No Real Growth


The question for the last six months has been focusing on interest rates – will they go up or down?  Everyone was expecting them to go up at the beginning of the year and yet they have plummeted to historic lows and continue to do so.

  • Germany’s 10 year yield dropped from near 2% to 1.06%
  • U. S. 10 year treasury yield has gone from 3.03% to 2.42%

This constitutes a bull market in bonds; high prices and low yields.

The stock markets have experienced losses.  As of early August; Britain’s FTSE 100, France’s CADC 40, Germany’s DAX, Japan’s Topix 500 and the DOW were all in negative territory for the year.

The reason for this is no surprise to us.  The major economies of the world are experiencing no true growth.  Much of Europe is back in recession and Japan’s GDP dropped by 6.8% in the second quarter. The U. S. had an extremely disappointing first quarter GDP dropping 2.1% annualized.  This recovered in the second quarter.  However 3.7% of the 4% gain was a result of a high volume of car sales to poor credit risk buyers.  Sub-prime car loans are no more sustainable than sub-prime home loans.

Low Inflation

The bond markets’ strength (high prices, low yields) can best be explained by low inflation.  The value of the interest and returning principal is not eaten away by inflation.  Also, the Iraq, Syrian, and Israeli mess draws investors to the safety of quality bonds.

Investors are also worried that the asset bubbles created by the Federal Reserve’s printing of money to buy bonds will pop as it looks like QE (Quantitative Easing) will end in the coming year.


“Financial markets have been manipulated on a global scale by Central Banks”

 – Ross Pamphilon, Manager of ECM Bond Fund

The Economist

August 16, 2014



“Snake Swallowing Its’ Own Tail”

 If both stocks and bonds are overvalued due to the bubble, why is the stock market not correcting more with all the turmoil in the world?

This is where it gets interesting.


  • Central banks have slashed interest rates because they feared the economy would weaken.  The economy is weak but companies are posting profits – how can that be?  Companies are showing profits not by selling more products or services but by cutting expenses by laying off workers.   Sooner or later the companies will not have enough workers.       THIS IS NOT SUSTAINABLE.
  • The share price of companies has been supported by corporations buying back their own shares and making the company appear more profitable.  As we have discussed before, this enables CEO’s to pay themselves enormous bonuses.  Sooner or later the share price must reflect the true value of the company.  THIS IS NOT SUSTAINABLE.


“The corporate sector is like a snake swallowing its’ own tail.  It is absorbing its’ own equity”.

 – Commentator from The Economist, Buttonwood Blog


Even though it looks like the stock and bond markets are defying gravity, there are logical reasons for their performance and those reasons are NOT SUSTAINABLE.