Over the past few weeks US interest rates have risen dramatically. ( click here from FB) For example 10 year US treasuries have gone from a low of about 2.30% t0 3.32 %. That is a 30% rise!!! This is a problem for a country that is addicted to very low cost money. This has occurred despite hundreds of billions of purchases from the FED ( I cannot imagine how much money they lost). The FED’s famous QE program met with much scrutiny, especially from free market players who see this as massively disruptive. The big question is what next? Further what are the reasons for the rise? Is it the economy is improving or that investors are demanding higher rates from the US because of concerns about lack of fiscal discipline? I have more questions then answers but when I step back what remains somewhat shocking to me is despite the rise, how low interest rates are. Despite this, despite it, we are not experiencing any real growth. Yes savings rates have gone up dramatically but we are still a country that is way to indebted. ( household and government) The corporate sector fairs better but investment on their part does not make sense unless the demand is there. How can there be demand when the consumer remains over-spent? I continue to think it will be a slow road to recovery for the US with the potential for some major bumps along the way.
“It [the Federal Reserve] wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive,” (click here from FB) said Grantham, who is chief investment strategist of Grantham Mayo Van Otterloo, a Boston-based asset management firm, and a respected voice in the financial world. “So, we’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is, ‘don’t play the game and hold money in cash.'” ( From CNBC)
I agree with the above, but would point out that the primary goal of ‘manipulating’ interest rates was to provide support for the housing market, as well as making money more affordable to support both business investment and private spending. The rise in equity valuations since late summer has been astonishing, and at these entry points, I am on the sidelines as well. Our favorite asset continues to be Gold. Jim Cramer was jumping up and down about it yesterday and is in words ” talk to me about price when it is 5% of portfolios.”
Have a great day.
Sorry for the lack of blog entries this past week. I spent Monday and Tuesday at a board meeting for the Women’s Funding Network and spent the rest of the week trying to catch up! I really don’t have much to say about the election results, except that it is going to be tough going in Washington. There are so many problems that need tough, thoughtful analysis and decision making and I doubt much will get done over the next few years. More in my realm of expertise has been the action by the FED to expand their balance sheet by another trillion. The Wall Street Journal has been doing some excellent writing on this including Wednesday’s oped “High Rollers at the Fed.” They say “this is a monetary mistake” which will have fiscal risks. The Fed’s balance sheet is more than $2.3 trillion, including $1.1 trillion of mortgage backed securities. When you add in what is held by Fannie and Freddie is is mind blowing. The good news ( ha ha ) is of course that the FED has earned $76 billion by driving down interest rates, but the bad news is that there is no exit strategy. If mortgage rates were to rise 100 bps from 4% to 5% it is estimated they would love $162 billion. Honestly, I cannot even wrap my mind around this. It is unprecedented and I think extremely dangerous for our economy. For a detailed analysis Bill Gross’ recent commentary is a MUST READ.