Market Perspective - July 2016

1. Market Perspective – July 2016
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Overview: This month we evaluate the implications of interest rates around the world hitting
record lows. With central banks pressing more monetary stimulus, some countries have even
exhibited negative interest rates. In July’s market commentary, we examine this highly
differentiated environment.

2. Interest Rates At Record Lows
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• Central banks have caused
interest rates around the
world to plummet to
unprecedented levels.
• Even “higher risk” countries
with weak balance sheets
and difficult economic
conditions (such as Spain,
with greater than 20%
unemployment) are trading
at credit levels implying
extreme safety.
• Current 10 year sovereign
yields are highlighted in
yellow.
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3. U.S. 10 Year Treasury Yields At Record Lows
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• During early July, the U.S. 10
year bond yield traded below
1.4%, the lowest level in
history.
• Over the last 20 years, bond
yields have fallen precipitously.
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4. German And Japanese Government Bond Yields Are Negative
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German 10 year government bonds
are also at the lowest level ever,
yielding negative 0.17%.
Japanese 10 year government bonds are
currently yielding negative 0.27%, the
lowest in history.
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5. What Do Low Or Negative Interest Rates Mean?
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Negative and Zero Interest Rate Policy (NIRP and ZIRP) will, according to a recent Bloomberg
article, “mark the start of a new era for the world’s central banks or finally expose the limits
of their powers.”
• What are negative interest rates? Negative interest rates occur when a borrower no
longer PAYS interest on a loan, but rather RECEIVES interest.
• Why have central banks gone down this path? The strategy is designed to discourage
saving, encourage borrowing/lending and spending, and ultimately spur inflation, all of
which should reinvigorate the economy. In a purely theoretical world, low interest rates
and an accordingly low discount rates should also help lift asset prices. For example, a
lower 30 year mortgage rate helps home affordability (lower interest payments) and,
accordingly, lifts home prices.
• Are there unintended consequences? Negative interest rates appear to be a sign of
desperation to boost growth. The actions serve to punish savers such as retirees living
on a fixed income. The dramatic increase in global debt, without much in the way of
accompanying growth, could eventually be a significant risk.
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6. Indebtedness Is Rising Rapidly
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As debt has risen from monetary stimulus, policymakers have expected that GDP would begin to
increase. As you will see in the next slide, this has not occurred, and accordingly, sovereign
indebtedness has increased to concerning levels.
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Total Debt of Government Sector (as a % of GDP) by Country

7. GDP Growth Has Not Accelerated
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Eurozone GDP has bounced off the negative
growth seen in 2011-2013, but remains at just
0.6%, in spite of the continued European Central
Bank’s efforts to stimulate growth.
U.S. GDP remains stubbornly low with recent quarters
showing below 2% growth, implying minimal positive
effect from the monetary stimulus.
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8. Conclusion: When historians look back at the critical components of the post-financial crisis era,
the key marker will be the enormous level of central bank action. In spite of the efforts, global
growth remains sluggish, and the impact to date appears to be questionable. The ramifications,
however, will be felt for years, if not decades, to come in the form of elevated sovereign debt
levels. In the meantime, as the “experiment” of low and negative interest rates continues, we are
mindful of valuation and risk/reward remains the dominant factor in our investment process.
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Market Perspective – July 2016
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Disclaimer
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Opinions expressed in this commentary may change as conditions warrant and is for informational
purposes only. Information contained herein is not intended to be personal investment advice for
any specific person for any particular purpose. We utilize information sources that we believe to
be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee
of future performance; investing involves risk and may result in loss of capital. Consider seeking
advice from a professional before implementing any investing strategy.