enough income. We may go into a period where stocks pay out more in dividends than many bond asset classes - especially if the stock market P/E keeps shrinking.

The current S&P 500 Dividend Yield is 1.97% (based on dividends paid out through March 2012).
Contrast this to US 10yr treasury at 1.58% and US 30yr treasury at 2.65%.

S&P 500 Dividend Yield Chart Might average stock yields return to the 3% that was typical in the 1960s?

Once upon a time it was considered "normal" for stock dividends to be a lot higher than interest paid out by comparatively super safe assests like US treasuries.

 

[rbmrtn]

Thanks for sharing your thoughts. Prior to 1950 dividend yields were normally in the 6% range. Stocks being more volatile, demanded a higher yield than bonds. Mark Hulbert had an article a few years that discussed this

For first time in 50 years, stocks yielding more than bonds - Mark Hulbert - MarketWatch

I am considering adding some longer dated bonds for the same reasons you lay out. Although I confess I have considered shorting treasuries the last few years, after all how low can yields go ? apparently a lot lower than we ever thought. Gary Schilling has been on this for while, that the 30yr bond was going below 2%.

I wonder if the FED is doing more harm than good with ultra low rates. There are lot of people ( I talking my 90yr old mother ) that will not put money in the stock market for any reason. They rely on CD/money markets for income since they are not getting any, they are not spending anything but bare necessities. They would bury their cash in coffee can than put in stock market ( Great Depression flashbacks )

If the FED is not careful in unwinding this, things could get ugly for bonds. From these level a 1% rise rates would be about 30% in long bond price.