Are Negative Interest Rates a Possibility in the U.S.?

Are negative interest rates a possibility in the U.S.? It is possible, though not likely. Negative interest rates are a rare phenomenon where investors are in effect paying to have their money invested, or in reality stored for them, instead of getting a return on their investment. This is a relatively new phenomenon that has been observed in some countries around the world, most notably Europe and Japan. There is currently around $15 trillion of government debt around the world that has negative interest rates. Many of the holders of debt with negative interest rates are institutions that must hold government debt due to regulations requiring them to do so. While the U.S. has so far avoided negative interest rates, as interest rates in the U.S. continue to decline, some investors fear that negative interest rates could come to the U.S. We can only wait and see if this happens.

Economic and Investment Highlights

Last Week

The yield last week on the three-month treasury exceeded the yield on the ten-year treasury by the widest margin since 2007, a phenomenon known as an inverted yield curve (see chart below in Charts for Review and Thought). The ten-year treasury ended the week at 1.731%, a multiyear low. The inverted yield curve is an often-watched recession indicator. A major force driving these yield declines is the ongoing trade tensions which give rise to concerns of a slowing worldwide economy. When investors have such concerns, they often buy relatively safe assets such as U.S. treasury bonds, which increases these bonds’ prices and drives their yields down.

Central banks in India, Thailand, and New Zealand aggressively cut rates.

Gold prices rose above $1500 per troy ounce, the first time in six years.

There is evidence that inflated bond ratings are back in vogue, as competition heats up in the credit rating industry. Inflated bond ratings were blamed as being a driver of the financial crisis.

Mortgage rates have declined to their lowest levels in three years, prompting a wave of mortgage refinancing.

The housing market in some small and mid-size cities such as Boise, Idaho and South Bend, Indiana, has been on an upswing. This is largely a result of shrinking inventory in these less-expensive markets.

The Dow Jones Industrial Average, the S&P 500 and the Nasdaq all fell last week, 0.7% for the Dow, 0.46% for the S&P 500 and 0.6% for the Nasdaq. The 10-year treasury yield ended the week at 1.731%.

The Week Ahead

This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.


Note: The comments that follow are derived from the economic indicators referenced in the Resources section of this newsletter and other sources in this report.

The Aruoba-Diebold-Scotti Business Conditions Index (ALS) has been trending up the last several weeks and is now very close the zero line. The ALS Index was relatively flat this past week. This is a very positive indicator for the economy on a short-term basis.

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2019 is 1.9 percent. This slight adjustment continues to support the ALS model assessment of an improving short-term economic environment.

The New York Fed Staff Nowcast stands at 1.6% for 2019:Q3.

The Chicago Fed National Activity Index (CFNAI) showed an increase in economic activity in May. The Chicago Fed National Activity Index (CFNAI) was –0.02 in June, up slightly from –0.03 in May.

All told, these short-term economic indicators are a neutral to positive analysis for the economy, at least on a short-term basis.

Expectations that stock prices will rise over the next six months is now at 21.7%, an unusually low level, in the latest AAII Sentiment Survey. The historical average is 38.5% for the survey. Nearly half of the investors in the survey described their short-term outlook as bearish. Please see the AAII Sentiment Survey for the complete results.

The latest Gross output (GO) reading suggests slow economic growth as we enter 2019.

On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of August 9, 2019) predict real GDP will grow at an annual rate of 1.8 percent this quarter, 2.0 percent next quarter, and 1.9 percent in the first quarter of 2020. On an annual-average over annual-average basis, the forecasters predict real GDP to grow 2.3 percent in 2019, 1.9 percent in 2020, 2.0 percent in 2021 and 2.1 percent in 2022. The forecasters predict the unemployment rate will average 3.7 percent in 2019, 3.6 percent in 2020, 3.9 percent in 2021, and 4.0 percent in 2022.

For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.

Stock Market Valuations

Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:


We continue to believe the economy is in a stable but now more vulnerable state. Recent economic reports have been showing signs of weakening. Nonetheless, the economy has remained fairly strong. In fact, the extremely strong first and second GDP showing and the strong labor market conditions still give us confidence that the economy, now in its tenth year of expansion, can continue to grow. But we are cautious on this outlook! Please see our complete Economic and Investment Review in the Spring 2019 quarterly issue of the Intrinsic Value Wealth Report Newsletter.

The broad market remains overvalued, although the Dow Jones Industrial Average looks more fairly valued than the broad market. But that does not mean that a market correction is imminent. Markets can and do stay overvalued for long periods of time. As discussed above and in the Economic and Investment Highlights section of this Commentary, we believe the economy is in a stable but vulnerable state that is showing signs of weakening. If the economy remains strong, the markets will likely remain strong. If the economy deteriorates, the markets may well correct. There are other events that could trigger a market correction, of course, but economic conditions are the most likely and foreseeable events that could make that happen.

We believe it is important to maintain a long-term view toward investing. This means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.

Chart for Review and Thought

Inverted Yield Curve

Simple and Effective Economic Forecasting Model

Notes (GDP Growth Chart):

  1. See the July 8, 2019 Commentary for an introduction to this model.
  2. Actual numbers 2007 through Q1 2019; forecasted numbers thereafter.
  3. Normal GDP growth is typically in the 2% to 3% range.
  4. A recession is generally defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).


We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers.

Business 539 – Financial Management – On July 1, 2019, Dr. Wendee started teaching Business 539 – Financial Management at California Baptist University (CBU). Dr. Wendee teaches courses in Finance and Economics at CBU.

Management 3080 – Business Responsibility in Society – Dr. Wendee will be teaching Management 3080 – Business Responsibility in Society at California State University, Los Angeles (CSULA) starting August 22, 2019. Dr. Wendee teaches courses in Management at CSULA.

Business 217 – Microeconomics – Dr. Wendee will be teaching Business 217 – Microeconomics at California Baptist University (CBU) starting September 4, 2019. Dr. Wendee teaches courses in Finance and Economics at CBU.

Business 218 – Macroeconomics – Dr. Wendee will be teaching Business 218 – Macroeconomics at California Baptist University (CBU) starting September 4, 2019. Dr. Wendee teaches courses in Finance and Economics at CBU.

Dr. Wendee will be presenting a paper on enterprise value creation at the International Leadership Association’s annual global conference which is being held in Ottawa, Canada this Fall.

Intrinsic Value Wealth Creation pyramid

We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.

The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.


See our Resources section for links to economic and other resources used in the preparation of this Commentary.

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