Just 3 short trading days later, and those ridiculous spreads between US and peripheral European bonds have collapsed.
As of today (10Y; 30Y):
Italy: 1.72%; 2.83%
Spain: 1.79%; 3.01%
US: 1.75%; 2.58%
In the eighties, the price of oil dropped from $30/bbl to $10/bbl and Shell did not cut the dividend. Conoco and Phillips Petroleum both had a history of cutting their dividends in tough times (before the merger and now post-merger). Shell has always had a unique culture regarding their dividend.
Both Conoco and Phillips Petroleum had a history of cutting/suspending dividends when times got tough. Royal Dutch Shell last cut its dividend in 1945, during the German occupation of the Netherlands during WWII. There are no guarantees in life, but Shell's institutional culture has always been such that the dividend is considered sacred (and its history backs it up).
Wow, so yahoo will not allow the shortened version of the "National Socialist German Workers' Party" on their message boards. That's kinda funny...
The last time Royal Dutch Shell cut its dividend was in 1945 when the Netherlands had just endured the ?Hunger winter? under #$%$ occupation (just before the end of WWII). So unless we see German Panzers on the horizon, I think the dividend is safe.
Sometimes it’s helpful to take a step back and put US Treasury rates in context. The following are yields for a sampling of global sovereign bonds as of today (first number is 10Y yield, second is 30Y):
Switzerland: -0.31%; 0.29%
Japan: 0.07%; 1.08%
Germany: 0.28%; 1.01%
France: 0.61%; 1.63%
Italy: 1.44%; 2.64%
UK: 1.53%; 2.34%
Spain: 1.55%; 2.84%
US: 1.88%; 2.70%
Of course twenty-five percent of Europe’s sovereign bonds are actually in negative yield territory, but those are generally of shorter duration (generally five years or less, although German bunds are negative out to seven years). Although there are fundamental reasons the rates on US Treasuries remain at historically low levels, one can’t ignore relative value as another compelling reason.
I really don’t know. I would imagine massive government interventions (via one-time wealth taxes, debt restructurings, etc.) before things got to that point, but who knows? Looking at Exter’s Inverted Pyramid, I’m comfortable for the time being with US Treasurys (the step immediately before cash and then gold), mainly because I like the income (and the fact that I expect yields to ultimately fall to much lower levels).
Thanks for the kinds words, dornweg. Once the world reaches peak debt, and I think we're close to that point, I don't know how or if the problem can be fixed, except through painful debt destruction (defaults and partial defaults). I met Lacy Hunt (Hoisington Management) about a year ago and asked him how he thought it would all play out. Lacy is the most brilliant economist I've run across, and I was anxious to hear his answer. When he said, "I just don't know", it sent a shudder down my spine...
Lol. I held a large position in AAPL from 2006 to 2012. I missed the peak, but made 8x my original investment. The easy money was made in AAPL a long time ago...
I'm guessing we'll see TLT at that level again this year, maybe even a little higher. One of these years the yield on the 30Y will approach 2%...and just stay there. That is, until the Fed cranks up QE4, which will be my signal to sell.
I’m not suggesting that this scenario will play out (nor is the Fed). But I think it might be interesting for investors to think about what the Fed projects could theoretically happen in its 2016 worst-case scenario, as required by the Dodd-Frank annual stress tests:
“The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities…”
“Asset prices drop sharply in the scenario, consistent with the developments described above. Equity prices fall approximately 50 percent through the end of 2016, accompanied by a surge in equity market volatility, which approaches the levels attained in 2008. House prices and commercial real estate prices also experience considerable declines, with house prices dropping 25 percent through the third quarter of 2018 and commercial real estate prices falling 30 percent through the second quarter of 2018. Corporate financial conditions are stressed severely, reflecting mounting credit losses, heightened investor risk aversion, and strained market liquidity conditions; the spread between yields on investment-grade corporate bonds and yields on long-term Treasury securities increases to 575 basis points by the end of 2016.”
“As a result of the severe decline in real activity and subdued inflation, short-term Treasury rates fall to negative 1⁄2 percent by mid-2016 and remain at that level through the end of the scenario. For the purposes of this scenario, it is assumed that the adjust- ment to negative short-term interest rates proceeds with no additional financial market disruptions. The 10-year Treasury yield drops to about 0.25 percent in the first quarter of 2016, rising gradually thereafter to reach about 0.75 percent by the end of the recession in early 2017 and about 1.75 percent by the first quarter of 2019.”
Currency wars are collectively deflationary and anti-growth, good news of course for long-term Treasurys. It’s ultimately bad for asset prices, but the stock market doesn’t get the joke (yet). Wait a sec…currency wars…crashing commodity prices…over-indebted economies…collapsing global trade…what does that all remind me of...oh yeah, the 1930’s! To refresh your memories of those events, I highly recommend that you give Hoisington’s 4Q 2014 report a read (free at the Hoisington Investment Management website). It’s a masterful, 5-page summary of the events of that grim decade. And keep in mind that Lacy Hunt wrote it over 12 months ago…
So the BEA's official first estimate of Q4 GDP growth came in today at 0.7%. The GDPNow forecast was overly optimistic by 0.3 percentage points, but still closer than most Street forecasts. (If the Atlanta Fed had just stopped with their second-to-last update, they would have nailed it exactly.) Sub-1% growth, what a perfectly logical time to raise rates...
This morning the final forecast for Q4 was released, coming in at 1.0% ( an increase from last week’s estimate of 0.7%, mainly due to existing homes sales data released last Friday). No mention was made of the dismal durable goods data released this morning, but I guess the housing data outweighed it. The BEA first estimate will be released tomorrow, so we’ll soon find out how the Atlanta Fed did with the latest quarter.
So in the past 6 weeks, it’s dawned on the Fed that global growth is slowing, US growth is slowing, and inflation continues to be benign. At the last meeting, they said that business investment was “strong”, but now it’s “moderate”. They raised rates last month, but admit economic growth “slowed last year”. But hey, they still expect to raise rates at a gradual pace, haha. So not to worry, our intrepid PhD economists are closely monitoring “global economic and financial developments”.
Does everyone feel more confident now?