Monthly Archives: January 2015

2015 Interest Rates

Over the past weeks as I read the predictions for 2015, I have been mulling different points of view about where interest rates are headed in 2015.  I think I have made up my mind that interest rates will be heading lower in 2015.

This chart as highlighted in this Business Insider article is rather telling:

10 Year Interest Rate Comparisons

 

Looking at this chart, the yield on the 10 year US Bond (the white line) appears out of line with the other primary developed countries. If you believe the US economy will stay the course in 2015, in comparison to its foreign peers, you would expect the US yield to be closer to the others.  Interestingly, given Japan’s debt problems, the Japanese debt also appears to be mispriced;  .03% seems awfully low for a country with the highest debt load of any country – investors in Japanese bonds seem confident that they will get all of their money back in 10 years. I would not be that confident.

So how low will interest rates go?  After all, they are almost at 0% now.  Well, we are in historic economic times – and negative interest rates are spreading.  Look at this price chart of German Bund interest rates:

 

The Swiss Bond Index is also negative, so its not inconceivable that US Bond yields could go negative this year.  So conventional wisdom was rates have nowhere to go up – but this shows how we are in very unconventional times and it may be time for unconventional thinking.

Deflation – Good or Bad?

I ran across this post regarding the increasing risk of deflation, and this chart caught my eye:

deflation

 

It is interesting to me how this shows clearly that as Quantitative Easing has winded down in 2014, the inflation that the Fed was manufacturing immediately died down.  So that got me thinking, is deflation such a bad thing?  Why has the government used such a historically drastic strategy  to try to spark inflation and avoid deflation?  On the surface, it would seem to me that deflation is a good thing for savers and workers ( wages typically do not keep up with inflation).  If you have huge debts (like the government)  deflation would be a bad thing as it makes your debt more expensive.

So I did some searching and found a couple good arguments on whether deflation is good or bad.   First up, Paul Krugman had a good article on why he thinks deflation is bad.  He gives three reasons why deflation is bad – I would encourage the reader to read the article and decide if the arguments make sense.

I also found this article covering how there is good deflation and bad deflation.  The article makes some of the same points as the Krugman article, but covers some different scenarios.

In reading these articles, I guess I haven’t made up my mind if deflation is good or bad. Arguably in late 2008 and 2009 we were on the brink of bad deflation due to the high household debt and drop-off in economic activity.  However now, it appears that the dropping oil prices and productivity improvements hint at ‘good deflation’.

I am going to keep mulling this whole issue over in my mind for awhile.  Because looking at the above chart – good or bad – it looks like we are about to be hit with a dose of deflation.

 

The NFL Reality Show

I was amused when I saw the ‘curious’ call in the Dallas – Detroit NFL playoff game that has garnered so much attention.

It seems to me faceguarding a player is one of the standard pass interference calls  to be made, and this looked like a textbook example.  So it was odd that even after the flag is thrown and the penalty is announced, the call gets reversed.

This article has a good recap of the events in case you missed it.   This play seemed to me the biggest playoff robbery since the mysterious interception that was overturned in the 2006 Pittsburgh – Indianapolis playoff game.   Interestingly enough, both of these legendary calls were made by Referee Pete Morelli.  This from 2006:

The league acknowledged Monday that referee Pete Morelli erred when he overturned on replay Polamalu’s interception of a Peyton Manning pass Sunday in the playoff game between Pittsburgh and Indianapolis.

That puts it mildly – that 2006 reversal was the worst call reversal I have ever seen.  So it interesting that Pete Morelli and his officiating crew  is in this latest controversy.  Its not like his calls have gone unnoticed over the years.  I stumbled across this article by a fan who did a review back in 2006 of games that Morelli has officiated, and the results weren’t flattering.

This excerpt from the 2006 review of Morelli’s crew:

Based on my grades this crew got two lukewarm passes and a failure. If I was a coach preparing for this crew, I would expect an even game called on the offensive line, I wouldn’t expect to be able to get a cheap pass interference call on a deep ball, I would expect some type of replay screwup, and I would be wary of having a penalty called on my team at a critical fourth quarter moment.

This officiating crew is not the best the NFL has. So why does the NFL continue to choose this crew for playoff games?    Perhaps they are taking a queue from Reality TV.  Fans of reality TV know that the shows are edited to build the best story line and build characters – they are not edited to provide a even handed journal of events.    The NFL is at the height of its popularity, so the NFL must be doing something right.   And the Dallas Cowboys – America’s Team  – is headed to the next round of the playoffs.

Nordstrom Is Building Its Space In The Online Clothing World

If you are an investor in Nordstrom (JWN) you should take a look at the December 2014 Investors presentation they released.  The chart from that presentation that got me thinking was this one:

nordstrom growth

Nordstrom’s is gaining traction on selling clothing online.  Nordstrom seems to have built the best of both worlds – with free shipping and their reputation for liberal return policies, they have given the consumer the ‘in-home dressing room’.

Business Insider also just ran this article discussing what Nordstrom is doing right.  So I wonder – who is  their biggest competitors in the online space?  There are the super high end retailers – i.e Tiffany’s and Nieman Marcus, but they don’t have the mass appeal as Nordstrom.  On the other end you have Macy’s, Target, and Amazon, who I don’t believe they draw the same class of consumer. So I think they have built a pretty decent spot fort themselves in clothing- a unique combination of online presence, customer service image, and brick and mortar stores.

Investors are taking notice – the stock is up 120% in five years, and is currently pretty richly valued.  But if you are a long term investor, or  if we see a pullback in their stock price,  I think Nordstrom is a company to consider for your portfolio.