Good Luck Finding a Place to Hide as Global Markets Crumble
By Lisa Abramowicz. Investors tend to respond to impending doom by selling risky stuff and hiding out in safer assets — namely, bonds in places such as Germany and the U.S.
There’s a problem with that formula this time around: Traders aren’t so sure they can find anything that’s truly safe right now. So, instead of piling into sovereign debt of developed nations, traders are pulling their money out of those places as the Greek economy teeters on the brink of collapse, Puerto Rico talks about delaying some debt payments and China’s stock market suffers its biggest selloff since 1992.
Investors yanked $2.9 billion from European government bond funds last week, more than ever before, and pulled $699 million from short-term investment-grade U.S. bond funds, Bank of America Corp. and Wells Fargo & Co. data show. While these assets have traditionally been havens during rocky periods, they look less appealing now after more than six years of unprecedented monetary stimulus that pushed yields to record lows.
Why is that a problem? Well, the European Central Bank’s bond-purchasing program this year sent yields so low (negative, in fact) that investors revolted, selling German debt in the face of some signs of economic growth and causing unprecedented volatility. In the U.S., the economy has improved enough that the Federal Reserve is planning to raise interest rates this year from virtually zero, where they’ve been since 2008 . . .
And nations and companies around the world have taken on unprecedented amounts of debt, all with the hope of igniting some growth, with the results being rather tepid. (Read more from “Good Luck Finding a Place to Hide as Global Markets Crumble” HERE)
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US Financial Outlook Has “Worsened Dramatically”
By Bob Adelmann. In its just-released report “The 2015 Long-Term Budget Outlook,” the Congressional Budget Office stated bluntly:
The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007-2009 recession and slow recovery…. If current law remained generally unchanged in the future … growing budget deficits … would push [the national] debt above its current high level.
It’s all about government spending that’s baked into the cake: the Baby Boomers retiring and asking the government to make good on its Social Security and Medicare promises and the rising costs of healthcare along with “an increasing number of recipients of exchange subsidies and Medicaid benefits attributable to the Affordable Care Act [which will] push up spending … if current laws … remain unchanged,” said the report.
The CBO created two avenues for politicians concerned about the matter to pursue: one, to keep the deficits from going any higher, and the other to bring them back down to historic levels. For the first, taxes would have to increase by $1,450 per person per year, starting immediately, or Social Security benefits would have to be cut by $2,400 per person per year, starting immediately . . .
The report considers the consequences of doing nothing: At some point investors in government bonds would become concerned about getting their money back and would demand higher interest rates to compensate for that risk. This would accelerate the deficits to new levels. As the report noted, “The larger the government’s debt, the greater the risk of a fiscal crisis.” (Read more from “US Financial Outlook Has “Worsened Dramatically”” HERE)
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