{"id":32200,"date":"2015-03-04T07:00:20","date_gmt":"2015-03-04T12:00:20","guid":{"rendered":"http:\/\/www.ino.com\/blog\/?p=32200"},"modified":"2015-03-06T09:50:49","modified_gmt":"2015-03-06T14:50:49","slug":"are-we-in-a-boom-or-a-bust","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2015\/03\/are-we-in-a-boom-or-a-bust\/","title":{"rendered":"Are We In A Boom Or A Bust?"},"content":{"rendered":"<p><meta property=\"og:image\" content=\"http:\/\/quotes.ino.com\/img\/sites\/ino\/email\/6335.jpg\"\/> <\/p>\n<p style=\"margin: 0 0;\"><img loading=\"lazy\" decoding=\"async\" src=\"\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350.png\" alt=\"George Yacik - INO.com Contributor - Fed &amp; Interest Rates\" width=\"350\" height=\"131\" class=\"alignleft size-full wp-image-30496\" style=\"padding-top: 10px;\" srcset=\"https:\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350.png 350w, https:\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350-300x112.png 300w, https:\/\/www.ino.com\/blog\/wp-content\/uploads\/2014\/12\/GeorgeYacik_Contributor_ImageBadge350-270x100.png 270w\" sizes=\"(max-width: 350px) 100vw, 350px\" \/><\/p>\n<p style=\"margin: 0 0;\"><br style=\"clear:both;\"><\/p>\n<p>This is the world we live in today: Stocks are priced as if the global economy is booming, while the bond market is priced as if we\u2019re in a worldwide depression.<\/p>\n<p>Nowhere is this truer than in Europe, where stocks are at or near record highs while yields on sovereign bonds are at record lows, below zero in many cases.<\/p>\n<p>Of course, we\u2019re neither in a boom or a bust. While we\u2019re closer to the former in the U.S., we\u2019re a lot closer to the latter in Europe. The bond market in Europe is telling us that the euro zone economy\u2019s in the tank, which is much closer to reality, while the stock market there is now trading at a seven-year high.<!--more--><\/p>\n<p>And who do we have to thank for this bizarre \u2013 and ultimately unsustainable \u2013 situation? The world\u2019s central banks, led by our own Federal Reserve, which basically started the whole concept of \u201cquantitative easing\u201d that has grossly distorted the value of financial assets.<\/p>\n<p>Now that our Fed seems to be at least contemplating \u201cnormalizing\u201d monetary policy \u2013 i.e., raising interest rates above zero \u2013 practically the rest of its foreign counterparts are only now starting to ramp up their own QE programs.<br \/>\nThis month the European Central Bank begins the expansion of its asset-purchase program to include sovereign bonds. But before it even bought a euro\u2019s worth of the bonds, the prospect of it doing so drove up both stock and bond prices to record levels.<\/p>\n<p>Last week the yield on German five- and seven-year government bunds (that\u2019s what they call them in Germany) dropped below zero for the first time. Essentially, investors are paying Berlin for the privilege of holding their money. However, that\u2019s a higher \u201cyield\u201d than leaving it on deposit at the ECB, where the deposit rate is even lower, at negative 0.2%.<\/p>\n<p>The yield on the benchmark 10-year bund isn\u2019t far from falling below zero, too. Last week yields on those securities fell to 0.26%, putting them even lower than comparable Japanese bonds, which previously had the lowest bond yields among the world\u2019s major economies, largely because the economy has been stagnant for much of the past 20 years.<br \/>\nAnd the odds are pretty good that German yields will continue to fall. The Wall Street Journal reported that German government securities are in short supply and getting smaller. When the ECB starts buying sovereign bonds, German bunds will account for more than a quarter of the total \u2013 owing to Germany\u2019s status as the largest economy in the euro zone \u2013 or around \u20ac12 billion each month.<\/p>\n<p>The problem is that net new German debt issuance is expected to total \u20ac15 billion \u2013 for the whole year! \u2013 as the government has been running a budget surplus and cut back on new debt issuance.<\/p>\n<p>But German bunds aren\u2019t the only securities that have benefited from the ECB\u2019s prospective QE program. Irish 10-year debt fell below 1% for the first time, while comparable Portuguese bonds fell below 2%.<\/p>\n<p>To put that into perspective, yields on comparable triple-A rated U.S. government bonds were yielding about the same as Portugal\u2019s, which are rated below investment grade. Does that make any sense?<\/p>\n<p>So how do we play this, or better yet, how do we protect ourselves when this house of cards inevitably collapses?<br \/>\nGreek stocks and government bonds soared in a relief rally after Athens won four month\u2019s breathing room with its bailout extension, although the issue will have to be addressed again come June.<\/p>\n<p>The question is, which is a wilder speculation: Buying German and other euro zone government bonds with zero interest rates or others that have been driven down artificially, or making a bet on Greece\u2019s economic recovery and remaining in the euro zone? Where are you likely to make the most money \u2013 or perhaps better phrased, where are you likely to lose the least?<\/p>\n<p>I\u2019d say it\u2019s a toss up.<\/p>\n<p>In this insane investment world, it seems that the riskiest bonds \u2013 meaning those most likely to fall in price \u2013 are gilt-edged securities like German bunds, since they seem to have nowhere to go but down. By contrast, the bonds with the least risk would seem to be those with relatively little downside risk and lots of upside potential.<\/p>\n<p>Let\u2019s look at <a href=\"http:\/\/www.ino.com\/blog\/2015\/02\/get-me-to-the-greek\/\" target=\"_blank\">Greek sovereign bonds<\/a> again. Last week Greek 10-year bonds were yielding about 9.5%, or about 800 basis points \u2013 eight full percentage points \u2013 more than comparable Italian and Spanish bonds.<\/p>\n<p>Is there really any chance that the country\u2019s lenders will allow it to default, and is there really much chance that its partners in the euro currency area \u2013 including Germany \u2013 will it allow it to? Probably some chance, but not a lot. While it might be a smart thing to let Greece leave, how sure could the rest of the European Union be that other members wouldn\u2019t eventually leave, too? They could never take that chance.<\/p>\n<p>This is Europe, remember. Our leaders in Washington are routinely and justifiably criticized for constantly putting off dealing with serious issues \u2013 Medicare and tax reform, anyone? But we have nothing on the Europeans, who practically invented that kick-the-can game.<\/p>\n<p>Look at how quickly the euro zone finance ministers approved Greece\u2019s four-month bailout extension after Athens submitted its request for the extension. Less than 24 hours. Do any of us think they could get a mortgage loan approved that quickly?<\/p>\n<p>Visit back to read my next article! <\/p>\n<p><a href=\"http:\/\/www.ino.com\/blog\/meet-george-yacik\/\" target=\"_blank\">George Yacik<\/a><br \/>\nINO.com Contributor - Fed & Interest Rates<\/p>\n<p><span style=\"font-size: 12px; font-style: italic;\">Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.<\/span><\/p>\n<!-- AddThis Advanced Settings generic via filter on the_content --><!-- AddThis Share Buttons generic via filter on the_content -->","protected":false},"excerpt":{"rendered":"<p>This is the world we live in today: Stocks are priced as if the global economy is booming, while the bond market is priced as if we\u2019re in a worldwide depression. Nowhere is this truer than in Europe, where stocks are at or near record highs while yields on sovereign bonds are at record lows, [&hellip;]<!-- AddThis Advanced Settings generic via filter on get_the_excerpt --><!-- AddThis Share Buttons generic via filter on get_the_excerpt --><\/p>\n","protected":false},"author":16,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6920],"tags":[4724,511,7334,7333,7048],"class_list":["post-32200","post","type-post","status-publish","format-standard","hentry","category-ino-com-contributors","tag-european-central-bank","tag-federal-reserve","tag-german-debt","tag-geroge-yacik","tag-sovereign-bonds"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v23.4 (Yoast SEO v23.6) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Are We In A Boom Or A Bust? - INO.com Trader&#039;s Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2015\/03\/are-we-in-a-boom-or-a-bust\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Are We In A Boom Or A Bust? - INO.com Trader&#039;s Blog\" \/>\n<meta property=\"og:description\" content=\"This is the world we live in today: Stocks are priced as if the global economy is booming, while the bond market is priced as if we\u2019re in a worldwide depression. Nowhere is this truer than in Europe, where stocks are at or near record highs while yields on sovereign bonds are at record lows, [&hellip;]\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.ino.com\/blog\/2015\/03\/are-we-in-a-boom-or-a-bust\/\" \/>\n<meta property=\"og:site_name\" content=\"INO.com Trader&#039;s Blog\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/inocom\/\" \/>\n<meta property=\"article:published_time\" content=\"2015-03-04T12:00:20+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2015-03-06T14:50:49+00:00\" \/>\n<meta name=\"author\" content=\"George Yacik\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"George Yacik\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/www.ino.com\/blog\/2015\/03\/are-we-in-a-boom-or-a-bust\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/www.ino.com\/blog\/2015\/03\/are-we-in-a-boom-or-a-bust\/\"},\"author\":{\"name\":\"George Yacik\",\"@id\":\"https:\/\/www.ino.com\/blog\/#\/schema\/person\/338e515291677fcecc03e9138134bd40\"},\"headline\":\"Are We In A Boom Or A Bust?\",\"datePublished\":\"2015-03-04T12:00:20+00:00\",\"dateModified\":\"2015-03-06T14:50:49+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/www.ino.com\/blog\/2015\/03\/are-we-in-a-boom-or-a-bust\/\"},\"wordCount\":978,\"commentCount\":1,\"publisher\":{\"@id\":\"https:\/\/www.ino.com\/blog\/#organization\"},\"keywords\":[\"european central bank\",\"Federal Reserve\",\"german debt\",\"Geroge Yacik\",\"sovereign bonds\"],\"articleSection\":[\"INO.com Contributors\"],\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"CommentAction\",\"name\":\"Comment\",\"target\":[\"https:\/\/www.ino.com\/blog\/2015\/03\/are-we-in-a-boom-or-a-bust\/#respond\"]}]},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.ino.com\/blog\/2015\/03\/are-we-in-a-boom-or-a-bust\/\",\"url\":\"https:\/\/www.ino.com\/blog\/2015\/03\/are-we-in-a-boom-or-a-bust\/\",\"name\":\"Are We In A Boom Or A Bust? 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