Why The Economic Alarm Bells Are Getting Louder


We’ve long told you about the ‘warning signs’ we see flashing on this market.

There are so many of them, and of varying degrees of importance, that we’ve lost track. All that we’re left with is a cacophony of noise.

From where it comes, we’re not sure. We just know that it’s a noise. And not a pleasant sounding noise either.

And now, if that ringing in the ears wasn’t bad enough, another din emerges. According to Bloomberg:

Corporate America has its eye on a new target as executives look to tighten their belts amid a slump in profits — and this time shareholders won’t like it.

After snapping up trillions of dollars of their own stock in a five-year shopping binge that dwarfed every other buyer, U.S. companies from Apple Inc. to IBM Corp. just put on the brakes.

Announced repurchases dropped 38 percent to $244 billion in the last four months, the biggest decline since 2009, data compiled by Birinyi Associates and Bloomberg show.

Stock buybacks and a rising market. Is the relationship causal or casual? A chart won’t tell us definitively, but it certainly should grab your attention.

As you can see from the chart, stock buybacks have taken off since 2009…

Source: Bloomberg, Birinyi Associates

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The rise in buybacks appears to correlate fairly well with the rising level of the US S&P 500 index over the same timeframe…

Source: Bloomberg

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We’ll put our neck out and say there is a direct relationship between the two. In which case, what happens to US stocks if companies stop buying back stock?

We’ll let you make up your own mind on that.

Not such good news after all

If you haven’t had enough of the clanging alarm bells, it gets worse. Again, from Bloomberg:

Australian benchmark bond yields fell to an all-time low, underscoring demand for debt that’s sending fixed-income securities surging around the world.

The Australian 10-year note’s yield fell as far as 2.20 percent, a record based on data compiled by Bloomberg going back to 1969. Bonds are rallying after the Reserve Bank of Australia cut its interest rate to an unprecedented 1.75 percent and reduced its inflation forecast earlier this month.

Of even greater interest in the march towards zero percent is the yield on the two-year bond. As the chart below shows, it too is trading at a record low:

Source: Bloomberg

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The yield currently sits at 1.562%. And although the chart only goes back to 1999, we’d say that it’s safe to assume Australia’s two-year bond yields have never been lower.

We can only wonder where it all went wrong.

It only seems like six years ago when then Australian federal Treasurer Wayne Swan was winning ‘Treasurer of the Year’, and when that very same ‘hero’ of the Western world was appearing on CNBC and elsewhere to explain how Australia was different, due to its low debt levels and more stable economy.

Ah, how times have changed.

However, we must say that, especially in an election year, Mr Swan is amazingly quiet on the trajectory of interest rates.

You would normally think that interest rates at this level would cause a former Treasurer to bark about how terrible it is for savers, and how an economy on the brink of recession is emblematic of the current government’s failures.

However, for a chap who appears to be somewhat vigorous when it comes to ‘Twittering’ and ‘Tweeting’, we note that there isn’t a peep about interest rates on Mr Swan’s Twitter account. That includes going back to 2 May when the Reserve Bank of Australia cut the Cash Rate to a record low 1.75%.

We wonder why?

And we do wonder why. As you know by now, at Port Phillip Publishing, we are apolitical. We don’t give a rot for either side of politics.

For the record, even more former federal Treasurer, Peter Costello, doesn’t appear to have been overly vocal about the recent RBA rate cut.

In the recent past, governments boasted about interest rates being at a record low. We seem to remember record low rates killing off Mark Latham’s prime ministerial bid in 2004…that and the handshake of course!

Should Mr Swan or Mr Costello decide to pipe up about the current state of interest rates, and how this is proof that things are worse/better under this government than at any time in the past, we’re all ears.

Of course, we can guess at a reason for the apparent silence (unless either has opined somewhere on the topic, in which case we’ll gladly admit our mistake and offer a full retraction of our smart Alec comments).

The reason is that, while interest rates at 3% may be a cause for cheer, interest rates at 1.75% — and heading for zero — are a clear cause for concern.

Not least for savers. Reminding you of the Rule of 72 — the simple method of calculating how long it takes to double your money, assuming a constant rate of return — at 3%, it will take you 24 years to double your money.

In the glory days of 5% interest rates, it would take you 14.4 years to double your money.

But be grateful of that ‘paltry’ 10-year wait. Should interest rates on a term deposit, or any other savings account, fall to 2%, the wait to double your money will lengthen by 12 years to 36 years.

And perish the thought if savings rates should drop to 0.5%. You may wish to resume that search for the fountain of eternal youth. At 0.5%, it would take 144 years to double your money.

Good luck savers!


Kris Sayce,

Editor, Port Phillip Insider

Ed Note: This article was originally published in Port Phillip Insider.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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