The coming flight to quality stocks

Posted by Scott Cendrowski, reporter
October 27, 2010 1:40 pm

Leave it to Jeremy Grantham to blast Fed Chairman Ben Bernanke and former chairman Alan Greenspan in a rightfully scary missive titled "Night of the Living Fed."


Jeremy Grantham, the institutional money manager in Boston who oversees nearly $100 billion, has been as critical of the Fed's interest rate policies over the past 15 years as he has been adept at spotting bubbles fueled by the low rates. He warned clients of tech stocks more than a decade ago and more recently called a worldwide asset bubble before the meltdown in 2008. (Though he's labeled a perma-bear, Grantham pounces on opportunities: on March 10, 2009, at the market's lows, he encouraged clients to load up on stocks in a note titled "Reinvesting When Terrified.")

His latest quarterly note reminds investors how dangerous it is for Bernanke and Co. to rely on ultra-low interest rates, and the resulting cheap debt, to promote economic growth. "My heretical view is that debt doesn't matter all that much to long-term growth rates," he writes. "In the real world, growth depends on real factors: the quality and quantity of education, work ethic, population profile, the quality and quantity of existing plant and equipment, business organization, the quality of public leadership (especially from the Fed in the U.S.), and the quality (not quantity) of existing regulations and the degree of enforcement."


A graph of total debt compared to U.S. GDP growth drives home the point: as the U.S. tripled its debt compared to GDP in the past three decades, GDP growth slowed to 2.4% from its 100-year average of 3.4%.

Read Grantham's entire note below (and we really encourage you to do so, even if it takes the better part of an afternoon). The most sobering section must be the effect that near zero percent interest rates has on retirees in the U.S.

"When rates are artificially low, income is moved away from savers, or holders of government and other debt, toward borrowers," Grantham writes. "Today, this means less income for retirees and near-retirees with conservative portfolios, and more profit opportunities for the financial industry; hedge funds can leverage cheaply and banks can borrow from the government and lend out at higher prices or even, perish the thought, pay out higher bonuses. This is the problem: there are more retirees and near-retirees now than ever before, and they tend to consume all of their investment income."

Flight to quality


Since Grantham is foremost a stock investor, we'll let you read his criticisms and instead highlight what he thinks it means for stocks. Grantham's takeaway: don't fight the Fed.

Stocks, which are overvalued by historical standards, can still run up 20% or more, he says.

Year three of a presidential cycle is typically a good time for stocks. Since FDR's presidency, some 19 cycles have passed with only one bear market. That, coupled with low short-term interest rates, leads Grantham to affix 50/50 odds on the S&P 500 Index reaching 1,400 or 1,500 in the next year.

"There is also the definite possibility that we could slide back into a double dip, so we may get lucky and have a chance to buy cheaper stocks," he writes. "But probably not yet. And, of course, if we get up to 1400 or 1500 on the S&P, we once again face the consequences of a badly overpriced market and overextended risk taking with six of my predicted seven lean years still ahead."

To cope with seven lean years (more here), Grantham still proselytizes high-quality stocks: the 25% of companies in the S&P 500 with low-debt and high, stable returns.

"For good short-term momentum players, it may be heaven once again," he writes. "Being (still) British, this is likely to be my nth opportunity to show a stiff upper lip." And it may be easier even for average investors, he observes, to buy high-quality blue chips because they are getting "so cheap" relative to the market.

Recently, in the largest stock rally since 1932, Grantham often notes, high-quality blue chips have trailed the speculative, debt-laden companies within the S&P 500. He writes that chances are one in three that, come another rally in the next year, high-quality stocks will join in. "….Quality stocks are so cheap that they will 'unexpectedly' hang in," he writes.


http://finance.fortune.cnn.com/2010/10/27/the-coming-flight-to-quality-stocks/

Most houseowners unaware of impact of interest rate rise

Three-quarters of home owners do not know what impact an interest rate rise would have on them, a survey has indicated.

 Published: 12:30PM BST 07 Jul 2010

Around 74pc of people with a mortgage admitted they did not know how a 1 percentage point rise in the Bank of England base rate would affect their monthly outgoings, according to the newly formed Consumer Financial Education Body (CFEB).

More worryingly, 15pc of people do not even know what type of mortgage they have, such as whether it is a fixed-rate deal, which would make them unaffected by an interest rate rise, or whether it is a variable-rate one, meaning their monthly payments would go up.

A further 15pc also do not know when their current mortgage deal comes to an end. The lack of awareness comes despite the fact that 51pc of people with a mortgage expect interest rates to rise during the coming nine months. 

Just over half of people said they had no plans to review their mortgage, or would leave doing so until just before their existing deal expired, while 14pc admitted they did not know what they would cut back on if their mortgage repayments rose by £200 a month. 

Tony Hobman, chief executive of the CFEB, said: "Interest rates have been at record lows for some while now. Although there is uncertainty about when this will change, it is clear from our research that many people with mortgages haven't thought about what it would mean for their monthly payments, or where they would find the extra money in their household budget if their mortgage rate was to go up. 

"Lack of time means many of us often put off reviewing our finances, but it doesn't have to be time consuming to keep on top of your money matters." 

The organisation is urging people to stay on top of their mortgage, and is offering help and guidance on how to prepare for when interest rates do rise. 

It advises people to look at the Keyfacts document they were given when they took out their mortgage, as this shows what their current interest rate is and when their deal expires. 

The CFEB has set up a mortgage calculator so that people can see what impact interest rate rises would have on their monthly repayments, while it also provides impartial mortgage comparison tables to help people find the best deal. Its mortgage toolkit can be found at www.moneymadeclear.org.uk/mortgages

 

The body was set up in April by the Financial Services Authority to take over responsibility for consumer financial education. 

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/7876910/Most-home-owners-unaware-of-impact-of-interest-rate-rise.html

Bank Negara ups OPR by 25bps to 2.75%

Written by Joseph Chin
Thursday, 08 July 2010 18:11


KUALA LUMPUR: Bank Negara raised the Overnight Policy Rate (OPR) by 25 basis points to 2.75% at the Monetary Policy Committee (MPC) meeting on Thursday, July 8.

"The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 2.50% and 3% respectively," it said.

The central bank said the MPC considered the new level of the OPR to be appropriate and consistent with the current assessment of the growth and inflation prospects.

It also said the stance of monetary policy continues to remain accommodative and supportive of economic growth.

On the domestic economy, it said recent trends in industrial production, financing activity, labour market conditions and external trade indicate that economic activity has remained robust in the second quarter.

"Going forward, while external developments may result in some moderation in the pace of growth, the domestic economy is expected to remain strong with continued improvements in private consumption and investment, and augmented by public investment spending," it said.

Domestic inflation recorded modest increases in April and May, mostly on account of supply factors.

Bank Negara said prices were expected to rise at a gradual pace in the coming months, in line with the continued improvement in domestic economic conditions, and taking into account possible adjustments in administered prices.

"Overall, inflation is, however, expected to remain moderate going into 2011," it said.


http://www.theedgemalaysia.com/business-news/169531-flash-bank-negara-ups-opr-by-25bps-to-275.html

Low interest rates lead to debt: RBA

Low interest rates lead to debt: RBA

June 15, 2010 - 1:34PM

Financial deregulation and structural declines in the cash rate have led to increased household indebtedness, the Reserve Bank of Australia (RBA) says.

But while evidence suggests increased levels of debt have not left Australian households over-exposed, pockets of stress remain, RBA deputy governor Ric Battellino said on Tuesday.

"All countries have experienced rises in household debt ratios over recent decades," Mr Battellino said in a speech in Sydney.

"Clearly, therefore, the forces that drove the rise in household debt ratios were not unique to Australia.

"The two biggest contributing factors were financial deregulation and the structural decline in interest rates."

Between 1985 and 1995, the average cash rate in Australia was 11.4 per cent, compared with the average 5.3 per cent between 2000 and 2010.

The current cash rate is 4.5 per cent following six rate hikes since October last year that took the rate off a 49-year low of three per cent.

However, Mr Battellino said first home buyers will bear close watching in the future while pockets of stress have emerged in Western Sydney following a sharp run up in house prices between 2002 and 2003.

"More recently there are some signs of increased housing stress in south-east Queensland and Western Australia, again following sharp rises in house prices in these areas," he said.

Mr Battellino said despite increased levels of debt, evidence suggests Australian households are servicing it well.

Most household debt is being raised to buy assets, while debt is being taken on by households in the strongest position to service it.

He noted financial assets held by households have grown to the equivalent of 2.75 years of household income, up from 1.75 years income in the early 1990s.

"If we look at the distribution of debt by income, we can see that the big increase in household debt over the past decade have been at the high end of the income distribution.

"Households in the top two income quintiles account for 75 per cent of all outstanding household debt.

"In contrast, households in the bottom two income quintiles account for only 10 per cent of household debt."

Mr Battellino was speaking to the Financial Executives International of Australia at the law firm Clayton Utz.

The event was closed to the media and an embargoed copy of the speech was provided.

This story was found at: http://news.smh.com.au/breaking-news-business/low-interest-rates-lead-to-debt-rba-20100615-ybxl.html

Lost Decade Looming?

May 20, 2010
Lost Decade Looming?
By PAUL KRUGMAN

Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.

For the past few months, much commentary on the economy — some of it posing as reporting — has had one central theme: policy makers are doing too much. Governments need to stop spending, we’re told. Greece is held up as a cautionary tale, and every uptick in the interest rate on U.S. government bonds is treated as an indication that markets are turning on America over its deficits. Meanwhile, there are continual warnings that inflation is just around the corner, and that the Fed needs to pull back from its efforts to support the economy and get started on its “exit strategy,” tightening credit by selling off assets and raising interest rates.

And what about near-record unemployment, with long-term unemployment worse than at any time since the 1930s? What about the fact that the employment gains of the past few months, although welcome, have, so far, brought back fewer than 500,000 of the more than 8 million jobs lost in the wake of the financial crisis? Hey, worrying about the unemployed is just so 2009.

But the truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

Let’s talk first about those interest rates. On several occasions over the past year, we’ve been told, after some modest rise in rates, that the bond vigilantes had arrived, that America had better slash its deficit right away or else. Each time, rates soon slid back down. Most recently, in March, there was much ado about the interest rate on U.S. 10-year bonds, which had risen from 3.6 percent to almost 4 percent. “Debt fears send rates up” was the headline at The Wall Street Journal, although there wasn’t actually any evidence that debt fears were responsible.

Since then, however, rates have retraced that rise and then some. As of Thursday, the 10-year rate was below 3.3 percent. I wish I could say that falling interest rates reflect a surge of optimism about U.S. federal finances. What they actually reflect, however, is a surge of pessimism about the prospects for economic recovery, pessimism that has sent investors fleeing out of anything that looks risky — hence, the plunge in the stock market — into the perceived safety of U.S. government debt.

What’s behind this new pessimism? It partly reflects the troubles in Europe, which have less to do with government debt than you’ve heard; the real problem is that by creating the euro, Europe’s leaders imposed a single currency on economies that weren’t ready for such a move. But there are also warning signs at home, most recently Wednesday’s report on consumer prices, which showed a key measure of inflation falling below 1 percent, bringing it to a 44-year low.

This isn’t really surprising: you expect inflation to fall in the face of mass unemployment and excess capacity. But it is nonetheless really bad news. Low inflation, or worse yet deflation, tends to perpetuate an economic slump, because it encourages people to hoard cash rather than spend, which keeps the economy depressed, which leads to more deflation. That vicious circle isn’t hypothetical: just ask the Japanese, who entered a deflationary trap in the 1990s and, despite occasional episodes of growth, still can’t get out. And it could happen here.

So what we should really be asking right now isn’t whether we’re about to turn into Greece. We should, instead, be asking what we’re doing to avoid turning Japanese. And the answer is, nothing.

It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

Will the worst happen? Not necessarily. Maybe the economic measures already taken will end up doing the trick, jump-starting a self-sustaining recovery. Certainly, that’s what we’re all hoping. But hope is not a plan.


http://www.nytimes.com/2010/05/21/opinion/21krugman.html?src=me&ref=general

Borrowing Money in Plain English

Related:

The Math of House Buying

Low Rates Good for Banks, but Pity the Saver

By FLOYD NORRIS

Published: April 15, 2010

Aren’t low short-term interest rates wonderful?

If you are a bank, the answer is yes, particularly because the low rates are accompanied by somewhat higher longer-term rates.

If you are a saver, however, your view might be very different.

This month some interest rate spreads have reached record levels. The difference between what the Treasury pays on a one-year bill — less than half a percentage point — and what it pays on 10-year bonds — a little below 4 percent — expanded to the largest on record this month. In banking jargon, that is a very steep yield curve.

For banks, that is a license to make money with very little risk, particularly since they can get people to open savings accounts that pay close to nothing.

This week I checked the Web sites of the four largest banks in the country — Bank of America, JPMorgan Chase, Citigroup and Wells Fargo — to see what they were offering on an ordinary savings account, say, one with $5,000 in it.

Chase, the retail operation of JPMorgan Chase, and Wells Fargo were offering 0.05 percent. That $5,000 would produce monthly interest of almost 21 cents. If you left such an account untouched for 20 years, and rates stayed where they are, the glories of compound interest would lead to a profit of $50. Before taxes, of course.

At that rate, if you wanted to put away enough to produce a retirement income of $50,000 a year, without touching the principal, you would need $100 million on deposit.

To be sure, you could get a better rate with that kind of money. But not that much better. JPMorgan Chase’s overall cost of funds in the first quarter of this year was only 0.83 percent.

Largely thanks to that, the bank reported an interest rate spread — the difference between what it charges for money and what it pays for it — of 3.24 percentage points in the first quarter. That is the highest for any quarter in at least five years. (Despite that spread, JPMorgan Chase reported losses on its consumer business, caused by bad loans made and credit cards issued while the credit party was going on.)

The other two banks were a little more generous to savers. Bank of America was offering 0.10 percent, and Citi was willing to pay a relatively high 0.25 percent.

If you open an account like those, be careful. If you make too many withdrawals or let the balance slip too low, some banks will charge fees. You don’t need a lot of fees to wipe out a rate of 0.05 percent. On the other hand, if you sign up for other services, the banks may offer slightly higher rates.

The lowest rate I found was from Chase. On an interest-bearing checking account, it offers 0.01 percent. With a $5,000 constant balance, by the end of the year you could accumulate 50 cents in interest.

Rates are low because the Federal Reserve wants them there, to help clean up the financial mess and stimulate the economy. All that makes sense, but it also feels unfair.

A large part of the blame for the mess should be laid on bankers, who made the bad loans and invented all those strange securities that blew up. But many banks were bailed out, and all that survived are now in a position to profit from such low short-term rates.

Some of the blame should go to individuals who lived beyond their means, buying houses they could not afford with funny mortgages. Some of those people are now getting government-subsidized adjustments to their mortgage payments, and they may even be forgiven part of their loan, although the banks are greeting that proposal with a distinct lack of enthusiasm.

Meanwhile, with little public attention, those consumers who acted responsibly, the ones who refrained from buying houses they could not afford and did not take out home equity loans to finance consumption, but instead saved their money for a rainy day, must feel like losers. If they put those savings into the stock market, they see share prices about where they were 11 years ago, and profits over the last year were probably not enough to offset losses in the previous 12 months.

And if they kept the money in cash, seeking to avoid all risk, this is their reward: 0.05 percent.

Now does that sound fair? Of course not.

That said, the current spread between Treasury rates does offer encouragement that things will get better for the economy, and for savers. The last two times the spread between the one-year and 10-year Treasuries approached this level were in 1992 and 2003. In each case, that happened as slow recoveries after recessions were finally about to accelerate.

That such a large spread has come this soon after the 2007-9 recession is another indication that this economic recovery is likely to be much stronger than many anticipate.

After America’s previous banking crisis, in the early 1990s, a steep yield curve helped banks to earn good profits at low risk. They could borrow from the public at very low rates, and charge much better rates on loans. If they saw few attractive loans, they could still earn good profits just by buying Treasury securities. That yield curve literally saved some banks, among them Citibank.

It did that at the cost of discouraging lending, since there were risk-free profits to be made while the banks cleaned up from the mess their all-too-risky previous lending had produced.

That could be happening again.

Much of the talk about whether the Fed should keep rates low focuses on the risk of higher inflation if it does so, or the risk of a new recession if the Fed allows rate to rise to anything close to normal levels. Perhaps the toll on savers should also get some attention.

http://www.nytimes.com/2010/04/16/business/16norris.html?ref=business

How interest rates affect your share portfolio

GREG HOFFMAN

November 5, 2009

When most people hear the term ''interest rates'', they think of the official cash rate (consciously or otherwise). This rate is set by the Reserve Bank board each month and is important because it impacts the cost of short-term finance, including the rates charged on variable rate mortgages.

The official cash rate is used as both an economic accelerator and handbrake by the Reserve Bank. When economic conditions turn down, as they have over the past 18 months, lower cash rates stimulate economic activity. When the Reserve Bank board believes things are heating up, it raises rates to slow them down; as it has done at its past two monthly meetings.

It's important to be aware of the official cash rate but there's another rate that should have as big a bearing on your sharemarket investment decisions as the official cash rate does on your mortgage: the 10-year government bond rate. There are several reasons why this is an important rate.

Firstly, it's a decent guide to future movements in short term rates. In January, buyers of 10-year government bonds were locking in a return of less than 4% for the coming decade. By June, that figure had risen to 5.8%; to anyone tracking this key measure, recent rises in the official cash rate would have come as no surprise.

Another reason why the 10-year bond rate is important is that it is typically viewed as an investor's ''opportunity cost''.

As a long term investor, by buying a 10-year government bond you can currently lock in a return of a little over 5.6% for the coming decade.

As it essentially involves lending money to the Federal Government, the 10-year bond rate is often referred to as the ''risk free interest rate''.

So, to take on the considerable risk of investing your money in shares, you need to be confident of an average annual return well in excess of this risk-free rate. In this way the 10-year bond rate exerts a ''gravitational pull'' on sharemarket returns; the higher the bond rate, the less a prospective investor will be inclined to pay for shares.

That's because our hypothetical investor will demand a higher return from the sharemarket to lure them away from the safety of government bonds. And, using this frame of reference, we can intuit a few things about the relative value between the sharemarket and the bond market.

Back in January, as the sharemarket was approaching a low point, the 10-year bond rate sank below 4%. This meant the gravitational pull on share prices was very weak by historical standards; bonds weren't offering much return compared with the dividend yields provided by a portfolio of blue chip shares.

Since January, the equation for share investors has become more treacherous; the 10-year bond rate has surged to 5.6% at the same time as share prices have risen strongly. In other words, 10-year bonds look more attractive than they did in January, while stocks look less so after having already risen by so much.

Capital growth eyed

Buying a portfolio of Australia's top blue chip stocks will likely provide a dividend return of less than 3.5% over the coming year. So today's buyer is counting on a decent amount of capital growth to ensure they're ahead of the safe-and-sound government bond investor, at the same time as shares have already delivered remarkable returns from their low point.

It's not impossible that the sharemarket will rise strongly from here, but it's much less likely to do so than it was back in January. Interestingly, though, while short term rates were nudged up this week by the Reserve Bank, the 10-year bond rate has eased a little over the past fortnight - from 5.8% to 5.65%.

This has occurred in tandem with the past fortnight's sharemarket hiccup. And if both of these trends continue (lower bond rates and a falling stockmarket), then the equation for sharemarket investors will improve once more.

Our analysts would rarely let broad financial or economic factors stop them buying a good share at a sensible price.

But it's all part of the backdrop we consider when going about our daily search for sharemarket bargains and provides some useful food for thought.

http://www.businessday.com.au/business/how-interest-rates-affect-your-share-portfolio-20091105-i05w.htm

Malaysia Increases Interest Rate as Recession Ends

Malaysia Increases Interest Rate as Recession Ends
March 04, 2010, 6:33 AM EST


By Shamim Adam

March 4 (Bloomberg) -- Malaysia’s central bank raised its benchmark interest rate for the first time in almost four years, saying record-low borrowing costs were no longer warranted as the economy emerges from recession and inflation accelerates.

The ringgit rose as economists predicted central bank Governor Zeti Akhtar Aziz will continue to raise rates. Asia is leading the global recovery from the worst recession since World War II and Australia, China, India and Vietnam have tightened monetary policy to fight inflation and avert asset bubbles.

“We should expect a few more upward adjustments,” Suhaimi Ilias, chief economist at Maybank Investment Bank Bhd. in Kuala Lumpur, said after the decision. “The central bank has the luxury of time to raise rates gradually. Other central banks will look at domestic conditions before making their moves.”

Indonesia’s central bank left its reference rate at a record-low 6.5 percent today. Australia this week raised its benchmark for the fourth time in five meetings, by 0.25 percentage point to 4 percent.

“The overnight policy rate was reduced to historic lows in early 2009 as a key measure to avert a severe and fundamental economic downturn,” the central bank said in a statement today. “These conditions no longer prevail. The domestic economy has since improved significantly and is now on a path of recovery.”

Ringgit Rises

Malaysia’s ringgit rose to 3.3585 a dollar after the rate decision, the strongest level in six weeks. The currency has gained 1.5 percent this year, making it the best performer after the Thai baht in Asia outside Japan.

“The Monetary Policy Committee decided to adjust the overnight policy rate towards normalizing monetary conditions and preventing the risk of financial imbalances that could undermine the economic recovery process,” the central bank said. “The stance of monetary policy continues to remain accommodative and supportive of economic growth.”

Asian policy makers risk creating asset bubbles and fueling inflation by keeping interest rates “too low for too long” in their attempts to boost domestic demand, Standard & Poor’s said in a report yesterday.

Malaysia’s Zeti has said in the past month that any increase in rates should be viewed as a “normalization” and not a “tightening.”

Exports Climb

Southeast Asia’s third-largest economy emerged from its first recession in a decade last quarter, and Prime Minister Najib Razak has said he expects this year’s expansion to beat the official growth forecast of as much as 3 percent.

Malaysia’s exports may climb this year at twice the 3.5 percent pace predicted earlier as the global recovery revives overseas sales of Sime Darby Bhd.’s palm oil and Intel Corp.’s computer chips, International Trade and Industry Minister Mustapa Mohamed said this week.

Before today, the benchmark rate was at its lowest level since it was introduced in April 2004, and had been unchanged since February last year. Malaysia’s borrowing costs are among the lowest in Asia, below the Philippines’ 4 percent benchmark.

The benchmark FTSE Bursa Malaysia KLCI Index fell 0.2 percent at the close today.

Attract Capital

“A rate increase may be good to attract some capital inflows,” Geoffrey Ng, who manages $1.2 billion of assets as chief executive officer at HLG Asset Management Sdn. in Kuala Lumpur, said before the decision. “The foreign-exchange reserves have been rather flattish in recent months and the country has been facing quite a bit of capital outflows. On the flipside, the risk is that the equity market will take it in a wrong way.”

Malaysia’s consumer prices rose for a second month in January, climbing 1.3 percent from a year earlier.

Inflation may accelerate later this year as the government studies a revamp of its fuel subsidy. Malaysia aims to come up with a new fuel-subsidy system before presenting the nation’s annual budget in October, Domestic Trade and Consumer Affairs Minister Ismail Sabri Yaakob said today.

Prices will increase “gradually” this year and inflation should remain “moderate,” the central bank said. It’s forecast for inflation takes into account possible adjustments in “administered prices” and rising global commodity and food prices, it said.

Bank Negara policy makers next meet to review interest rates on May 13. The central bank kept the statutory reserve requirement unchanged today. The measure determines the amount of money lenders need to set aside as reserves.

--With assistance from Michael Munoz in Hong Kong and David Yong in Singapore. Editors: Stephanie Phang, Lily Nonomiya

http://www.businessweek.com/news/2010-03-04/malaysia-increases-interest-rate-as-recession-ends-update1-.html

• MARCH 4, 2010, 10:35 A.M. ET

Malaysia Raises Rates 

By ALEX FRANGOS

In a sign of the rapidly improving economic fortunes across Asia, Malaysia's central bank raised its benchmark interest rate Thursday and noted the "economic recovery is firmly established."

Malaysia is the first of the medium-sized, export-oriented economies in Asia to raise its target interest rate. Its move will be closely watched in the region, where policymakers have moved gingerly away from the extraordinary policy stimulus put in place during the global financial crisis.

Similar macroeconomic conditions in Taiwan, South Korea, Thailand, Singapore are likely to lead to rate hikes in coming months. All have benefited from their exposure to China and the restocking of inventory in the U.S. and Europe, especially for technology-related goods. Indonesia's central bank kept its interest rate steady on Thursday, saying that inflation remains under control.

"Now that Malaysia has moved, other central banks in the region may feel more comfortable doing so as well," said Matt Hildebrandt, economist with J.P. Morgan in Singapore. He added, though, that tightening would happen only gradually amid concern about the global economic outlook.

Malaysia's rate increase comes after China and India tightened credit through raising bank reserve requirements. Australia, whose economy is heavily reliant on Asian demand, has raised its benchmark rate four times since October, most recently on Tuesday. Vietnam raised rates in December to fight off speculation on its weakening currency.

In recent weeks, Malaysia and other area economies including China, Taiwan and Thailand, announced stronger than expected fourth quarter growth, surprising government economists and hastening the need to return interest rates to more normal levels. Prices have begun to rise across Asia. That combined with the ultra-low interest rates, could spark a dangerous bout of inflation.

"Growth is expected to strengthen further," Bank Negara Malaysia said in its statement accompanying the quarter percentage point hike in the benchmark overnight policy rate, to 2.25%. "Prices will gradually increase during the year," it said, while predicting that "inflation is expected to remain moderate." The bank noted the risks of "rising global commodity and food prices."

Thursday's hike was the first move by Malaysia's central bank since it dropped rates for the final time in February 2009. It was the first rate increase since 2006.

The tightening of monetary policy in the region highlights the gap between recoveries in emerging economies, especially in Asia, and the developed world, where interest rates are expected to remain at rock bottom levels for several more months if not longer. That dichotomy could lead to investors to shift money into the higher interest rates of Asian currencies and away from the U.S. dollar, the euro and the yen.

In the policy statement, the Malaysian central bank cited the "continued improvement" in exports, "particularly from the regional economies," an allusion to the strength of trade within Asia. Traditionally, Asia's export-led economies have relied substantially on demand from the U.S. and Europe. Malaysia's economy grew 4.5% in the last quarter of 2009 compared to the year earlier, helped along by strong consumer spending and trade.
While that relationship between the consumer in the developed world and the producers in the emerging world remains intact, there are signs that growing demand from consumers and businesses within the emerging markets, especially in China, has the potential to fill in for the sluggish buying power among Western consumers.

"A higher proportion of our trade is now with the region," said Malaysia's central bank governor, Zeti Akhtar Aziz, in an interview last week. She said more and more of the products Malaysia ships to China are for Chinese consumers, rather than components that will be assembled into goods for Americans and Europeans. "That's a new development and it has intensified," she said.

Write to Alex Frangos at Alex.Frangos@wsj.com

http://online.wsj.com/article/SB10001424052748704187204575101031978300278.html?mod=googlenews_wsj  

What BNM's normalisation of policy means
http://tauke-saham.blogspot.com/2010/03/what-bnms-normalisation-of-policy-means.html

Zeti: Interest rates need normalisation

Zeti: Interest rates need normalisation
Written by Siti Sakinah
Friday, 29 January 2010 18:33

KUALA LUMPUR: Some “normalisation” of the interest rates are now in order after they were reduced to “unprecedented” levels following the global financial crisis, said Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz.

She said on Friday, Jan 29 that the interest rates were reduced to the current 2% to avoid a fundamental recession as the global crisis had led to an emergency condition.

“Therefore, (we) need to look forward to some normalisation of interest rates at some point,” she told reporters after a public lecture by the first holder of the International Centre for Education in Islamic Finance (INCEIF) Chair, Dr Abbas Mirakhor.

She said that the normalisation should not be looked at as a tightening, because the policy can still support growth “especially in an environment where inflation is going to remain modest”.

Asked on the danger of keeping the interest rates too low for too long, Zeti said that

• although there were no signs of asset bubble risk,
• it could lead to other financial imbalance, such as consumer moving their funds outside the country in order to enhance the return on their savings.

“It would result in them (the consumers) taking higher risk without them realising and cause problems later on,” she said, adding that if these problems were to happen, the central bank would have to implement more drastic measures, and to avoid that “we should look at some point to normalized the rates”.

Zeti said that the country was not seeing excessive leverage on home loans nor seeing the formation of an asset bubble as “borrowing by households still remains within prudential levels”. She said that Malaysia offers a wide range of advisory services so consumers had been “prudent in managing their debt and are living within their means”.

On a separate matter, Zeti said Malaysia’s plan to issue foreign banking licences would be revealed in the second half on this year as Bank Negara was currently in the process of evaluating the applications that had been sent before the Dec 31 deadline.

http://www.theedgemalaysia.com/business-news/158786-zeti-interest-rates-need-normalisation.html

Reviewing the basics of interest-bearing investments

To have a good understanding of interest-bearing investments, learn and know the followings.

The risks of interest-bearing investments, for example:

• inflation,
• interest rate cycles and
• dubious borrowers with poor credit ratings.

The advantages of investing in this asset class, particularly

• the interest income on which you can rely.

Some of the main interest-bearing investments in the market.  These include: 

• cash,
• money market funds,
• bonds,
• participation mortgage bonds and
• voluntary purchased term annuities.

You have to know about two new market places other than the stock market: 

• the money market, where short-term interest-bearing secuities are traded, and
• the bond market, where longer-term interest-bearing securites such as bonds are traded.

Malaysia may raise interest rates in the first half of the year

Malaysia may raise interest rates in H1: Citi
Published: 2010/01/27


Malaysia may raise interest rates in the first half of the year, said Citigroup Inc, which brought forward its estimated timing of an increase from the fourth quarter, after the central bank said borrowing costs can’t be kept “too low.”

The central bank may boost the overnight policy rate by 25 basis points at the next policy meeting on March 4, followed by another 25 basis points on May 13, Citi said.

Meanwhile, CIMB Group Holdings Bhd says Malaysia’s central bank may raise interest rates “sooner than expected” following yesterday’s monetary policy statement by Bank Negara Malaysia.

The central bank’s overnight policy rate may start rising in the first half of this year from the current level of 2 per cent and reach 2.5 per cent by year-end, CIMB said. -- Bloomberg

Britain is out of recession at last – but are you?

Britain is out of recession at last – but are you?

While the nation’s output of goods and services grew in the final quarter of last year, according to the latest official figures, many people will be wondering whether their own finances are actually in better shape.

By Richard Evans
Published: 9:33AM GMT 26 Jan 2010


For many the answer will be no.

Recovery can bring its own problems; for a start, rising demand tends to stoke inflation, which could prompt the Bank of England to raise interest rates – good news for savers, but not something that hard-pressed home owners would welcome.

 “The danger is that, with a return to growth, Britons will underestimate the hardships of recovery,” said Stephen Barber of Selftrade, the stockbroker.

So what are the prospects for our personal finances as the economic recovery takes hold?

Tax
With Britain borrowing record amounts of money, many expect public spending cuts or tax rises – or both – as the Government attempts to balance the books. Income tax could have to rise by as much as 5p in the pound, said Mark Dampier of Hargreaves Lansdown, the asset manager.

“We have been living through a phoney war, mainly because of the electoral cycle. No political party has the heart or the courage to tell it as it really is,” he said. “So we won’t get a real Budget until after the election and this will probably be worse than the infamous 1981 Geoffrey Howe Budget. So the real war will begin probably some time in July.

“What can we expect? I strongly suspect that the big tax takers – basic-rate tax and VAT – will rise, VAT to 20pc and basic-rate tax by 2p to 5p in the pound.”

He added: “The high level of government and consumer debt makes me feel quite pessimistic. It took over 300 years for us to have £380bn worth of public debt. It has taken this government 12 years to bring it to £850bn. Reducing it will mean a huge shock to our finances – the recession is not over for most of us.”

Adrian Shandley of Premier Wealth Management said: “After the election taxes will rise and, if this is coupled with a rise in interest rates and inflation, individuals could find themselves much worse off, with higher mortgage payments, higher taxes and a lower real value of their wages.”

Interest rates and inflation
Commentators are divided on the likelihood that interest rates will rise from their current unprecedented lows. Mr Dampier said official rates were unlikely to rise this year because a tough post-election Budget “would equate to a significant interest rate rise”.

But he pointed out that you don’t need the Bank of England to put up official rates for mortgage costs to rise. Lenders are by and large able to change their standard variable rates at will, while Skipton Building Society recently abandoned a pledge to keep its SVR within three percentage points of Bank Rate.

“Money is very expensive at the moment even though base rates are at a 311-year low,” Mr Dampier said. “While for home owners with a tracker mortgage 2009 probably proved to be rather good in terms of income, I think for the consumer who has kept their job the recession is only just about to start. I believe people are going to be in for a real shock. They have got used to a standard of living that goes up every year. I expect that standard of living for the next four or five years to fall.”

Ros Altmann, a governor of the London School of Economics, said interest rates would have to start rising at some point. “They cannot possibly stay at these low levels as the economy picks up,” she said. “But I fear that the Bank of England might keep rates too low for too long. This leads to a significant risk of rising inflation – indeed inflation is already well above the official target – and once inflation takes hold it may not be easy to bring it back under control.”

Higher interest rates might seem like good news for savers, who would finally see better returns on their money, she said. But if inflation rose faster than interest rates, pensioners’ and savers’ incomes would not keep up with increasing household bills. “Rising rates also means higher mortgage rates, which will put further pressure on many households’ incomes.”

Vicky Redwood of Capital Economics, the consultancy, said rises in interest rates looked unlikely. “So at least mortgage costs should stay low. But house prices still look overvalued and could start to fall again, leaving more households in negative equity,” she added.

Investments
While you would expect the end of a recession to be good news for the stock market, it’s worth bearing in mind that markets generally look ahead, so much of the good news will already be “in the price”. So instead of simply expecting the FTSE100 to soar, investors may have to be selective if they want to profit, experts say.

“A return to growth does not mean a return to pre-credit crunch investment strategies,” Mr Barber said. “Investors would do well to build portfolios which are both defensive and which take advantage of the new opportunities in Britain and across the world.”

Mr Dampier agreed, saying: “I think it becomes a real stock picker’s market. There are some areas of the stock market – high yielding defensives and special situations – which I think could blossom through a difficult time in the economy. But the general indices may well tread water.”

Bond investors may have to be more careful, Ms Altmann warned. “As the Bank of England begins to unwind its policy of quantitative easing, it will have to try to sell gilts. This will push bond yields up and prices down. Bond investors would lose money, while rising yields could also unsettle the stock market later on.”

Jobs
An immediate improvement in employment prospects is unlikely, experts say. Ms Redwood said: “Jobs will remain hard to find, with employers likely to remain nervous about hiring when the economic recovery is still sluggish. In fact, we expect unemployment to start rising again and it could even reach 3m.

“Even if employment holds up, that is only likely to be because firms are controlling costs by cutting or freezing pay instead. For many people, it will still feel very much like a recession.”

Ms Altmann agreed. She said: “Companies will not suddenly rush to recruit new staff until they are more confident that the recovery will last, so unemployment is likely to stay high and pay will not increase much if at all for most of us.”

Household bills
There is further bad news for consumers when it comes to council tax and household energy bills. “We can expect council tax to rise further as we are paying for the public sector pensions,” Mr Dampier said. “Utility bills will continue to rise, not only because of rises in commodity prices but also because of environmental taxes.”

http://www.telegraph.co.uk/finance/personalfinance/consumertips/7077807/Britain-is-out-of-recession-at-last---but-are-you.html?utm_source=tmg&utm_medium=TD_rec&utm_campaign=pf2701am

The Economic Climate (7): The economy has gone from hot to cold in a matter of months.

A hot economy can't stay hot forever. Eventually, there's a break in the heat, brought about by the high cost of money. With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth. So they stay where they are and put off buying the new house. Or they keep their old clunkers and put off buying a new car.

Suddenly, there's a slump in the car business, and Detroit has trouble selling its huge inventory of the latest models.  The automakers are giving rebates, and car prices begin to fall a bit.  Thousands of auto workers are laid off, and the unemployment lines get longer.  People out of work can't afford to buy things, so they cut back on their spending.

Instead of taking the annual trip to Disney World, they stay home and watch the Disney Channel on TV.  This puts a damper on the motel business in Orlando.  Instead of  buying a new fall wardrobe, they make do with last year's wardrobe.  This puts a damper on the clothes business.  Stores are losing customers and the unsold merchandise is piling up on the shelves.

Prices are dropping left and right as businesses at all levels try to put the ring back in their cash registers.  There are more layoffs, more new faces on the unemployment lines, more empty stores, and more families cutting back on spending.  The economy has gone from hot to cold in a matter of months.  In fact, if things get any chillier, the entire country is in danger of falling into the economic deep freeze, also known as a recession.

The Economic Climate (6): Price of Money (Interest rate) rise in hot economy

With new stores being built and factories expanding all over the place, a lot of companies are borrowing money to pay for their construction projects.  Meanwhile, a lot of consumers are borrowing money on their credit cards to pay for all the stuff they've been buying.  The result is more demand for loans at the bank.

Seeing the crowds of people lining up for loans, banks and finance companies follow in the footsteps of the automakers and all the other businesses.  They, too, raise their prices - by charging a higher rate of interest for their loans.

Soon, you've got the price of money rising in lockstep with prices in general - the only prices that go down are stock prices and bond prices. 

• Investors bail out of stocks because they worry that companies cannot grow their earnings fast enough to keep up with inflation. 
• During the inflation of the late 1970s and early 1980s, stock and bond prices took a big fall.

A hot economy can't stay hot forever.  Eventually, there's a break in the heat, brought about by the high cost of money.  With higher interest rates on home loans, car loans, credit-card loasn, you name it, fewer people can afford to buy houses, cars, and so forth.  So they stay where they are and put off buying the new house.  Or they keep their old clunkers and put off buying a new car.

Cash: The real enemy of investors is not fluctuation of principal, it is inflation!

Many investors confuse safety of principal with a "sure thing investment."  Cash accounts provide investors with peace of mind because their principal does not fluctuate in value and because interest is added to the account on a periodic basis.  The institution providing the savings vehicle invests the money deposited by the investor in loans and bonds.  They take the dual risks of volatility and loss of capital - not the investor.  Unfortunately, investor peace of mind is an illusion, because the real enemy is not fluctuation of principal, it is inflation!  And "cash" investments do not keep pace with inflation!  As inflation robs investors of their purchasing power they must invade principal to buy the goods and services they need to live.  As the years go by, the investors' peace of mind is replaced by fear as they continually dip into their principal to pay for lifestyle expenses that rise with inflation.

In fact, cash flunks one of the most important tests we set for our perfect income investment.  In exchange for safety of principal and liquidity, the returns on cash are generally very low.  In fact, at current rates, the return on most cash alternatives isn't even as high as the rate of inflation, as measured by the Consumer Price Index (CPI). 

On December 31, 2003, the average yield on a 30-day Treasury bill was a paltry 0.85 percent while the annual rate of change in the CPI was 1.88 percent.  In other words, the interest on your money, would not be sufficient to replace the purchasing power you're losing to inflation.

Even if you think cash passes the safety of principal test because your principal does not fluctuate in value, it fails three other important safety tests.

• First, the safety of cash begins to look suspect if you're losing the true value of your money - the ability to buy the things you need - because of inflation.
• Second, since the yield is so low, the income generated by cash is not sufficient to buy the goods and services you need, which will force you to liquidate your principal. 
• Finally, the false illusion of safety is compounded because the low yield on cash is further reduced by taxes.  Worst yet, you will pay tax at your highest marginal rate.  Unfortunately the combination of a high tax rate and a low yield only increase your need to liquidate assets. 

So much for safety!

The more you study the inflation problem, the more you realize how important it is to a successful retirement plan.  Inflation has been pretty tame over the past 10 years, averaging only 2.75 percent per year.  Don't be lulled into a false sense of security and allow yourself to think that inflation is not going to be a big problem for you in the future.

In the 1970s inflation averaged just over 7.4%.  By the 1990s inflation had moderated to an average of just over 2.9%.  Still, the average inflation rate for the entire 30-year period from 1972 through 2002 was 5.12%.

Just a small increase can be crushing to retirees.  You would need to invest a lot more money initially in a cash investment to provide enough interest to be reinvested against the day when you need to take more income to keep up with rising costs.

Inflation is the Retired Person's Greatest Enemy

1972-2002 (30 years)  Average inflation rate 5.12%
1982-2002 (20 years)  Average inflation rate 3.36%
1992-2002 (10 years)  Average inflation rate 2.75%

Example:

Let's say you had an income need of $3,000 per month and you noticed that you could buy a five-year CD with a current yield of 4% (a generous assumption based on current yields).  To generate an income of $3,000 per month or $36,000 per year, you would need to deposit $900,000 in the bank.

The first year everything seems to work well, but in the second year you notice two problems:

1.  You had to pay taxes on your interest income, and you had not factored that into the question.  Where do you get the tax money?
2.  Your living costs are rising, and you forgot to factor in inflation.  If inflation averages just 3% for the first year, your annual expenses would increase by an additional $1,080, compounding your income need.  After only the first year, you would have to start liquidating principal to buy the same goods, and services you enjoyed the year before.


Safe but Sorry

Over the years we have seen many people make the same big mistake - they opt for the safety of principal that cash investments offer and ignore inflation risk.  Inflation robs them of the purchasing power of cash; this illusion of safety would cost dearly.  When interest rates drop, they maybe forced to dip into their original capital.  The more principal taken out, the less income will be produced putting them on a slippery slope. 

The classic problems of:

• low yield,
• high taxes and
• no inflation protection

 are pretty common to all types of fixed-income investments. 

Bonds start out with a little more income for each dollar invested, but suffer the same defects that cash investments do.  And, although it may not be widely understood by most investors, bonds can also suffer from high volatility and risk under the right circumstances.

Is there another option to meet your income needs without impairing the capital base?  We shall take a look at the difference dividend paying stocks can make.  As an investor in dividend-paying stocks, you not only get to keep more of what you earn from dividends becasue of lower taxes, but it's likely your dividend income and value will increase over time to keep you with inflation.  These exciting fundamental benefits are also available in dividend-paying stocks for growth.

Government bond markets for major economies are not prone to crash

Strategy: Government bond markets for the major economies are not prone to crashes

The characteristics of bonds:

1. The level of interest rates set by the government are somewhat predictable
2. They are not as risky as stocks.

Many people point out that stocks outperform bonds in the long run. Perhaps. However, one comfort you do have with high-grade bonds is that you are unlikely to wake up in the morning and find you have lost 25% of your investment, which of course does happen occasionally with stocks.

Most unexpected shocks to the economy are bad news:

• a crash in consumer or business confidence,
• a terrorist attack,
• a war,
• a SARS crisis, etc.

Now if one of these pushes the economy into a dive, stocks plummet while bond prices can actually go higher (that is, pushing the yields lower).

In the 1987 October share crash, panic was everywhere. Those who were holding bonds did very well. The bad news for the economy was good news for interest rates.

There is also the interesting effect of government deficits on bond yields, especially in the United States.

• One could argue that the government bond markets should work like all markets, so that if the government wants to borrow more and more, it has to pay a higher interest rate, and sell bonds at a lower price.
• This was a criticism of fiscal policy by one brand of economists - the monetarists. They argued that 'crowding out' would mean that higher deficits don't help a weak economy, because they simply push up borrowing costs for everyone.
• However, current interest rates in the US are normal even though the deficit is at an all time high, therefore such an argument is not convincing.

As an investor in the stock market, bonds are alternatives. There have been dream runs in the share market. This article alerts you to the attractions of the bond market when your strategies steer you in that direction.