This was an incredibly volatile week. The Stock Market was like a rollercoaster, with deep dives and massive surges which whipsawed investors around, but it ended the week at roughly the same place it ended last week. Trade, earnings, economic slowing and interest rates are the biggest themes right now. There’s tremendous uncertainty and things seem to be worsening. The US is still in much better shape than the rest of the world. But its immunity is being challenged. Under these circumstances, it’s pretty remarkable how well the Stock Market is holding up. The Bond Market continues to tell a different story, one of slowing growth and deflationary pressures. Rates are negative overseas with increasing size. The spat between the US and China is showing no signs of relief. The British economy contracted for the first time since late 2012. There’s so much going on for what’s usually a sleepy stage of Summer.
Interest rates are the price of money. It’s the cost of borrowing. Money is cheap, and in some cases the cheapest it has ever been. The 10-Year Treasury yield hit 1.6%, the lowest level since the 2016 Presidential election. The ultimate low was 1.3%, reached almost exactly three years ago. There is a growing trend overseas, which is becoming more and more concerning. Interest rates have gone negative. The French 10-Year Bond yield went negative for the first time ever this Summer. In Germany, the entire yield curve went negative last week. That also had never happened before. There are now 11 countries with a negative yield on its 10-Year government bonds. There is now over $13 Trillion in global debt that is paying negative interest. Compared to the rest of the world, interest rates in America are high. Foreign investors have sought the safety and yield of Dollars and Dollar-denominated assets. Demand for American assets is still strong.
Falling rates have been a big positive for housing. 30-Year fixed mortgages are back below 4% in many cases. They were 5% last Fall. Historically, a 1% decline in mortgage rates has led to a 7% increase in home sales. The problem today is home prices are already very high and the economic slowdown suggests a recession could be on the horizon. Buyers have not been racing to the housing market of late. The lower rates have largely contributed to an increase in refinancing of loans, not new purchases. Many Americans have been priced out of the housing market, particularly the younger generation.
Central banks have been cutting rates and taking them negative overseas, in an attempt to stimulate the slowing economies. The European Central Bank started the process by taking rates negative in 2014. Japan followed suit a couple of years later. The big risk right now is that it fails to stem the tide of the slowdown but creates an asset bubble. In case you were wondering, negative interest rates overseas have infiltrated the mortgage space. Not in the US though, at least not yet… A bank in Denmark is offering mortgages at a negative interest rate. That means it is effectively paying its customers to borrow money to buy a house. Our concern is that interest rates in America could push the flat line and go negative. The Fed lowered rates in July for the first time in a decade. The Market is signaling the Fed has more rate cuts ahead. Central Banks are running out of ammunition to combat another crisis. This is just not normal. That said, we keep saying, these are clearly not normal times.
You’ve probably heard the phrase, “May you live in interesting times.” It is believed to be an English translation to a Chinese curse. Oh the irony in so many ways. Bobby Kennedy quoted it in a speech in 1966. He went on to say, “Like it or not, we live in interesting times. They are times of danger and uncertainty; but they are also the most creative of any time in the history of mankind.” That seems to fit 2019 as well.
We hope you have a nice, and perhaps interesting, weekend. We’ll be back, dark and early on Monday.
Mike
