Posted on 01/03/2015 6:26:23 AM PST by blam
Sam Ro
January 3, 2015
January 2015 is looking a lot like January 2014. The US economy has been improving, the unemployment rate has been coming down, and the Federal Reserve has been increasingly prepping the world for tighter monetary policy.
For most bond market experts, all that means US interest rates are going to head up, especially considering the fact that rates have been falling for three decades.
But Jeff Gundlach is not like most bond market experts.
A year ago this month, Gundlach, the head of DoubleLine Funds, went contrarian and correctly predict rates would fall.
In a new interview with Barron's, Gundlach is once again going contrarian and saying rates could go lower than we seen in a very long time:
Where the median economic forecast tabulated by Bloomberg for the 10-year U.S. Treasury Bond yield for year-end 2015 currently stands at 3.24%, Gundlach thinks the 10-year that finished 2014 at 2.17% could potentially take out its modern-era low of 1.38% yield hit in 2012. This would particularly be the case if crude-oil prices keep falling to, say, $40 a barrel from their 2014 year-end level of about $55. This further drop from the 46% decline suffered by crude in 2014 would only accentuate deflationary forces he sees at work globally that continue to drop long-bond yields...
(snip)
(Excerpt) Read more at businessinsider.com ...
How can they go any lower???
Here's the problem with this economists prediction:
Falling oil prices have the net effect of a HUGE TAX BREAK, far bigger than the Federal Government would provide.
Less $$ in the gas tank = more $$ in consumers pockets. What they'll do with that additional money remains to be seen, however typically that money is spent on other goods and services which spurs the economy.
It's fact that more $$ in people's pockets, the more the economy recovers. Happens every time.
Exactly. Intra-Bank lending rates were already as low as .25% and lending directly from the Fed was 0%. There's no room to go lower.
Lower gas prices have the net effect of a TAX BREAK. More money in people's pockets = higher consumer spending overall.
I filled up my 12 year old gas guzzling SUV for under $40 just the other day. At the height of gas prices here which were $4.50/gal I was spending about $100. That's a $60 difference.
I'm lucky I only fill up once every 3 weeks due to how little I need to drive. Other folks I know aren't as lucky. They're filling up once, twice a week. An extra $200-$300 in their pockets every month sure makes a HUGE difference on what they do on a monthly basis!
The "economist" who wrote this article doesn't know his ass from a hole in the ground.
There is such a thing as negative interest... actually, anything lower than the rate of inflation (not the kind they manipulate and publish... but real inflation, like, say the price of eggs being $1.29 last week and is now $2.19) is a penalty for hoarding cash.
How can it go below ZERO?
We will have to start paying banks to keep our money in savings accounts and CDs.
We will have to start paying banks to keep our money in savings accounts and CDs.
EU banks have already started charging people for saving money with negative interest rates. Reminds me of storage costs for gold.
He could be saying that low oil prices are not being caused by the Saudis, but by a global recession. The point is being made because no way increased supply can possibly cause such a huge drop. See http://davidstockmanscontracorner.com/occams-oil-razor-oil-is-falling-hard-because-world-demand-is-falling-hard/
In that case, interest rates will go down, though, yes, can’t go much lower.
Lower oil prices are being caused by two things: The first is a price war between Saudi Arabia and the United States. The Saudi's are desperately trying to undermine the Light Shale Oil revolution in the United States. The second is they're also trying to protect their own market share against other OPEC members giving "discounted" prices to the Chinese.
Now the side benefit for both Saudi Arabia and the United States in all this is the economic damage being done to Russia, Iran, Libya, and Venezuela. Russia and Iran are common enemies to both Saudi Arabia and the United States. So there's some "satisfaction" in hurting both of them. Libya and Venezuela (along with other OPEC and non-OPEC members) rely on high oil prices to support their economies and "social programs." Both countries are in economic collapse, which happens when you're one export is oil combined with a socialist/marxist government with central economic control.
The point is being made because no way increased supply can possibly cause such a huge drop.
Actually, yes it can. It's called OVER-SUPPLY. Three years ago the United States wasn't pumping millions of barrels of light shale oil daily. Today we exceed the output of Saudi Arabia, OPEC's biggest producer. We did that in three short years. Adding NINE MILLION new BARRELS OF OIL PER DAY absolutely will - and has - had a major impact on oil prices. The Saudi's themselves recognize the shale oil boom as the biggest threat to them.
Now are deteriorating economic conditions in China contributing to the collapse in the price of oil? Absolutely. How major of a factor is China's economic collapse vs. over-supply? I don't think we know that yet and your guess is as good as mine.
Can low oil prices spur economic recovery? Absolutely, see my post above how.
“say the price of eggs being $1.29 last week and is now $2.19) is a penalty for hoarding cash. “
I saw it coming. I picked up a few thousand cases of eggs earlier this year. I will hold out till they hit $3.00 a dozen and then sell.
I've long said here on this forum that the key to America's economic recovery was dependent on two things.
First is cheap energy. We're achieving that.
Second is bringing manufacturing back to the United States.
Manufacturing only comes back if energy is cheap and plentiful in the United States. One of the main reasons so much of our own manufacturing headed over to Mexico and then China was for cheaper labor. The shift to China for cheaper labor coincided with high energy cost. Even then it was cheaper to manufacture textiles, electronics and other goods in China then "ship it back in bulk" to the US for sale.
More and more companies are recognizing that Chinese labor really isn't that great, they're tired of their patents being violated (read that: intellectual property being stolen and are getting tired of propping up a corrupt Chinese Government. (If we think the USA is bad, we're amateurs compared to China.)
With the drop in energy prices, it's actually cheaper to manufacture here now, than it has been in the past, even with our higher labor costs.
Companies no longer ship raw materials to China from the United States for manufacture and assembly. Those raw materials now stay here. Companies no longer pay shipping costs back to the US for finished goods, and they're benefiting from our lower energy costs. The cost savings from all three typically now offset the higher labor costs in the US.
General Electric has moved appliance manufacturing and assembly back to the U.S. for example. A large battery company is moving to Indiana from China, and not far from where I live new Tool & Die shops are being built moving those facilities back from China.
It's happening. Won't be over-night, probably happen over the next decade, but we are seeing manufacturing shift from China back to the U.S. and yes, lower oil/energy prices are having an impact on that.
Rising cost of eggs is being attributed to a new law in California which prohibits egg laying hens from being housed in pens they cannot move in.
The dummies in California are now regulating the size of the pens for each egg laying hen and that's having an impact on egg prices.
BTW, I'd read that California is the #1 egg producer in the country, so the actions of California have a direct impact on egg prices.
I’d say that increasing costs of healthcare(Obamacare) more than makes up for the decreases ($40/week) in gas.
When are they going to admit that monetary manipulation doesn’t work AT ALL. Oh sure, you can goose some things short term, but the market must seek reality.
“How can it go below ZERO?”
Germany and Switzerland already have negative rates.
“Falling oil prices have the net effect of a HUGE TAX BREAK, far bigger than the Federal Government would provide.”
This is not true. In this case, consumer spending does not increase one cent; instead, the consumer will just have this “tax break” money to spend on something else. Instead of paying more for gasoline, the consumer will buy a Korean-made TV from a part-time clerk at Best Buy. No additional money is generated, but the same money is just spent differently. Hence, there is no additive GDP growth. Yes, input costs will drop for certain industries, but whether the savings are passed on to the consumer is another question (example: airline ticket prices have not dropped). Also, there will be wide destruction of well-paying jobs in the oil-producing states (the Dakotas, south Texas, Ohio, Pennsylvania). The average compensation in the oil industry is ~$95,000 per year, and this industry has accounted for all of the net job growth over the last 5 years. Furthermore, each oil job creates another 2.8 jobs in the local economy.
The bottom line: be careful about thinking linearly about the drop in oil prices. The second and third order effects could be devastating.
Won't there be an increase in the velocity of money.
(Hence, increased economic activity and taxes collected?)
“How could they go any lower???” Apparently, the bank could pay you to take a loan.
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