1. Hyre Weekly Commentary
March 26, 2012
The Markets
A trillion here, a trillion there and, pretty soon, you have a nice market rally.
Through a program called quantitative easing, central banks around the world have flooded the
world economy with the equivalent of trillions of U.S. dollars. Quantitative easing involves
central banks making large-scale purchases of debt – usually government or mortgage debt – and
paying for that debt by creating money out of thin air, according to The New York Times. The
hope (and remember, hope is not an investment strategy) is that with more money sloshing
around the global economy, interest rates will drop and that will stimulate demand and increase
economic growth.
If all goes according to plan, the economy will recover and then the central banks will sell the
bonds they purchased and “destroy” the money they received for selling the bonds. When the
whole cycle is completed, the net effect is no new money is created, according to the BBC.
Optimists say this is an appropriate activity for central banks when the economy faces major
hurdles. Pessimists say the central banks are unlikely to turn off the spigot and we could end up
with runaway inflation.
And, yes, it’s a big spigot. Just between the U.S. and the United Kingdom, more than 2.5 trillion
dollars of new money has been created since 2008, according to Reuters and the BBC.
On top of that, the European Central Bank made more than 1 trillion euro available to banks in
the form of cheap three-year loans in just the past few months. The hope (there’s that word
again) is that banks will use this money to lend and invest, and, thereby, boost the economy,
according to Bloomberg.
All this “easy money” has helped fuel a strong start to many of the world’s stock markets this
year. The big question is, will this easy money be the bridge that gets the world economy back
on a self-sustaining growth path or is it simply keeping the patient addicted to an unsustainable
monetary policy?
2. Effectively answering questions like this keeps our job very interesting!
Data as of 3/23/12 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor's 500 (Domestic Stocks) -0.5% 11.1% 6.3% 19.3% -0.5% 2.1%
DJ Global ex US (Foreign Stocks) -1.6 11.2 -7.9 16.1 -3.9 5.4
10-year Treasury Note (Yield Only) 2.2 N/A 3.4 2.7 4.6 5.4
Gold (per ounce) 0.4 5.7 15.6 20.6 20.5 18.8
DJ-UBS Commodity Index -1.5 2.4 -13.6 8.0 -3.1 3.9
DJ Equity All REIT TR Index -0.4 8.6 13.5 37.3 -0.9 10.3
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend)
and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the
three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the
historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.
QUANTITATIVE EASING HAS LED TO A STEALTH “TAX” ON SAVERS in what’s
been called “financial repression,” according to Bloomberg. As mentioned above, one goal of
quantitative easing is to lower interest rates. On that score, it’s succeeded since interest rates are
super low all along the yield curve. Unfortunately, there’s a problem with that – interest rates on
many bonds and savings accounts are lower than the rate of inflation. This means savers are
losing purchasing power (the stealth tax) while debtors are able to pay back their debts in inflated
(i.e., “cheaper”) dollars. Savers are effectively being “financially repressed.”
The public debt of the U.S. is more than $15 trillion, according to the Treasury Department. The
annual interest expense on that mountain of debt is more than $400 billion. Not surprisingly, the
government wants to keep interest rates low because that will keep their interest payments low.
Also, by tolerating some inflation, that debt pile can be paid back in inflated dollars. So, who
loses in this deal? It’s the diligent American saver who lives below their means and has to endure
very little interest on their savings.
Government policy makers are well aware that their actions are, to some extent, helping debtors
at the expense of savers. They also know that in this complicated, global economy, there’s no
easy way to make everybody happy and still get us out of the fiscal hole we’re in. Knowing that,
we’ll keep doing our best to help you prosper.
Weekly Focus – Just for Fun
If you could spend one year traveling around the U.S. and Canada, how many different bird
species do you think you could see? Well, there’s actually an informal competition that does just
that and it’s called a Big Year. Last year, a movie starring Steve Martin, Jack Black, and Owen
Wilson chronicled the Big Year exploits of three men who tried to set a new Big Year record in
1998. Sure enough, one of the men set a new record of seeing 748 bird species that year. Check
out the movie and you’ll never look at birding quite the same.
Best regards
3. Jim Hyre, CFP®
Registered Principal
P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would
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Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.
* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in
general.
* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the
National Association of Securities Dealers Automated Quotation System.
* Gold represents the London afternoon gold price fix as reported by www.usagold.com.
* The DJ/AIG Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The
Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen
as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment
Trust (REIT) industry as calculated by Dow Jones
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future
performance.
* Consult your financial professional before making any investment decision.
* You cannot invest directly in an index.
* Past performance does not guarantee future results. mc101507
* This newsletter was prepared by PEAK for use by James Hyre, CFP®, registered principal
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Jim Hyre, CFP®
Registered Principal
Raymond James Financial Services, Inc.
Member FINRA/SIPC
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