Welcome to the end of the week! Just sit back, relax, and enjoy this weeks roundup of interesting reads in another edition of Happy Hour.
30 Sec Econ Review
Negative Rates in Europe
The European Central Bank announced negative rates this week, along with a few other measures, to help move it forward. Much like QE helped to lower rates, increase borrowing, and grow the economy, this is expected to do the same.
At the beginning of the year I pointed out how Europe is following a similar path as the US. If this is true, the results should be the same – higher stock prices, lower rates.
No Wage Growth Yet
The missing ingredient to a robust economy.
Back to Low Rates
I highlighted the lower rates not to long ago. Here’s a quick rehash. Everyone expects higher rates in the future. Reality and expectations don’t always agree in the short-term – so rates are lower for now.
Low rates are great for borrowers, like businesses trying to grow, new home buyers, or home owners wanting to refinance a mortgage, but terrible for investors.
Here’s what happens. Yield chasers take more risk for smaller and smaller returns. For treasuries, its interest risk and inflation. As you move up to riskier bonds, into corporate and junk bonds, you add default risk. As rates fall people look for alternatives in higher yielding dividend stocks, like REITs and utilities.
Remember how that worked last May?
Low Volatility and Volume
No surprises here. Volatility needs big news to thrive. That’s not happening. It’s been downright dull most of the year.
That sound like good news, but it adds a false sense of security to the markets, which never ends well for those who forget about risk.
I’m reminded of another lesson from Peter Lynch:
At some point in the next month, year, or three years, the market will decline sharply.
A smart investor will take advantage of that opportunity while everyone else bails out.