Monday, April 4, 2016

Rates, Yield and Returns

So this morning out of boredom I looked at the markets; 5 years ago the 30 year T-bond generated a yield of 4.5%, today its 2.6%, the S&P 500 on the other hand went from 1,332 to 2,064 -- so clearly being long the market over the past 5 years was a good idea!  Frankly, owning 30 year bonds too was a good idea.  If memory serves the GOP stated that Obama's second term would be terrible for investors -- so they go that really wrong since the market is up by nearly 55%...

But that's not the real issue, the issue going forward is that as interest get closer and closer to zero the upside diminishes; because the option of zero interest rates is to keep cash at hand.  Banks if they pay no interest provide limited services.  In terms of earning quality, its been poor for some time -- the magic of accounting trickery still ensures that companies generate greater profits -- from non core activities.

The banks will survive -- they've made sure by payoff the politicians -- it may not work because the risk that the banks have taken is even greater than it was, the risk of contagion is unquantifiable -- Europe is a mess and NOTHING has been fixed, Greece's Debt/GDP continues to rise -- Gernamy told Greece a few days ago to "take a hike" on new money, unemployment in most of Europe is also rising, and ethnic tensions are rising -- the massive increase in refugees is starting to put pressure on the system -- so far the problems have been anecdotal, but they could create a political force against the integration of refugees.  

In Quebec, a mayor (he should be praised) when asked by the new immigrant muslim community that the pool become single sex -- told the press and the community that new arrivals had to adopt the rules and customs of the country that was welcoming them, not the other way around.  They should strive to learn French and come part of the community, and not try to impose their customs on the Canadian citizens.


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