All the talk last year about how mortgage rates were going up because the Federal Reserve was going to stop buying Treasury bonds and mortgages was just that, talk. Since the Fed actually started to “taper” their bond purchases, mortgage rates have declined along with the rate on the ten-year Treasury.
There are two possible reasons for this decline in 2014:
- Bond investors are anticipating very slow economic growth in the United States.
- Bond investors are fleeing from troubled places like Russia, India, China, Brazil, Argentina and Venezuela.
After reviewing lots of charts of the various sectors of the U.S. economy, my conclusion is that the second reason is the most likely.
For years, Wall Street tried to convince us that “BRIC countries” were the only place to invest. Investor money flowed into Brazil, Russia, India and China. They were the darlings of Wall Street. Well, the bloom is off the rose for these countries for a variety of reasons.
The continuous failure of socialism is currently on display in Argentina and Venezuela.
Another theme promoted by Wall Street in the past six months is that Europe is “on the mend.” The thesis was that these countries would buy stuff from us and increase employment in America. I’m not sure where the thread of evidence was to support this notion, but I have heard it a lot this year.
All the while, “analysts” on business news shows were promoting this notion. Mario Draghi was talking a different story. He’s the head of the European Central Bank. He has been talking for months about how inflation is dangerously low in Europe and that if he had to he would deploy some heavy weapons.
Yesterday, he unloaded the financial equivalent of the “Little Boy” atomic bomb on the global marketplace. This bomb is a new policy of paying negative interest rates on excess bank reserves parked at the European Central Bank. In effect, this will punish banks for not having money deployed in loans or other investments.
In the United States, the Fed pays interest on excess reserves. There is a small, but positive, return for parking the money at the Fed.
Don’t let anybody kid you, the United States is still the beacon of economic growth in the current global environment. A lot of this growth has been artificially created by Fed monetary policy, and it remains to be seen how well our economy will perform when the Fed stimulus is removed over the next 18 months.
But for the time being in the global economy, America is still the prettiest pig at the trough. Money continues to flow into the American bond and commercial real estate markets. Prices are getting higher for both asset classes. Oh, I forgot to mention that stocks are at record highs as well.
Money will continue to pour into the United States until there is another alternative. The U.S. dollar is likely to continue strong, as China and Japan and now Europe are trying to devalue their currency to compete with America in the global marketplace.
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