Negative interest rates: Playing with economic antimatter

In particle physics, antimatter encounters between particles and antiparticles leads to mutual annihilation. In economics encounters between investors asset and negative interest rates leads the annihilation of wealth.

Today we see some $2 trillion in German government bonds with maturities less than 10 years now yields below zero. As strange as this may appear is not a unique phenomenon as Bank of Japan’s $5 trillion of debt securities also have negative yields and soon the European Central Bank will begin offering a trillion-euro bonds that could yields a -0.2% or more.

us treasury note  interest rate 2013 to 2015

Yield on the US 10 year treasury note (from

Such actions are negatively influencing US Treasury yields as seen with the 10-year note and its decrease in yield of 2.24% just five weeks ago to a yield of 1.9% today. These money destruction yields reflects the decisions by the Japanese and European central banks to mimic the US Federal Reserve quantitative easing program and both push investors into riskier asset classes such as high-yield corporate bonds or stocks and a hope of artificially inflate their moribund economies. The danger from  negative interest rate policies is  the serious risk of deflation. In modern economies and with their fiat currencies deflation increases the real value of foreign debt and often precipitates recession or increases recession severity.

us dollar index

US dollar index (from

Added to this “economic matter: antimatter” mix is the massive borrowing in US dollars from companies in China or other emerging economies in Asia and South America while the Federal Reserve was employing their quantitative easing programs and the dollar was “cheap”. In fact non-U.S. borrowers increased their dollar indebtedness to nearly $9 trillion from $6 trillion (data from the Bank of International Settlements). As the Bank of Japan and the European Central Bank lowered interest rates to below zero, this has pushed the US dollar higher and “dollar debtors” are struggling to pay back their high-priced US dollar loans with falling currency-priced revenues. A similar scenario occurred just prior to the 1997 in the Asian financial crisis as countries acquired too much foreign debt. Many economists believe that the Asian crisis was created by policies that distorted incentives within the lender–borrower relationship. The highly leveraged economic climate was unsustainable level as asset (currency) prices eventually began to collapse and cause individuals and companies to default on their debt obligations.
Take home message:
Today, with the US dollar already strong, any change in US interest rates by the Federal Reserve would place China and other emerging economies burdened with too much US dollar denominated debt into a “lose-lose situation” of both hiking interest rates and precipitate a domestic credit crunch or keep rates in the negative and let inflation accelerate along with investor capital outflows.

Annual growth rate of the S&P 500 versus US GDP

S&P 500 : Three Strikes and Your OUT!

S&P 500 growth versus GDP growth

Other than a mini correction in April 2011, that was triggered largely from the European sovereign debt crisis, the S&P 500 (^GSPC) market price has continued to grow annually on average by 15.4% + 0.1 SD (median value of 13.1%) these last 6 years.  During this same six years the economy has limped along at an average annual growth rate of just 1. 4 % 2.1. (median value of 2.3%) .

With the S&P 500 at an all time high and companies reporting 2015 first quarter results that coincide with major league baseball’s opening day,  it’s time to ask as investors, “Is the present bull market in the 7th inning stretch or are we closer to the bottom of the ninth, two outs and S&P 500 at bat ?

s&P 500 chart for 2008 to 2015

S&P 500 chart 2008 to 2015


Annualized growth rate S&P 500 ( %)
Growth Rate US GDP (%)
2007 3.5 1.8
2008 -38.42 -0.3
2009 23.47 -2.8
2010 12.79 2.5
2011 1.54 1.6
2012 13.38 2.3
2013 29.72 2.2
2014 11.43 2.4
2015* 2.5 2.3 to 2.7
*YTD as of 2-28-15 & GDP estimate



Three strike, Yerrrrrrr.. OUT!

baseball umpire calling S&P 500 out

S&P 500 your out!

Investors deciding whether to buy, sell or simply stand pat in this market face three near-term challenges:

Strike 1. A weakening economy that may see first-quarter gross domestic product grow by less than 1 %.

Full-year 2015 GDP projections by economists fell from a range of 2.6% to 3.0% in December 2014 to 2.3 % to 2.7 % this March week following comments from Federal Reserve.  Core inflation which excludes food and energy prices dropped from an expected 1.5 % to 1.8 % range to the new range of 1.3 % to 1.4 %.  Headline inflation which includes energy and food the total inflation rate has declined from a December expectation range of 1.0% to 1.6 % to a range of 0.6 % to 0.8 %.

Strike 2. Deteriorating corporate earnings that could see an annualized profit loss on the S&P 500 for 2015.

According to S&P Capital IQ the S&P 500 is expected to show just 0.3 percent profit growth for the full year and down from an expected 8.6 percent  prediction as recently as Dec. 1.

Most would agree that the S&P 500’s rally off the March 2009 low was, and still is,  largely driven by the extreme easing measures from the Federal Reserve. Should business earnings flatten or modestly decline, as they now  appear to be doing, further stock market gains would prove hard to achieve at best.

Strike 3.  The Federal Reserve is expected to tighten monetary policy at a time when central banks around the world are loosening theirs. This has lead to a strong US dollar.

According to Bank of America the dollar is set for its strongest quarterly strengthening since 1992,  due in large part from  the market’s expectation that the Federal Reserve will increase interest some time in the second half of this year. The US rates being now far higher than those of European nations or Japan will cause the dollar to get stronger as investors buying US bonds a better deal over those offered by other nations.

Take home message

Time for more investors to be selective before they swing away on their next stock purchase .


Cox, J. 2015 There’s a huge sentiment split building in market.  CNBC

 Annualized Growth Rates of the S&P500

GDP Growth (annual %)

Cox J. 2015 Fed removes ‘patient’ but says no April hike coming

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