Keep watch on world economy, U.S. debt ceiling
There has been a lot of movement on Wall Street in both the bond and stock markets.
As this column is being written on Monday, stocks are looking at maybe their worst four-day sell-off in a long time. Last week the Dow fell 2.23 percent. That is $2,230 for every $100,000 invested. This all started when some members of the Fed suggested that it might be time to consider tapering the Fed's bond purchase in QE 3. Our economy is still highly leveraged and built on cheap money. Much of the increases in the stock market valuations can be attributed to the Fed's actions. Because interest rates have been so low, many investors have taken the risk trade and moved into stocks to try and get a higher yield.
About half of all analysts on Wall Street think we are headed for a major correction of maybe 15 percent to 20 percent. If they are right, would you be able to sleep at night? The other half of analysts think the market will keep going up. It is important to consider who each type works for and does he or she have a motive. For example, following a more-than-200-point drop on one day last week, some brokers were calling it a buying opportunity. I hope they have better tips than that.
Today, the Fed's minutes were to be released. Many investors will be pouring over these minutes because there is already uncertainty at the Fed with Chairman Ben Bernanke's departure happening soon. Depending on who is appointed the new leader, that may re-direct the current focus. They have been buying $85 billion of government debt every month. The money comes from running the printing presses.
The Federal Reserve has been buying both mortgage-backed securities (MBS) and treasuries. Right now the Fed is absorbing 65 percent of all new MBS.
Ten-year treasuries jumped to 2.825 on Friday. They were selling for 1.632 percent in May. These are important, because many other interest rates are tied to their yield.
Home mortgages are one example. As this interest rate rises, it will become more expensive to buy a house. Housing construction is one of the biggest drivers of the economy. Think how many jobs are created, not just in construction, but in all of the components of a house.
Many investors considered bonds to be the safe money in their portfolios. People receiving their statements are finding out this is not safe money. Billions of dollars have liquidated from these funds recently.
This is something that we have been warning about for months. Outflows were $19.7 billion in August following $14.8 billion in July.
Egypt is a major concern for many investors. It is the biggest country in the Middle-East. It is also a key U.S. ally. Much of the region's oil goes through Egypt. Coming up on Sept. 22 are the elections in Germany, Europe's biggest economy. If Chancellor Angela Merkel were to lose, there could be policy changes. Japan is also holding a vote soon on a new consumption tax. The outcome could have major international affects.
In September, Congress returns to Washington. Lawmakers will have to tackle many big issues, including the debt ceiling. This is how much debt the country is allowed to incur.
If you have ever wondered if government statistics are ever manipulated consider this. On May 17, the Treasury Department announced that our government's debt was exactly $16,699,396,000,000. In July, it was announced that for the month, the U.S. had a deficit of $98 billion. Eighty-seven days after the first announcement, we had the same national debt as in May.
This figure happens to be just $25 million lower than the current debt ceiling. What they will try to get us to believe when they think we are not watching?
Gary Boatman is a certified financial planner and local businessman who serves as president of the Monessen Chamber of Commerce.