Tag Archives: japan

What Negative Interest Rates Tell You About The Risk-Reward Backdrop

When a country’s central bank reduces its interests rates below zero (i.e., “goes negative”), the action should boost the relative appeal of stock assets. That is the theory. Unfortunately, recent policy initiatives by the European Central Bank (ECB ) and the Bank of Japan (BOJ) have failed to inspire their respective stock markets. The ECB first began fooling around with negative interest rate policy in June of 2014 by lowering its overnight deposit rate to -0.1.% It went to -0.2% in September of 2014; it went even lower (-0.3%) by December of 2015. Did these rate manipulating endeavors benefit European equities or hurt them? The EuroStoxx 600 Index moved lower shortly after each of the interventions and it currently trades at a lower value since the inception of negative rates. Meanwhile, the Bank of Japan (BOJ) became the second major player to announce plans to charge financial institutions (-0.1%) for the privilege of depositing money. Since the announcement on January 29, 2016, the Nikkei 225 has shed 7.5% of its value. The price depreciation even includes a monster 7% snap-back rally – a price surge that came on speculation that the BOJ will enact more “stimulus” due to persistent recessionary pressures. Naturally, front-loading an enormous rally in stock and real estate prices to create a wealth effect is not the sole aim of a country’s central bank. Academic policy leaders believe that sub-zero rate policy strengthens a region’s or nation’s export competitiveness by weakening a corresponding currency. Take a peek at the falling euro via the CurrencyShares Euro Trust ETF (NYSEARCA: FXE ) since June of 2014. On the flip side, European exporters haven’t exactly been lighting the world on fire since its currency cratered. Trade volumes have been largely flat. Whatever exporting advantage might have been reaped from a a weaker euro-dollar was nullified by anemic demand around the globe. It seems there is more to winning the global trade game than engaging in currency wars. And there’s more. Sometimes, a country’s best laid plans go awry. The yen via the CurrencyShares Japanese Yen Trust ETF (NYSEARCA: FXY ) has actually gained 5.5%-plus since the BOJ lowered its target rate to -0.1%. The hope that additional depreciation in the yen would boost export competitiveness – absent more successful efforts to depreciate the currency – may backfire. If negative interest rates are unable to create a wealth effect and have an uncertain track record with respect to boosting export competitiveness, why do it at all? Hope. Zero percent rate policy coupled with quantitative easing (QE) in the United States succeeded at creating a wealth effect and depreciating the U.S. dollar up until the Federal Reserve began tapering QE stimulus in 2014. The hope around the world had been that the Fed’s gradual stimulus removal in the U.S. since 2014 would allow zero percent rates to work better in Europe and Japan. It didn’t. And with few other tools at the disposal of foreign central banks, “going negative” became the illogical conclusion. Is it possible that negative rates in Europe and/or Japan will eventually work? Either to boost respective economies abroad or foreign asset prices for stateside investors? Anything’s possible. However, it has been more beneficial to sell into international equity strength. Consider the iShares MSCI All-World Ex U.S. Index ETF (NASDAQ: ACWI ). Buying the dips of the previous bear market rallies proved damaging. Of course, the central bank of the United States has not resorted to negative interest rates… yet. On the contrary. The Federal Reserve has gradually removed stimulus over the last few years. It ended its final rate manipulating bond purchase (QE) in December of 2014; it raised overnight lending rates 0.25% in December of 2015. Whereas the ECB in Europe and the BOJ in Japan may not be able to revive risk appetite through monetary policy alone, the U.S Fed can. Interest rate gamesmanship fostered the 10/02-10/07 stock bull; it front-loaded the stock rally for the 3/09-5/15 bull market. Nevertheless, until the Federal Reserve reverses course by opting for zero percent rates with a 4th round of quantitative easing, bear market rallies will continue to deceive those who hide their heads in the sand. If you are already prepared for the S&P 500 to fall 20%, 25% or 30% from its May high – if the S&P 500 SPDR Trust (NYSEARCA: SPY ) falling to 170, 160 or 150 does not faze you – then you would not need to make changes to your portfolio. On the flip side, investors who recognize that the risk-reward backdrop for U.S. equities remains unseasonable may wish to reduce their overall U.S. stock exposure. Selling into a bear market rally can help one raise the cash desired to weather the series of tornadoes yet to come; it also gives one the confidence to increase stock exposure at more attractive prices. Consider a cash level of 25% to 35%. For Gary’s latest podcast, click here . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

IBM Helping Push the Blockchain Revolution

As businesses look to embrace blockchain technology, IBM ‘s recent initiatives will provide a boost to the process of its adoption. Blockchain was born out of Bitcoin, and grew in popularity as companies realized its potential as a distributed ledger shared via a peer-to-peer network. Blockchain is a disruptive and

Investment Wisdom From The Original Global Guru

Sir John Templeton, who passed away at the age of 95 in 2008, was the original Global Guru. Templeton provided me with an introduction to the world of global investing when I picked up a book on Templeton’s investment philosophy many years ago in Amsterdam. While today you can buy a Brazilian or Malaysian or South African stock with a click of the mouse, the world was a very different place when Templeton began his global investing career. John Templeton: A Pioneer in Global Investing Born in 1912, Templeton hailed from the South (Winchester, Tennessee), graduated from Yale in 1934 and won a Rhodes Scholarship to Oxford. After studying law in England, Templeton embarked on a whirlwind grand tour of the world that took him to 35 countries in seven months. That tour exposed him to the enormous investment opportunities that exist outside of the United States. In the very first display of his famous contrarian streak, Templeton came to Wall Street during the depths of the Great Depression to start his investment career in 1937. Templeton soon borrowed a then-princely sum of $10,000 ($170,000 in today’s dollars) as a 26-year-old investor and bought shares of 104 European companies trading at $1 per share or less. This was in 1939, the year German tanks rumbled into Poland, launching World War II. Though dozens of companies were already in bankruptcy, only four companies out of those 104 turned out to be worthless. Templeton held on to each stock for an average of four years and made a small fortune. In 1940, he bought a small investment firm that became the early foundation of his empire. Templeton then went on to build an investment management business whose name became synonymous with value-oriented global investing. He launched the Templeton Growth Fund in 1954 – notably in Canada, which then had no capital gains tax. He made his company public in 1959 when it only had five funds and $66 million under management, and eventually sold his business to Franklin Resources for $913 million in 1992. Templeton focused his final years largely on philanthropy, endowing the Centre for Management Studies at Oxford. He also established the Templeton Prize in 1972, which recognized achievement in work related to science, philosophy and spirituality. His Templeton Foundation, which today boasts an endowment of $1.5 billion, distributes $70 million annually in grants to study “what scientists and philosophers call the Big Questions.” Past winners have included Mother Theresa, Billy Graham, Desmond Tutu and the Dalai Lama. John Templeton: Contrarian to the Core Templeton’s investment track record was impressive, although, given his deeply contrarian style, inevitably quite volatile. A $10,000 investment in the Templeton Growth Fund in 1954 grew to roughly $2 million, with dividends reinvested, by 1992. That works out to a 14.5% annualized return since its inception. Templeton was perhaps best known for investing in Japan in the 1950s when “Made in Japan” was synonymous with free toy trinkets found in cereal boxes. And like all great investors, Templeton was not afraid of big bets. At one point in the 1960s, Templeton held more than 60% of the Templeton Growth Fund’s assets in Japan. That kind of a concentrated position in a global fund would be illegal on Wall Street today. But Templeton also had the savvy to exit markets when they were overvalued, selling out of Japan well before the market collapsed in 1989. Central to Templeton’s investment philosophy was buying superior stocks at cheap price points of “maximum pessimism.” He diligently applied this approach across a range of countries, industries and companies. As Templeton noted in an interview in Forbes in 1988: “People are always asking me where the outlook is good, but that’s the wrong question. The right question is, ‘Where is the outlook most miserable?’ ” My favorite Templeton anecdote was his bet against the U.S. dotcom bubble in 1999. Templeton famously predicted that 90% of the new Internet companies would be bankrupt within five years, and he very publicly shorted the U.S. tech sector. I think it’s a terrific irony that John Templeton – a value investor known for sussing out little known global opportunities – made his quickest and possibly biggest fortune by shorting U.S. stocks. John Templeton: Lessons for Today’s Market With most global stock markets trading in bear market territory, you may find some comfort in John Templeton’s most famous piece of advice: ” To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward .” This advice is simple – but not easy to implement. Templeton also added a small refinement to this approach. He recommended that you initially take a small position in your investment ideas before rushing in. If it’s a truly great bargain, there’s no need to hurry. Finally, what I found most refreshing about John Templeton is his relentless optimism. Templeton once asked a journalist to write about why the Dow Jones Industrial Average might rise to one million by the year 2100. At first blush, “Dow 1,000,000” sounds absurd. Yet, it turns out that thanks to the miracle of compound interest, the Dow would only need to rise about 5% per year to hit that level in 86 years.