April 6, 2015
The Markets
The global economy performed a bit like a Rube
Goldberg contraption during the first quarter of 2015, although it’s doubtful
many countries found humor as economic, financial, and political events
triggered other economic, financial, and political events across the world.
Europe heads
into deflation
“The whiff of deflation is everywhere,” reported The Economist early in 2015:
“Even in America, Britain, and Canada – all growing at
more than 2 percent – inflation is well below target. Prices are cooling in the
east with Chinese inflation a meager 0.8 percent. Japan’s 2.4 percent rate is
set to evaporate as it slips back into deflation; Thailand is already there.
But it is the euro zone that is most striking. Its inflationary past – price
rises averaged 11 percent a year in Italy and 20 percent in Greece in the 1980s
– is a distant memory. Today, 15 of the area’s 19 members are in deflation; the
highest inflation rate, in Austria, is just 1 percent.”
Low energy prices contributed to persistently low
levels of inflation in many countries, although oil prices were slightly higher
toward the end of the first quarter.
The Swiss
take pre-emptive action
In mid-January, anticipating the European Central Bank
(ECB) was about to try to head off deflation with a round of quantitative
easing (QE) that would reduce the value of the euro, the Swiss National Bank
(SNB) announced it would no longer cap the value of the Swiss franc at 1.2 per
euro. The response was exceptional and unexpected. Experts speculated the SNB
planned for the franc to lose value against the euro. Instead, it gained more
than 30 percent. The Swiss market lost about 10 percent of its value on the
news, and U.S. markets slumped, too.
The ECB
commits to a new round of QE
The SNB may have miscalculated the effect of
de-capping its currency, but it was correct about the ECB and QE. After months
of dithering and debate, the ECB announced it was committed to a new round of
QE and would spend about $70 billion a month through September 2016. Global
markets cheered. Stock markets in Europe ascended to a seven-year high. The
euro descended to an 11-year low.
Disparate
central bank policies trigger currency issues
Divergent monetary policy – the Federal Reserve ended
a round of QE just before the Bank of Japan and the ECB introduced new rounds
of QE – proved to be a pressure cooker for currencies. With the dollar rising
and the euro falling, countries with currency pegs were forced to follow suit.
U.S. dollar-linked countries generally tightened monetary policy, even if it
might hurt their economies, and euro-linked countries pursued looser monetary
policy. The Economist reported that,
“Denmark has had to cut interest rates three times, further and further into
negative territory, in order to discourage capital inflows that were
threatening its peg against the euro.”
Interest
rates fall lower and lower and lower
Thanks to quantitative easing, lots of banks in the
United States and Europe have a lot of cash tucked away in their central banks’
coffers. The Economist reported:
“…negative interest rates have arrived in several
countries, in response to the growing threat of deflation… Banks, in effect,
must pay for the privilege of depositing their cash with the central bank.
Some, in turn, are making customers pay to deposit cash with them. Central
banks’ intention is to spur banks to use “idle” cash balances, boosting
lending, as well as to weaken the local currency by making it unattractive to
hold. Both effects, they hope, will raise growth and inflation.”
In the Euro area, Germany, Denmark, Sweden,
Switzerland, the Netherlands, France, Belgium, Finland, and Austria have issued
bonds with negative yields. Why would anyone be willing to pay to invest in bonds?
The Wall Street Journal suggested one
possibility: Investors think yields have further to fall.
Data as of 4/2/15
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
Standard & Poor's 500 (Domestic Stocks)
|
0.3%
|
0.4%
|
9.3%
|
13.4%
|
11.7%
|
5.8%
|
Dow Jones Global ex-U.S.
|
1.0
|
4.5
|
-2.3
|
4.3
|
2.6
|
3.3
|
10-year Treasury Note (Yield Only)
|
1.9
|
NA
|
2.8
|
2.2
|
4.0
|
4.5
|
Gold (per ounce)
|
0.2
|
-0.1
|
-7.2
|
-10.6
|
1.1
|
11.0
|
Bloomberg Commodity Index
|
0.3
|
-4.4
|
-25.3
|
-11.5
|
-6.0
|
-4.7
|
DJ Equity All REIT Total Return
Index
|
1.0
|
4.7
|
22.9
|
14.0
|
14.9
|
9.7
|
S&P 500, Dow Jones Global
ex-US, Gold, Bloomberg 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 Total Return 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.
healthcare? revolution? Really? We may be taking part in a revolution and not even
realize it! The way healthcare is provided in the United States has been
changing. In the past, Americans participated in fee-for-service healthcare.
You might think of it as healthcare a la carte. Hospitals and doctors were
reimbursed for each test and treatment, which created incentives to do more
rather than less, and may have caused the system to perform less efficiently.
The Economist recently reported, as a result of the Affordable Care
Act, hospitals and doctors are being paid by results. Instead of getting a fee
for each service, they receive a flat fee for all services performed:
“There are also incentives for providers which meet
cost or performance targets, and new requirements for hospitals to disclose
their prices which can vary drastically for no clear reason… The upshot is
there are growing numbers of consumers seeking better treatment for less money.
Existing health-care providers will have to adapt or lose business. All sorts
of other businesses, old and new, are seeking either to take market share from
the conventional providers or to provide the software and other tools that help
hospitals, doctors, insurers, and patients make the most of this new world.”
A
key to making the transition from fee-for-service to alternative healthcare
payment models will be providing doctors with support and guidance as they
adopt new systems. A Rand study
evaluated episode-based and bundled payments, shared savings,
pay-for-performance, fees/taxes, and retainer-based practices as well as
accountable care organizations and medical homes. The study found, “There was
general agreement among physicians that the transition to alternative payment
models has encouraged the development of collaborative team-based care to prevent
the progression of disease.”
Weekly
Focus – Think About It
Best regards,
Leif M. Hagen
Leif
M. Hagen, CLU, ChFC
LP Financial Advisor
MN Ins. #53654
MN Ins. #53654
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* This newsletter was
prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with
the named broker/dealer.
* The Standard & Poor's
500 (S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general. You cannot invest directly in
this index.
* The Standard & Poor’s
500 (S&P 500) is an unmanaged index. Unmanaged index returns do not reflect
fees, expenses, or sales charges. Index performance is not indicative of the
performance of any investment.
* 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.
* Gold represents the
afternoon gold price as reported by the London Bullion Market Association. The
gold price is set twice daily by the London Gold Fixing Company at 10:30 and
15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg 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 DJ Equity All REIT
Total Return 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.
* Economic forecasts set
forth may not develop as predicted and there can be no guarantee that strategies
promoted will be successful.
* Past performance does not
guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly
in an index.
* Consult your financial
professional before making any investment decision.
* Stock investing involves
risk including loss of principal.
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Sources:
http://www.economist.com/news/finance-and-economics/21644196-low-or-negative-inflation-spreading-around-world-more-worry (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/04-06-15_TheEconomist-The_High_Cost_of_Falling_Prices-Footnote_1.pdf)
http://www.economist.com/news/finance-and-economics/21640371-policy-will-help-less-so-other-big-economies-better-late (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/04-06-15_TheEconomist-Better_Late_Than_Never-Footnote_6.pdf)
http://www.economist.com/news/finance-and-economics/21642204-monetary-policies-and-falling-inflation-are-behind-currency-turmoil-money-changers (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/04-06-15-TheEconomist-Money-changers_at_Bay-Footnote_8.pdf)
http://www.economist.com/news/finance-and-economics/21644203-negative-interest-rates-do-not-seem-spur-inflation-or-growthbut-they-do-hurt (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/04-06-15_TheEconomist-Worse_Than_Nothing-Footnote_9.pdf)
http://blogs.wsj.com/moneybeat/2015/02/02/why-all-the-talk-of-negative-bond-yields/ (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/04-06-15_WSJ-What_Negative_Bond_Yields_Mean_for_Investors-Footnote_10.pdf)
http://www.economist.com/news/business/21645741-wasteful-and-inefficient-industry-throes-great-disruption-shock-treatment (or go to http://peakclassic.peakadvisoralliance.com/app/webroot/custom/editor/04-06-15_TheEconomist-Shock_Treatment-Footnote_11.pdf)
