How the Interest Rate "Super Cycle" Pressures Insurance Comapnies: Allianz

Allianz is one of  the World's largest insurers.  Here Allianz's chief executive, Oliver Bäte, speaks with Alistair Gray, who covers insurance the FT, talks to  about ultra-low interest rates, asset bubbles, M&A activity and Pimco after the departure of Bill Gross in this September 27, 2015 View from the Top.  Do credit bubbles have to burst? Is the interest rate "super cycle" driving investors into foolishly risky investments and insurance companies into mergers they will regret?

Are Treasuries Turning?

The bull market in US Treasuries is three decades old. 

 

Michael Mackenzie, US markets editor, tells Long View columnist John Authers in this January 25th video (5m 10sec) that this could be about to change.   The rise in equities as a harbinger of a strengthening economy suggests bond yields are set to rise.  

Is it 2008 all Over Again?

In an FT video, Michael McKenzie tells us that investors are returning to a 2008 mindset. 
"Equity investors are battening down the hatches and fearing the worst as a resolution of the eurozone crisis appears forlorn and the Fed's fiscal stimulus misfires." (2m 28sec)

Can the BLS Move the Dollar? If So, Which Way?

On June 3rd, 2010, James Mackintosh, investment editor for the Financial Times, looked forward to the Bureau of Labor Statistic (BLS) monthly employment report from the US. He discusses how interest rates and the strength of the economy inter -react with foreign exchange markets in determining the value of the dollar. (2m 15sec)

The ECB Has Focus

The European Central Bank (the ECB) has one focus in its mandate, inflation. It takes that single mandate seriously. While the U.S. Federal Reserve drove the federal funds rate to 2% two hundred and twenty basis points below the U.S. inflation rate, the ECB has raised rates. The ECB's policy rate is now at 4.25%. Here the Wall Street Journal's Joellen Perry questions Jean-Claude Tichet, the ECB President.

Read her article here.

There are signs of a Downturn in Europe

The European edition of the Wall Street Journal reports that Denmark is in economic recession and the whole euro zone is in danger of following the Danes.

Emma Charlton and Joel Sherwood report "The Purchasing Managers Index for the euro zone's manufacturing sector contracted in June for the first time in three years, dropping to 49.2 from 50.6 in May, research group Markit Economics said. A PMI reading above 50 signals an expansion in manufacturing, while a level below 50 indicates a contraction.

"Europe's economies are currently facing a toxic combination of elevated inflationary pressures, higher oil prices, strong exchange rates, weakening global growth and tight credit conditions. Denmark, Spain, the United Kingdom and Ireland also face falling housing prices after a recent boom, trailing a trend set in the U.S. after a two-year lag."

Unlike our Fed, who is fighting the U.S. recession with the wrong weapon, The European Central Bank (the ECB) is raising rates.

A Tip from the TIPS Market: Investors are Expecting More Inflation

Inflationary expectations are growing. That comes across loud and clear from a number of surveys:

When the Conference Board surveyed households in May they found they expected an inflation rate of 7.7 percent for the year ahead (a record high survey result.) Lynn Franco, Director of its Consumer Research Center said "Consumers' inflation expectations, fueled by increasing prices at the pump, are now at an all-time high and are likely to rise further in the months ahead."


The University of Michigan reports that households expect inflation over the next five years to be near 3.4 percent, its highest reading since 1995.

The professional forecasters surveyed by the Federal Reserve Bank of Philadelphia (the old NBER/ASA survey) projects inflation over the next five quarters at 2.5 percent.

Another gauge is the difference between regular treasury bond yields and those on Treasury Inflation-Protected Securities (TIPS.) Currently the spread is 2.45 percent which would appear to indicate that investors expect a 2.45 percent inflation rate over the next ten years. But that may understate investors' true expectations. The Federal Reserve Bank of Cleveland adjusts the raw spreads for liquidity premia. Charles T. Carstrom and Timothy S. Fuerst explain how that is done in a briefing. With this adjustment the implied expected inflation rate is 3.32 percent.

Will Our Global Inflation Cause Bonds to Again be "Certificates of Confiscation?"

Min Zeng and Liz Rappaport noted in yesterday's Wall Street Journal that "Treasurys are in their worst selloff in months as investors return to riskier assets and have second thoughts about government debt in the face of inflation concerns." More fundamentally, investors now realize the credit crunch has been dealt with by a vast overextension of short term credit by the U.S. Federal Reserve. This has set off inflation in the U.S. and a global commodity boom that dangerously resembles the beginning of the Great Inflation of the 1970s.

Historically investors have had to protect themselves against rising inflation by demanding higher yields. There is a nasty lesson every bond market neophyte learns quickly and painfully: higher yields mean lower prices. In the 1970s, bonds were called "Certificates of Confiscation," because their losses were so great. The bonds' principal kept losing value in real terms as inflation eroded their purchasing power. Then prices fell each time inflation accelerated. Investors marked them down to keep yields up with inflation.

Aussie Bonds Look Good: The Reserve Bank Has Guts

Bill Gross manages big money: $120 billion in bonds. He does this on behalf of California-based Pacific Investment Management Co. (PIMCO.) PIMCO's bond fund is the world's largest.

Guess what he likes: Aussie bonds.


According to a report on Bloomberg this morning, "'The Reserve Bank of Australia should be commended for [its] inflation targeting,'' Gross said. 'Australia has some of the most attractive real interest rates in the world.'' In other words, the Reserve Bank of Australia takes seriously its job of maintaining the value of the Australian dollar. The Australian central bank pursues a policy of keeping inflation between two and three percent a year.

Bloomberg News, based on a near unanimous poll of economists, predicts "Australia's central bank Governor Glenn Stevens will raise the benchmark interest rate by a quarter-percentage point to 7.25 percent at the next policy meeting on March 4."