Wondering about a strong vs. weak dollar at 3am?

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In the interest of not spreading fake news and unsubstantiated claims, let’s just imagine for a moment that as reported by some sources, President Trump was in fact pondering various economic issues facing the country at 3am and was actually curious – Is a strong dollar good or bad for the U.S. economy? Actually Mr. President, that’s a great question.

Forget that it’s 3am, forget that he called his National Security Advisor, not an economist or a Charted Financial Analyst, and forget that in a discussion with the Wall Street Journal he made mention of the impact of the strong dollar on our ability to compete internationally. Let’s forget all of the politics and just look at the question posed through an economic lens.

Is a strong dollar good or bad for the U.S. economy?

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First, let’s work through an example of a strong dollar using wine as an example.

Imagine that you had a great bottle of French Bordeaux wine on your honeymoon in Paris and you’d like a bottle of it to celebrate an anniversary back in the States. Let’s say that that bottle of French Bordeaux wine costs €50 Euro

In the summer of 2008 on your one year anniversary the exchange rate was:

 $1 Dollar for €.667 Euro

So, that €50 Euro bottle of wine cost $75 (€50 * $1 / € .667)

Now here we are in February of 2017 and on your ten year anniversary the exchange rate is:

$1 Dollar for €.940 Euro.

The dollar is stronger, it has appreciated, your dollar buys more Euros than it used to.

So, say you want to celebrate with that same lovely bottle of French Bordeaux.

OK, that €50 Euro bottle of wine now cost $53.19 (€50 * $1/€ .94)

This is what it means for the dollar to strengthen. A strong dollar makes imports cheaper.

Did the Bordeaux maker get less money somehow? No, he still got his €50 Euro in each case, but the American consumer who bought it paid far less money for the exact same product because of the exchange rate difference.

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So one thing that we can say definitively is that when the dollar strengthens, imported products, like French wine, electronics from Asia and cars from Germany are cheaper for American consumers. That’s good for consumers of imports and it makes our dollar go farther. Similarly, American businesses that use imports as inputs to their manufacturing process have lower costs when the dollar strengthens.

But, on the flip side, the opposite is true. That Frenchmen who is tired of his local Bordeaux and wants a California Cabernet isn’t as happy. His $50 bottle of California Cabernet went from Euro €25 to Euro €47. And again there was no impact to the producer, our winemaker in California got the same $50 in both cases.

Similarly, other goods and services foreigners buy that are imported from America from Levi’s to Air Jordan’s to John Deere tractors to Boeing planes are all more expensive. So as the President correctly pointed out, a strong dollar makes our products more expensive in foreign markets and that in turn generally makes our companies less competitive in the global marketplace. If our companies are less competitive, they hire fewer Americans and they invest less in R&D, which further constricts our economy.

So if your policy is to try and increase U.S. manufacturing jobs, you probably actually want a weak dollar so the goods we export are more attractive to foreigners, not less.

But then it gets complicated because after we look at the first order impacts, there are many other forces and factors, such as interest rates, trade imbalances, reserve currency speculation and even expected inflation that can all come into play and either support or alter the attractiveness of a strong dollar.

Suppose you have a strong dollar, but you feel it’s strong enough at the moment, but you’d also like to raise interest rates. Raising interest rates will likely increase demand for dollars and strengthen the currency even more. And that’s the crux of economics; there are always 2nd, 3rd and 4th order impacts and considerations that may not necessarily be consistent with your original intent. And that’s even assuming that the economists agree on what will happen in each of the scenarios.

So if you’re planning a big foreign vacation or have your eyes on a foreign automobile, you want a strong dollar. If you want U.S. companies to be as competitive as possible in a global marketplace, a weak dollar is probably better.

PLEASE REMEMBER:

- INVESTING AND INVESTMENT MANAGEMENT INVOLVES RISK, INCLUDING THE LOSS OF YOUR INITIAL INVESTMENT OR ANY INVESTMENT GAINS.

- PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

- THIS GENERIC INFORMATION IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION FOR ANY INDIVIDUAL TO TAKE A SPECIFIC ACTION.

- PLEASE INVEST PRUDENTLY AND SEEK PROFESSIONAL HELP FROM A FINANCIAL ADVISOR, INVESTMENT MANAGER, ACCOUNTANT, LAWYER OR OTHER PROFESSIONAL ON MATTERS THAT YOU ARE UNSURE OF OR THAT ARE UNIQUE TO YOUR PERSONAL CIRCUMSTANCES.

- FINANCIAL PLANNING AND INVESTMENT MANAGEMENT SERVICES PROVIDED BY J. BRADFORD INVESTMENT MANAGEMENT, NASHUA NH.

Job Hunting Today?

Job Hunting Today?

A guest blog by Rachael Bohac

It’s been reported the first Wednesday in January is the biggest job hunting day of the year.  We can all understand why:  We just had several great days or weeks off for the holidays and now it’s back to the grind.  The terrible boss, the long days, the thankless projects, the menial raise.  The glimmer of hope that somewhere out there on the world-wide-web is a new position that will be the glass slipper your LinkedIn profile has been crafted for, is all the motivation you need to hit up Indeed and Monster.  Heck, maybe even the local newspaper. 

So, once you’ve properly caffeinated and answered the critical emails, you sneak a peek to see if the grass might be greener.  The day-dreaming about that big raise is brimming with enough optimism to get you through the dark, dreary January hangover of Christmas.

After the requisite resume submissions to the corporate black hole, a couple of phone screens and finally a face to face interview, you land that gig.  Sweet.  Now what to do with that the bursting bank account?  If you’re fortunate enough to have your credit in order, investing in a home is historically a move that leads to long term wealth.  Furthermore, there are several additional factors developing in 2017 that may increase the probability of that being true, not only for wealth creation, but your internal rate of return (IRR) for that cash during the period of time in which you own the property.  In plain English, the IRR is the return you get from using your new, hard earned, direct deposited, salary to cover your mortgage payments, taxes and insurance instead of rent paid to a landlord. This flow can create a significant return on your investment, especially when you sprinkle in the appreciation rate and tax deductions.

Yay! Sounds good, so let’s buy a house or two since mortgage interest rates are still historically low and home prices have modulated since the bubble burst in 2008. But you heard interest rates “are going up”.  Yes, that is true on a micro-level, but the buying power of the low interest rates is still undeniably strong.  For example, if people were getting 4% last year, but today you’d have to stomach the atrocity of a 4.5% fixed rate for 30 gridlocked years, that is a difference of $30 whole American dollars per month for a $100,000 of the loan. (Wait! Don’t fret, because you still have the ellusive IRR on your side).

Now chances are if you are looking to trade up your job, you might also be looking to trade up a home you already live in.  If you purchased a home a few years ago, you can likely roll that equity into the new place when you sell that home in the spring market.  The stress of selling your first house can be overwhelming, but 2017 has your back, because there are shockingly low inventory levels of homes for sale on the market, making every new listing get that much more attention and sell that much quicker. 

Next, you’ll tell me you’ve got no equity, but you still want that bigger house because your new job helps you afford it.  Seriously, no problem.  Despite stricter mortgage lending practices since the great recession, there remains several high loan-to-value (LTV) mortgage programs ranging from 97 – 103% of the purchase price to help you into your dream home.  

2017 is the perfect storm of good news for those dreaming of the first place to hang their hat or the place they can install their Griswold-Christmas-Bonus-Inground-Pool.  Now get out there and get those resume’s flying because it all starts by ditching that terrible boss.

Cheers to a prosperous 2017.

About Rachael Bohac

Rachael Bohac is a licensed Realtor with Keller Williams Realty Metropolitan out of Bedford, NH.  She’s been licensed since 2005 in the residential market and has additional specialties in multi-family, investment properties and financing solutions. With a M.S. in Marketing she brings an intense and comprehensive level of marketing to her listing clients.

www.RachNH.com

PLEASE REMEMBER:

- INVESTING AND INVESTMENT MANAGEMENT INVOLVES RISK, INCLUDING THE LOSS OF YOUR INITIAL INVESTMENT OR ANY INVESTMENT GAINS.

- PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

- THIS GENERIC INFORMATION IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION FOR ANY INDIVIDUAL TO TAKE A SPECIFIC ACTION.

- PLEASE INVEST PRUDENTLY AND SEEK PROFESSIONAL HELP FROM A FINANCIAL ADVISOR, INVESTMENT MANAGER, ACCOUNTANT, LAWYER OR OTHER PROFESSIONAL ON MATTERS THAT YOU ARE UNSURE OF OR THAT ARE UNIQUE TO YOUR PERSONAL CIRCUMSTANCES.

- FINANCIAL PLANNING AND INVESTMENT MANAGEMENT SERVICES PROVIDED BY J. BRADFORD INVESTMENT MANAGEMENT, NASHUA NH.

What's Going on in the World, Economically.

Periodically, J. Bradford Investment Management publishes updated commentary, research, analysis and economic viewpoints. This work represents the views, insights and analysis of Jason Haviland, President and Chief Investment Officer at J. Bradford Investment Management.

We'll dig into all the details below, but here is a summary:

The disclosures at the bottom of this blog post are particularly relevant for this material. Let us know if you have any questions.

O.K. Let's jump in!

First, let's look at our domestic stock markets. The Dow Jones Industrial Average, the S&P 500 and the NASDAQ are all at or near record highs and have generally been on an upward trend for nearly eight years.

Assuming no major swings, March 9th 2017 will be the eighth year anniversary of this bull market. If you have a 401(k) and have been invested for the last decade, it’s been quite a ride. If you stayed the course, you saw your balance take quite a hit in 2008, but then it very likely came back rather nicely with the upswing in markets across the globe.

And if you're relatively young and started investing anytime after the Spring of 2009, you've only ever seen your balance climb steadily upward. Markets have been very positive for many years, but markets do not move forever upward.

So the big question on everyone’s mind is: Will the U.S. stock market climb higher yet? It might. And if it does, it will likely be driven by some combination of:

1.   The health of the U.S. economy

2.   A continued rise in corporate earnings

3.   Continued historically low interest rates

4.   The attractiveness of the U.S. market compared to other developed markets.

Let's look at how these factors may impact the market and the likelihood that their impact will be a positive one.

Let’s start with the first two factors, the U.S. economy as measured by GDP and corporate earnings. These two elements have been very impactful historically in driving stock market performance.

I can absolutely envision a scenario where the U.S. economy continues to grow and potentially even breaks out of the slow growth cycle that it has been in for many years. Some combination of the momentum already underway in the economy and pro growth policies in Washington could set the stage for this to happen.

But the other side of that coin, limits on growth (such as restrictions to selling in international markets) and weakness or very tepid growth in the U.S. economy, are not unrealistic outcomes either. There is some risk that the incoming administration may take an action with unintended consequences that negatively impacts growth and earnings in certain sectors or even across the board.

Investment markets are often driven by expectations of what will happen in the future, and so far, the stock market believes that the grass is greener and that a negative, economic contraction scenario won't happen, which is probably a good thing. We'll be watching this closely.

And it's also possible that we could see more of what we've seen for the last several years. That is, things are generally pretty good for most, but some sectors that don’t perform well, particularly those in political cross hairs. Overall, we may see conditions not really deteriorating, but not really improving either. Things are just good.

Whatever happens, we believe that it is important to assess if there is a commensurate and appropriate reaction and absorption of that information in the stock market, which gets reflected in pricing. If the market is priced as if we are on a high growth path (which you could argue that it is now), but we are actually on a slow growth, neutral or downward path, that could be problematic. We're watching that balance closely.

Next, item #3, our low interest rate environment. We have had low, very low, zero and in some parts of the world, negative interest rates for an extended period of time. Such a long period in this low interest rate environment is relatively unprecedented in financial history. So, when we look at historical valuation measures for insight, the interest rate regime at the time of the analysis is an important factor for comparison. One problem we have now is that we don't have many equivalent historicalperiods like the one we are in now to analyze for comparison.

So how might this low interest rate environment be distorting prices? One simple explanation of the increased inflow of capital to the stock market over the last several years is that because interest rates are so low it just doesn't make any sense to earn half or a quarter of a percent in a CD or 1% on a bond, so investors are investing in stocks instead. Instead of bonds, they are buying stocks that are perceived to be safer (such as utilities) and that generate income (such as dividend stocks). I believe that there is some truth to that assertation and that if interest rates remain abnormally low, the stock market will be seen as an alternative, even if it is a quite imperfect and much, much more risky one.

Lastly, #4, our relative position to the rest of the developed world. In some sense, all stock markets worldwide compete for investment dollars, with investors making determinations as to where they can achieve the best return. If the world economy remains generally stagnant or certain key areas such as Europe start to experience contraction or even just very slow growth without full-blown recessions, it might be the case that the U.S. benefits from simply being the most attractive choice against a backdrop of mediocre choices.

Similar to individual winners and losers in the U.S. markets, there will be individual winners and losers in international markets as well. Most immediately, we’ll face the implications of Brexit, OPEC price controls, the delicate Chinese economy and potential fall-out from the financially troubled members of the Eurozone. As those implications unfold, international investors may judge the U.S. markets to be a better option in the short to medium term.

I believe that all four of these factors have been contributors to our current sustained bull market and some combination of them may drive the market higher, but it's not entirely clear that they will all be pushing upwards as they have been recently, especially interest rates.

So let’s dive a little deeper into interest rates. The Federal Reserve has recently signaled a willingness to raise interest rates. In addition, economic conditions also support increasing rates. As such, interest rate increases from the Federal Reserve in the short to medium term seems very, very likely.

Since bond prices move inversely to bond rates, that means that the prices and values of all our bond holdings in mutual funds and ETFs will likely decrease.

We are likely entering a tough stretch for bonds. However, we should not lose sight of the strategic reasons we hold bonds in the first place – income, diversification, reduced volatility and over the long term -- better risk adjusted portfolio returns. In this environment, individual bonds and bullet maturity shares have some advantages. Here too, we will be monitoring the markets closely.

We would be remiss if we didn’t also consider the political implications of the recent election.

In this area we have a tempered and measured view. Until we get back into the full legislative session, the market is reacting to what it thinks the current administration will do. Ultimately the market will move based on what the administration actually does vs. what they’ve said they would do during the campaign.

Yes, they have a legislative plan, but legislation is complicated and special interests are as powerful as ever in DC, so we’ll know a lot more in the Spring once we see how all the competing interests line-up and after the early executive orders actually get issued. That is, we’ll see what actually happens.

Whew, that was a lot. Or maybe you just jumped here to the bottom line...fair enough. So what does all that mean for our investment portfolios?

Here are our five key takeaways:

• U.S. stock market performance and portfolio performance may be mixed and even diversified portfolios may see more volatility than usual. However, we still believe that it will be more important than ever to hold a diversified portfolio that is periodically rebalanced and potentially tilted towards investments that will perform well in the more likely scenarios.

• We believe that an increased cash holding is warranted. We believe that the market forces discussed here will push and pull against each other over the course of 2017, more so than in 2016, and when combined with potential for geo political instability and less ability to use bonds as a cushion, we’ll want higher cash holdings.

• Sector, smart beta and individual security selection will be important investment lenses for 2017, which we intend to use and pursue.

• We expect increased volatility for the short to medium term that may create opportunities for long-term value buys.

• Interest rates will likely rise in the short to medium term and inflation may follow. Investments that move inversely to rates will be under pressure in the short to medium term and investments that rise during periods of inflation may be warranted.

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PLEASE REMEMBER:

- This material is provided as of December 2nd, 2016 and readers should bear in mind that investment and economic conditions can change very rapidly and that changes or developments subsequent to that date may drastically alter the validity of this analysis.

- There are forward looking statements in this analysis and these statements should not be construed as a prediction or guarantee of what will happen.

- Investing and investment management involves risk, including the loss of your initial investment or any investment gains.

- Past performance is no guarantee of future results.

- This generic information is provided for educational purposes only and should not be construed as a recommendation for any individual to take a specific action.

- Please invest prudently and seek professional help from a financial advisor, investment manager, accountant, lawyer or other professional on matters that you are unsure of or that are unique to your personal circumstances.

- Financial planning and investment management services provided by J. Bradford Investment Management, Nashua NH.

Is Alexander Hamilton the Lead Singer in a Boy Band?

No, Alexander Hamilton is still that Alexander Hamilton, the first Secretary of the Treasury and the father of the United States banking system. That guy on the $10 bill. The one and only, Alexander Hamilton.

But thanks to the run-away success of the Broadway musical “Hamilton”, my kids, who now have a full-blown outbreak of “Hamilton Fever”, know a shocking amount of history on a revolutionary era figure who wasn’t even president. I’d be surprised if they could even name two or three more people from that era period?!?

Yet, they know where and when he was born, his family history, his professions, all of his suitors, the sisters, their rivalry, Hamilton’s son, how he died and they can recount a number of the interactions he had with Aaron Burr, including their duel. In all honesty, I often forget who won that duel, so on that matter, they actually knew more than me...

Now, I am getting a little tired of the repeat lyrics, but, they’re learning and they don’t even know it. Sort of the modern day equivalent to Billy Joel’s “We Didn’t Start The Fire”. Those lyrics are a history lesson unto themselves.

I love that my kids are engaged and it’s great to see such interest in such an impactful historical figure.

Back to Hamilton briefly. Almost everything he did set the stage for American capitalism to become American capitalism. From his penning of many of the Federalist Papers and their advocacy for a strong central government, particularly in matters of finance, to his ideas around the federal government assuming the debt of the states after the Revolutionary war, to his recognition of the need to set up both a central bank and regional banks that would help build prosperity across the nation, he really deserves the praise he gets and I’m glad he was spared removal from the $10 bill.

There are many ways in which today's Treasury, Federal Reserve and the Federal Reserve System play a very important role in keeping the United States economy moving forward at a stable and steady pace. The business of money can at times become highly politicized, but Hamilton laid a solid bedrock.

As investment managers, we do watch and pay attention to what the Federal Reserve says and does and we try to manage the risks that some of their actions might trigger, but generally we take the long view and invest in a diversified and balanced way for whatever decisions the Fed makes.

For some in our industry, watching and predicting Fed moves is a sport, which I suspect Hamilton would approve of knowing that we no longer duel when we disagree about inflation, interest rates or the debt. Federal Reserve TV anyone?

PLEASE REMEMBER:

- INVESTING AND INVESTMENT MANAGEMENT INVOLVES RISK, INCLUDING THE LOSS OF YOUR INITIAL INVESTMENT OR ANY INVESTMENT GAINS.

- PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

- THIS GENERIC INFORMATION IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION FOR ANY INDIVIDUAL TO TAKE A SPECIFIC ACTION.

- PLEASE INVEST PRUDENTLY AND SEEK PROFESSIONAL HELP FROM A FINANCIAL ADVISOR, INVESTMENT MANAGER, ACCOUNTANT, LAWYER OR OTHER PROFESSIONAL ON MATTERS THAT YOU ARE UNSURE OF OR THAT ARE UNIQUE TO YOUR PERSONAL CIRCUMSTANCES.

- FINANCIAL PLANNING AND INVESTMENT MANAGEMENT SERVICES PROVIDED BY J. BRADFORD INVESTMENT MANAGEMENT, NASHUA NH.

Congrats to the NH Community Loan Fund on Another Successful Year!

Just a brief shout-out to the New Hampshire Community Loan Fund on another successful year!

They provide a really compelling combination of loans, capital infusions and ongoing technical assistance and support to help ensure the success of their projects and ultimately, their investments.

Not only do their investments have a tremendous impact and do tremendous good in our communities, they also offer investment opportunities that can provide a very competitive rate of interest to investors of every shape and size.

Building a long-term track record is difficult, but build a long term track record they have!

I'd encourage you to read about all of their success stories in their Annual Report. It has the details of who they help, and why, and the breadth of their impact. According to that very Annual Report, the New Hampshire Community Loan Fund has had 33 years without investor losses. That's impressive.

Congrats to everyone involved with such an impactful organization!!

PLEASE REMEMBER:

- INVESTING AND INVESTMENT MANAGEMENT INVOLVES RISK, INCLUDING THE LOSS OF YOUR INITIAL INVESTMENT OR ANY INVESTMENT GAINS.

- PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

- THIS GENERIC INFORMATION IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION FOR ANY INDIVIDUAL TO TAKE A SPECIFIC ACTION.

- PLEASE INVEST PRUDENTLY AND SEEK PROFESSIONAL HELP FROM A FINANCIAL ADVISOR, INVESTMENT MANAGER, ACCOUNTANT, LAWYER OR OTHER PROFESSIONAL ON MATTERS THAT YOU ARE UNSURE OF OR THAT ARE UNIQUE TO YOUR PERSONAL CIRCUMSTANCES.

- FINANCIAL PLANNING AND INVESTMENT MANAGEMENT SERVICES PROVIDED BY J. BRADFORD INVESTMENT MANAGEMENT, NASHUA NH.

Negative interest and saving for college in Switzerland

• Saving for college is hard enough, but with a negative interest environment as discussed in a previous blog, it's REALLY hard... 
• Rates are negative on some Swiss government investments
• Not likely an immediate concern for U.S. investors

COLLEGE SAVING IN SWITZERLAND

In Switzerland, the government recently sold 10-year government bonds at an ever so slightly negative rate of - 0.055%. What does that mean? Imagine a Swiss family trying to save for college for their eight-year-old child. Say they decided to invest 20,000 Swiss Francs in 10-year Swiss government bonds. At the end of 10 years they would get back roughly 19,890 Swiss Francs. About 100 less than they started with. If they had put it in their mattress, at least they would still have 20,000 Swiss Francs when Pierre-Yves turns 18.

Luckily there are many investment alternatives to 10-year Swiss bonds and this is one of the few situations where Swiss customers actually face negative interest rates. So far, the negative rates have generally been passed between banks and government institutions and the banks have simply absorbed the loss on negative interest as a "cost of doing business"

But if rates go further negative, things will get interesting. The banks may decide that at that point aggressive lending becomes preferable to the negative rates they are paying or they may pass the cost (i.e. the negative rates) on to business customers or even on to retail consumers and many more investments would yield "negative returns".

Certainly many investments can and do lose money over certain periods of time, but those are generally risky investments. The investments here are supposed to be "ultra safe" or even "guaranteed". Would you leave your money in the bank if the rate is negative? Would you buy a government bond with a negative rate?

Fortunately, in the United States, the Federal Reserve has indicated that they plan to slowly increase rates back to more historically normal levels. U.S. Markets have been quite volatile in late 2015 and early 2016 and there are many risks facing U.S. investors, but an immediate action to lower U.S. interest rates negative probably isn't one of them.

If you would like to discuss your College Saving strategy or the potential impact of negative interest rates in further detail, please schedule a free consultation.

PLEASE REMEMBER:

- Investing and investment management involves risk, including the loss of your initial investment or any investment gains.

- Past performance is no guarantee of future results.

- This generic information is provided for educational purposes only and should not be construed as a recommendation for any individual to take a specific action.

- Please invest prudently and seek professional help from a financial advisor, investment manager, accountant, lawyer or other professional on matters that you are unsure of or that are unique to your personal circumstances.

- Financial Advisor and Investment Management Services provided by J. Bradford Investment Management, Nashua NH.

Wait, what?!?! Negative interest rates?!?

NEGATIVE INTEREST

• We are facing this situation because of the low interest rate environment that has persisted worldwide since the “Great Recession”

• Negative interest rates are as bad as they sound. Let’s say the interest rate is a negative one percent (-1%). I'm the bank and you give me $100. Then in one year, I give you back $99?!?

• The negative rates are primarily seen in borrowing and lending between governments and banks in Europe and Japan – consumers haven’t had much exposure to negative rates, yet.

Most of us recognize that we are in a “low interest rate environment” and have been since the Federal Reserve and Central Banks across the globe began lowering interest rates and taking steps to keep interest rates low in response to the Great Recession.

The practical impact to consumers of low interest rates has meant meager fractions of a percent of interest on our savings accounts, bank CDs and money market accounts and potentially no interest on our checking accounts.

GLOBAL IMPACT

The Great Recession had a global impact, so this low interest rate environment has generally persisted throughout much of the world for the last eight years.

Unfortunately, in many countries the economic expansion has been much slower and much less robust than anticipated and as a result, policy makers in many countries are continuing to look for ways to do three things:

1) Juice the engine of economic expansion

2) Strengthen currencies and

3) Fight deflation by inducing some inflation

All three objectives are generally accomplished by lowering interest rates. Generally, lower interest rates attract more borrowing for companies that would like to start or expand their businesses and when more companies borrow and expand – boom -- it creates jobs and economic expansion. That expansion should lead to rising prices and modest inflation and the low rates should strengthen the currency. The problem is that interest rates have been at or near zero for years and if governments now want to lower them further to pursue any of the objectives above, that means the rates have to be pushed negative.

In both Japan and Europe, some kind of negative interest rate environment similar to this is exactly what is happening. In many places the negatives rates only apply to banks and government borrowing and lending with each other, but it is happening. Because the rates are only ever so slightly negative right now, many banks are absorbing the losses associated with negative interest rates when dealing with retail customers and as a result, their profit margins are getting squeezed.

What happens if rates continue to go even further negative and the banks profit margins get squeezed too much? That remains to be seen because no one really knows for sure what the impact of significantly lower interest rates will be. Demand for the negative interest rate currency will likely rise and demand for hard assets like precious metals and real estate will also likely rise. But there will also be many unintended consequences and "shadow banking" type activities as consumers try and preserve the value of their money.

If you would like to discuss negative interest rates further or the impact on your portfolio, please feel free to schedule a free consultation.

PLEASE REMEMBER:

- Investing and investment management involves risk, including the loss of your initial investment or any investment gains.

- Past performance is no guarantee of future results.

- This generic information is provided for educational purposes only and should not be construed as a recommendation for any individual to take a specific action.

- Please invest prudently and seek professional help from a financial advisor, investment manager, accountant, lawyer or other professional on matters that you are unsure of or that are unique to your personal circumstances.

- Financial Advisor and Investment Management Services provided by J. Bradford Investment Management, Nashua NH.