Headwinds for Central Banks

November 11th, 2014
in contributors

Macro Strategy Report for November 2014

by Jim Welsh with David Martin and Jim O'Donnell, Forward Markets

The Federal Reserve (Fed) has indicated that it will be data dependent in deciding when it will raise interest rates. The recent decline in inflation expectations, economic weakness in Europe, the plunge in oil prices and heightened financial market volatility will only serve to reinforce the scrutiny of incoming data. Whenever the Fed actually raises rates, it is important to remember they will only be raising the cost of short-term money and will not reduce the level of liquidity.

Follow up:

This is what the Fed did when it raised rates from 1.00% to 5.25% between 2004 and 2006. We believe the obsession with when the Fed will act on rates is truly much ado about nothing. Our guess is that the first rate increase will come later rather than sooner and the total increase in short-term rates will be far less than the historical norm. Prior to the financial crisis, the federal funds rate historically averaged 2.0% above inflation. Under those conditions and with inflation running at 1.7% currently, the federal funds rate would be 3.70%. We obviously live in more interesting times.

In the wake of the financial crisis, governments around the world significantly increased government spending to offset the drop in private demand as workers were laid off and unemployment rates soared. The excess spending stabilized global economic growth but resulted in huge budget deficits and an increase in total global debt. Compared to 2007, 2014 global debt levels are higher but global economic growth is slower. With growth slower, there is less cash flow supporting a greater amount of debt. Central banks in developed countries, however, have reduced the interest expense burden from higher debt levels by pushing interest rates to 0%, offsetting some of the decline in aggregate cash flow from slower global growth, especially in Europe and the U.S.

Federal debt held by the public in the U.S. has surged from $5.0 trillion in July 2007 to $12.6 trillion in April 2014. Public debt does not include debt owed to intragovernment agencies like Social Security. When intragovernment debt is included, total federal debt now exceeds $17 trillion.

In August 2007, the interest rate paid on publicly held government debt was 4.95% and interest expense totaled $253 billion in the 2007 fiscal year. As of September 2014, the interest rate paid on public debt was just 2.04%. Despite a doubling in public debt since 2008, the total interest expense in the 2014 federal budget ended September 30, 2014, was just $231 billion. Interest expense has declined due to the plunge in interest rates since 2008 and the Fed maintaining its zero interest rate policy.

As we discussed in the October Macro Strategy Review (MSR), total U.S. public and private debt has mushroomed from 165% of gross domestic product (GDP) in 1982 to 350% in 2014. In other words, there is $3.50 of debt for each $1.00 of GDP. More importantly, each additional dollar of debt assumed between 1982 and 2007 increasingly generated less than a dollar of GDP growth. Since debt as a percentage of GDP rose from 165% in 1982 to 370% in 2007, the value of each additional $1.00 of debt only generated $0.44 of GDP in 2007.

Compared to Europe and Japan, however, the U.S. is a model of austerity. The debt-to-GDP ratio for the 18 countries in the eurozone is 460% while in Japan the ratio is a mind-boggling 640%. China hasn't been immune to the debt binge either: over the past five years, China's debt-to-GDP ratio has soared from 150% to 250%. An International Monetary Fund (IMF) analysis found that in the majority of instances, large increases in credit growth during the last 40 years led to slower growth or a financial crisis in subsequent years.

If debt really spurred economic growth (as one Nobel Prize winning economist advocates), Europe would have grown far faster over the last 15 years and Japan's economy would have boomed. The increase in debt levels followed by subpar growth has played out over the last 15 years in the U.S., Europe and Japan, especially since 2008. Contrary to perception, there has been no deleveraging since the financial crisis.

The high debt-to-GDP ratios in the U.S., Europe and Japan are likely to limit how much central banks can increase short-term rates in coming years. Higher short-term interest rates would increase interest expenses for corporations and consumers and act as a brake on growth. As interest expense consumes a greater share of income, consumers would have less money to spend and corporations less money to buy back shares or for capital investments. It would also negatively impact fiscal budgets.

For instance, an increase in the interest rate on U.S. public debt from 2.04% to 3.04% would cause interest expense to soar from $231 billion in 2014 to more than $300 billion in future years. We would be surprised if the federal funds rate is above 1.75% at the end of 2017, and that's if the Fed proves to be more aggressive than we expect.

The overhang of debt is likely to keep short-term interest rates lower than even Federal Reserve members expect in the next few years. If short-term rates remain low, long-term Treasury rates are likely to also remain lower than expected, even after the Fed begins to raise rates. If and when long-term rates rise, we doubt it will be due to central bank rate actions.

One thing that could cause long-term rates to become unhinged would be a loss of confidence in central banks' ability to engender self-sustaining economic recoveries and their capability to manage the next slowdown in their domestic economy or the global economy. We don't know when or if this red line of confidence will be crossed, but our guess is that it may be another two or three years down the road since equity markets still respond favorably when a Fed member hints at a fourth round of quantitative easing (QE) or a European Central Bank (ECB) member suggests the ECB might pursue more accommodation.

The loss of confidence in central banks at some point is still a significant risk since markets currently believe that central banks are the "masters of the universe." Ah, the folly of mankind and efficient markets.


We have previously discussed the numerous structural issues that have weighed on growth in individual European countries and the overall eurozone. As we noted in the September MSR, ECB President Mario Draghi created a window of opportunity for individual countries to address their structural problems after his July 2012 "whatever it takes" comment alleviated the sovereign debt crisis.

At that time, the yields on sovereign debt throughout Europe were soaring and there were real concerns that the European Union (EU) was on the road to disintegration. In the summer of 2012, the yield on 10-year sovereign bonds was 7.22% in Spain, 14.65% in Portugal, 7.24% in Italy and an astronomical 33.70% in Greece.

It's hard to believe that in September 2014 10-year yields were plumbing 200-year lows at 2.04% in Spain, 3.05% in Portugal, 2.25% in Italy and just 5.52% in Greece.

While the huge decline in the cost of funding is a positive for each of these countries, the opportunity to make structural changes within their domestic economies was squandered over the last two years. As France and Italy flirt with another recession, schisms within the EU are beginning to reappear and could raise doubts about the future of the eurozone in the next year.

According to the rules of the European Commission (EC), each EU country must submit an annual budget that shows it is limiting its budget deficit to 3.0% of GDP. Countries that have deficits that exceed that threshold must present budget projections that outline a path to achieving a deficit of 3.0% or less in future years. In the wake of the financial crisis, the EC was given new powers so that it now has the right to demand changes to proposed budgets before they are submitted to a country's parliament for passage. The EC can also fine a country up to 0.2% of the country's GDP if it doesn't acquiesce to the EC's enforcement of the rules.

A test of the EC's authority is coming soon as France is expected to submit a 2015 budget that would result in a deficit of 4.3% of GDP. Although the 2015 budget limits the increase in government spending to $26.5 billion, or 0.2% of GDP, it isn't even close to the 0.8% in spending cuts France had promised. Instead, France is proposing a spending reduction of $63 billion over the next three years rather than in 2015 and wouldn't achieve a budget deficit of 3.0% until 2017. French Finance Minister Michel Sapin said the government had limited spending cuts in 2015 to avoid tipping an already weak French economy into recession:

"We are committed to being serious about the budget, but we refuse austerity."1

It is understandable why the EC might be a bit skeptical of France's fiscal discipline, since France's deficit hasn't been under 3.0% anytime in the last 10 years. Even when global growth was decent in 2004, 2005, 2006 and 2007, France was still unable to produce a budget deficit less than 3.0% of GDP. EC rules also expect each country to lower its government debt-to-GDP ratio to less than 60% over the next 20 years. With France running serial deficits every year, its government debt-to-GDP ratio has been trending higher and now stands at 95%. In order to achieve the 60% threshold, France would have to run budget surpluses of more than 3.0% for many years. We could make a comment about the Tooth Fairy, Santa Claus and France's chance of running budget surpluses, but that would be unnecessary.

France has a long history of refusing austerity in good times and bad. France's government spending represented 56.7% of GDP in 2009 and rose to 57.1% by the end of 2013. French citizens on the receiving end of the slightest reduction in government spending feel any cut is too deep. In early October, nearly all pharmacies and notary agencies were closed the day before the budget was announced because it included plans to open these sectors to greater competition. In explaining his budget, President François Hollande said,

"There is no savings plan that is painless...If you don't hear screaming, that means we aren't saving."2

The French public is screaming alright. An August 2014 poll by TNS-Sofres, a market research and information group, found that only 13% of French people are confident in President Hollande. In fact, of the G7 nations, President Hollande is the only leader with a lower approval rating than President Obama. What are the odds that Hollande has the political capital to change labor market rules put in place to protect existing workers, even though they smother job creation?

As we've mentioned before, there are twice as many companies in France with precisely 49 employees as there are companies with 50 or more employees. This labor market anomaly is the result of government intervention that burdens a company that adds a fiftieth employee with almost three dozen labor laws from France's 3,200 page labor code. A 2012 study by the London School of Economics and Political Science determined that the additional rules for companies that add a fiftieth employee increased labor costs by 5-10% and concluded "there is a strong disincentive to grow."3 Without a radical overhaul of labor laws and social welfare programs fed by government spending that consumes 57.1% of GDP, France's economy will continue to go nowhere slowly.

Much like France, Italy suffers from labor market sclerosis and an even larger fiscal imbalance. At the end of the first quarter 2014, Italy's debt-to-GDP ratio was 135.2% and is likely to creep higher as Italy's economy has slipped into its third recession in five years. In order for Italy to lower its debt-to-GDP ratio to 60% as EC rules stipulate, Italy would have to run a primary budget surplus before interest costs of 7.0% a year. The Chicago Cubs will win not one but two World Series titles before that happens. Government spending at the end of 2013 represented 50.6% of GDP, so any reductions in spending will lower GDP growth, at least in the short run. Youth unemployment stands at 43.7% due to Italy's reliance on short-term labor contracts, which were used in the 1980s and 1990s to make it easier for companies to hire and fire new employees. Since these labor contracts last just 90 days, job insecurity may be the Italian youth's most prominent feature.

According to Eurostat, the number of workers younger than 25 years old employed under short-term labor contracts has soared from 20% in 1998 to more than 50% in 2013. Entry level wages for young workers dropped almost 30% between 1990 and 2010, according to a 2013 Bank of Italy study. Keep in mind that these temporary contracts were designed to further protect existing, union and government job holders, not to help young workers. Italian labor laws give a laid-off employee the right to take their employer to court for unfair dismissal irrespective of the reason for dismissal. These labor disputes often take years to resolve, which winds up costing the company far more than simply keeping a sub-standard employee.

The inflexibility and guillotine-like threat to employers within Italy's 2,700 pages of labor laws led to the concept of the short-term labor contracts as a token of relief for employers from labor laws intended to protect workers. In its 2014- 2015 assessment, the World Economic Forum ranked Italy 141 out of 144 for the efficiency of its labor market, quite an achievement for a "developed" country. As these examples show, the less than invisible hand of government intervention has intended and unintended consequences.

Matteo Renzi became Prime Minister of Italy on February 22, 2014. At just 39 years old, the former mayor of Florence offered young people in Italy hope for changes that might improve their economic future by overhauling Italy's rigid labor market. Renzi has said,

"Without shaking up the Italian labor market, Italy is going nowhere."4

On October 9, Italy's senate passed the first parliamentary approval hurdle in forwarding Renzi's signature revamp of labor rules. If passed by the end of 2014, it would take effect mid-2015. It would be generous to describe Renzi's proposal as modest in scope. If enacted, the new rules would apply to about a quarter of Italy's 25 million workers and would not cover public sector workers. They also would not apply to existing workers but only new hires, so it would take years before the majority of workers are covered. Under the rules, when workers are hired under permanent contracts, job protections and entitlement to severance would be phased in gradually as the employee gains seniority.

Renzi's proposal does not address Italy's labor taxes, which are among the highest in Europe, the scarcity of job-training programs for those laid off and costly collective wage bargaining. Any labor market reform is better than nothing, but these measures appear to lack the audacity many young Italian voters were hoping for when they cast their vote for Renzi last February.

The IMF has raised the likelihood of a eurozone recession to 38% as Germany may not be as immune as once thought to the economic malaise that seems to be overtaking the eurozone. German exports fell 5.8% from July to August, the largest monthly decline since the 2009 recession. In July, exports jumped more than 4% from June, so part of the decline in August may be attributed to unevenness in order flow. Industrial production plunged 4% in August, the worst drop in nearly six years. Recent surveys of business sentiment have fallen to multi-year lows, as measured by the ZEW Indicator of Economic Sentiment. The dreary reports led four of Germany's most respected economic institutes to cut GDP growth estimates made last April from 1.9% to 1.3% for 2014 and from 2.0% to 1.2% for 2016.

The risk of another recession has revived calls for eurozone governments and the ECB to do more to stimulate growth. As France's finance minister Michel Sapin told reporters on October 13,

"My fear, which is shared by many, is that...we risk entering a period a la Japan that would do a lot of damage to our economies and...our budgets."5

Sapin is suggesting that France's budget problems could be worse in the future unless France spends more now. Obviously, the French finance minister is rationalizing why France does not want to cut government spending in its 2015 budget. On October 7 during an IMF meeting, Germany's finance minister Wolfgang Schäuble declared,

"The worst thing we could do would be to repeat yesterday's mistakes" of relying on public debt to lift growth.6

He has a point. In 2003, the eurozone's debt-to-GDP ratio was less than 350%, but had jumped to 460% as of March 31, 2014. In 2006, eurozone government spending as a percentage of GDP was 46.7%, but by the end of 2013 it had increased to 49.8%.


Mario Draghi has warned that monetary policy alone cannot do all of the heavy lifting. The ECB has lowered rates to 0.15%, enacted negative rates for bank reserves held at the ECB and launched a $1.3 trillion long-term refinancing operation that it hopes will encourage bank lending to businesses and consumers. Banks can borrow from the ECB at 0.15% for up to four years if the funds are lent to businesses and consumers and two years if they are not.

The first installment of loans was made available in September but turned out a disappointment as 255 banks only borrowed $107 billion versus the $135 billion the ECB expected. The IMF said during its October 8 meeting that 70% of the large banks it monitored were not in a position to support an economic recovery via lending. Year-over-year bank lending in the eurozone was down 1.5% through August (the latest data available). As we have noted many times, the lack of bank lending in the eurozone is critical since 80% of credit creation is done by banks in Europe versus 35% by banks in the U.S.

The weakness of European bank balance sheets is another structural problem limiting economic growth. The results of the ECB's asset quality review will be announced on October 26 (after this is being written) and provide a measure of the progress banks have made and how much more needs to be done. A recent ECB report evaluating the overall health of the eurozone banking system found that the number of banks had declined from 6,690 in 2008 to 5,946 in 2013. The total value of outstanding loans and other bank assets fell from $42.3 trillion in 2008 to $33.8 trillion in 2013, a decline of 20%. After the financial crisis, the number of problem loans began a steady rise and, despite signs of stabilization in some countries, the ECB has determined that

"The turning point does not yet appear to have been reached."7

The ECB's report made it clear that lenders still faced severe problems, especially in Italy and Greece.

With the eurozone economy bordering on another recession, pressure on the ECB to do more is mounting even though further steps are not likely to have a meaningful impact on growth. The ECB's long-term refinancing operation will attempt to push $1.3 trillion into the eurozone banking system, but bank balance sheets are not healthy enough to support a significant increase in bank lending. Liquidity is not the problem, so increasing it, no matter how low the interest rate, is not the solution. Even if German opposition to quantitative easing subsides, how much could it accomplish when 10-year sovereign bond yields are already extraordinarily low? Markets rallied strongly on October 21 when it was reported that the ECB was considering buying corporate bonds while European corporate bonds have experienced a meaningful decline in yields since the end of 2013. If ECB purchases push corporate yields down another 20 basis points, will that really matter to corporate spending and economic growth in the eurozone? We think there is a risk that markets are pricing in more economic improvement than is likely from additional ECB actions.

Most of the structural problems facing the eurozone have been building for decades. Labor market rules intended to protect workers have evolved into a straitjacket that has caused many countries to flounder. At an economic conference in Riga, Latvia, Jens Weidmann, president of the German Bundesbank and a member of the ECB's governing council, said

"The biggest bottleneck for growth in the euro area...is the structural barriers that impede competition, innovation and productivity."8

In our view, the biggest structural problem (and the elephant in the room no European leader ever acknowledges) is the level of government spending. In 2013, eurozone government spending amounted to 49.8% of GDP, up from an already nosebleed level of 46.7% in 2006.

When government spending is virtually half of GDP, the most significant impediment to increased competition, innovation and productivity is smothering government intervention, not private industry. Sadly, expecting politicians who had a hand in erecting the edifice of stagnation that is the eurozone economy to acknowledge the damage done and dismantle it is a naïve line of thought. More likely, any substantive changes will be the result of an intervention that brings the eurozone economy to its knees. Most change occurs incrementally over time at first, and then suddenly.

Can’t Make This Stuff Up

With European countries like France and Italy struggling to grow their economies, government statisticians are working overtime to find ways to increase GDP. All EU countries are now required to take a complete accounting of underground businesses like drugs and the sex trade.

By getting a more complete assessment of economic activity, including the "wages of sin," Eurostat says it will be better able to calculate GDP for each country. Eurostat estimates GDP could increase by 2% in Italy, Ireland, Portugal and Spain, and lift Germany and France's GDP by 3%. By increasing a country's GDP, its debt-to-GDP ratio decreases slightly, which especially benefits the data in those countries with high ratios.

Although a country's debt-to-GDP ratios would be lower using the new system, the actual debt would not be any easier to service since governments can't collect taxes from underground activity like drugs and the sex trade. After incorporating this new data, Eurostat now estimates that eurozone GDP rose 0.3% in the first quarter, up from its original estimate of 0.2%, and second quarter GDP advanced 0.1% rather than showing no growth. Since now using the new method the eurozone economy actually grew by 0.1% in the second quarter, an "official" recession will be avoided if growth in the third quarter is negative. Well, isn't that a relief.

United States

At the end of 2013, federal, state and local spending represented 36.5% of U.S. GDP. The relative vibrancy of the U.S. economy compared to Europe can partially be explained by the smaller role of government. This healthy gap narrows, however, when the cost of government regulation is considered. Regulation is a form of indirect taxation since companies and individuals assume the cost of compliance. To be sure, there are significant benefits to society due to regulations. The air we breathe, the food we eat and the water we drink are all far safer because of regulations. Corporations would not have voluntarily spent the money needed to make the environment safer than it was 50 years ago or repair products as the result of a recall.

There are costs to regulation, however, and often they are conveniently overlooked and undisclosed to the voting public. The free market Competitive Enterprise Institute (CEI) compiled reports of compliance costs from various government agencies and found that the regulation tax now tops $1.86 trillion- more than 10% of GDP. The cost of regulation is likely to increase as more aspects of the Affordable Care Act take effect in 2015 and 2016. Even if one discounts the CEI's estimate, direct and indirect government spending in the U.S. is taking up an increasingly large portion of GDP.

U.S. Economy

Sluggish income growth of about 2% in the U.S. during the last three years has led us to expect U.S. growth to remain below expectations and well below the average of post-World War II recoveries. This view has proved prescient and recent data showing that incomes only grew by 2% through September over the past year suggest GDP growth is not likely to hold near 3.5% as many economists have forecast. We live in a global economy and weak growth in Europe, Japan, China and emerging economies in general will act as a headwind.

We expect dollar strength to continue in coming months, which will have a modest dampening effect on exports. The decline in energy prices is a plus since it puts more money into consumer pockets and lowers business costs. This should allow consumer spending to hold up well during the holiday season. Energy companies represent 27% of capital investment, so lower energy prices may result in less business investment from this important sector.

If oil prices decline to $70 dollars a barrel and stay at that level, the growth in fracking may be curtailed and expose companies that have borrowed heavily in recent years to expand drilling and exploration. We expect growth to slow gradually in coming quarters and fall below 3.0%.


In last month's MSR we laid out the technical reasons why we thought the market was vulnerable to a correction of 7%. At a minimum we thought the S&P 500 Index would decline to 1,905 and mentioned that the 50% retracement of the 281.34 rally from the February 5 low would bring the S&P 500 down to 1,878. We also noted that

"Lower prices are certainly possible given the levels of technical weakness; it will just depend on whether reasons to sell are strong enough to measurably increase selling pressure."

As it turned out, a myriad of reasons to sell appeared, including a break of the S&P 500's 200-day moving average, a downgrade of the European economy by the IMF and cases of Ebola in Dallas after the nation had been assured everything was under control. On Wednesday, October 15, when Ebola fears reached their peak, the S&P 500 dropped to an intraday low of 1,820 before rallying and closing at 1,862. The 7% correction we expected was achieved almost exactly on a closing basis.

At the low on October 15, the stock market was extraordinarily stretched to the downside but has snapped back like a rubber band with a vengeance after a Fed governor suggested the Fed might consider QE4 and the German finance minister said the ECB might buy eurozone corporate bonds. Such is the power of even hints of more monetary accommodation. The question is whether the recent decline is more evidence of a further weakening in the technical underpinnings of the bull market or a springboard for the next leg up in the bull market. As this is being written on October 23, we can't answer that question with the same degree of conviction we had last month that the market was poised for a correction.

Prior to the correction, we thought there was a decent chance that the S&P 500 would advance again and potentially make a new high. The strength of the rebound would seem to increase the probability of that outcome. Should the S&P 500 make a new high, we will focus on whether the New York Stock Exchange (NYSE) advance/decline line is also making a new high and if there are a healthy number of stocks making a new 52-week high (i.e., close to 300 stocks). Our proprietary Major Trend Indicator did a nice job of warning that the market was on the cusp of the largest correction in three years. We would want to see it recover and ideally surpass its early September high, although it is currently well below that level.

Our bias leans toward a new high that is followed by a more severe correction in the first half of 2015 since Europe remains a mess and global growth is likely to slow more in coming months. The outcome will probably hinge on whether the market pays more attention to economic reality or the prospect of more monetary largesse. If the market proves stronger than we expect, we'll change our tune.


As discussed previously, the large overhang of U.S. debt, as measured by the debt-to-GDP ratio, is likely to postpone when the Fed raises rates and limit the extent of rate increases, potentially through 2016. The low level of short-term rates would then continue to act as an anchor on longer-term Treasury yields. The yield on the 10-year Treasury bond has made lower lows during 2014, which are connected by the declining trend line. On October 14, the yield closed at 2.206%, just beneath the trend line. On the morning of October 15, the yield plunged to an intraday low of 1.868% before closing at 2.090%.

For a relatively staid market like Treasury bonds, this is unprecedented volatility. Our guess is that a number of hedge funds that had been short 10-year Treasury bonds were forced to cover their shorts to meet a margin call that resulted in a brief period of panic buying. Once those short positions were covered, buying dried up and the yield popped back into the channel it has traded in for most of 2014. We expect the 10-year Treasury yield to trade between 2.20% and 2.66% for the balance of 2014. As this is being written on October 23, the yield has climbed to about 2.30% and closed the gap it left from the October 9 low of 2.289%.


As we expected, gold has rallied more than $70 during the pullback in the dollar. The rally has been weaker than we anticipated, however, and may have stalled out when gold failed to exceed $1,260. This suggests gold may not be able to reach the $1,300-$1,325 level (wave E in the Gold Spot Rate chart) we thought possible last month. Since we expect gold to eventually decline below $1,180, we would raise the stop from $1,192, as noted in the October MSR, to $1,210 on the December gold contract, as this is being written on October 23. This represents a 61.8% retracement of the $72.30 rally from the recent low. Conversely, selling above $1,270 seems appropriate given the relatively weak rally to date.

  1. Horobin, William, Wall Street Journal, "France 2015 Budget to Curb Spending," October 1, 2014.
  2. Alderman, Liz, New York Times, "France Produces a 'No Austerity' Budget, Defying E.U. Rules," October 1, 2014.
  3. Luis Garicano, Claire Lelarge and John Van Reenen, "Firm Size Distortions and the Productivity Distribution: Evidence from France," March 1, 2012.
  4. Zampano, Giada, Wall Street Journal, "Renzi Seeks to Break Italy's Hiring Logjam With Revamp of Labor Rules," October 9, 2014.
  5. Eurozone finance chiefs meeting in Luxembourg, October 13, 2014.
  6. Walker, Marcus and Troianovski, Anton, Wall Street Journal, "European Policy Makers At Odds As Eurozone'sEconomic Woes Deepen," October 14, 2014.
  7. Ewing, Jack, New York Times, "Central Bank Details Somber State of Europe's Banking System," October 13, 2014.
  8. Barley, Richard, Wall Street Journal, "The ECB's Ever-Expanding Shopping List," October 21, 2014.
  9. Dr Jens Weidmann, Reforms for Recovery and Resilience, Bank of Latvia Economic Conference 2014, October 17, 2014..

Definition of Terms

10-year Treasury is a debt obligation issued by the U.S. Treasury that has a term of more than one year, but not more than 10 years.

An advance-decline line is a technical indicator that plots changes in the value of the advance-decline index over a certain time period.

Basis point (bps) is a unit of measure that is equal to 1/100th of 1% and used to denote a change in the value or rate of a financial instrument.

Debt-to-GDP ratio is a measure of a country's federal debt in relation to its gross domestic product (GDP). By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt.

European Commission (EC) is the EU's executive body and represents the interests of Europe as a whole (as opposed to the interests of individual countries).

Federal funds rate is the interest rate at which a depository institution lends immediately available funds to another depository institution overnight.

G7 (also known as the G-7 or Group of Seven) is the meeting of the finance ministers from the seven industrialized nations (Canada, France, Germany, Italy, Japan, United Kingdom and United States of America) of the world.The finance ministers of these countries meet several times a year to discuss economic policies.

Gross domestic product (GDP) is the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. The GDP of a country is one of the ways of measuring the size of its economy.

The Major Trend Indicator is a proprietary technical tool that measures the strength or weakness of the market and helps identify bull and bear phases. During bull markets it helps indicate when the market may be vulnerable to a correction, and during bear markets it helps identify a potential rally.

Quantitative easing refers to a form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero.

S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.

Texas ratio is a measure of a bank's credit troubles and is used to identify potential problems.

Volatility is a statistical measure of the dispersion of returns for a given security or market index.

One cannot invest directly in an index.

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