interest rates in the USA v other advanced economies

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Submitted by gzz on December 17, 2018 - 12:09pm

Ten Year Bond Rates

USA 2.86
Canada 2.06
Germany 0.25
UK 1.26
France 0.73
Spain 1.40
Holland 0.41
Switzerland -0.24
Japan 0.02
Australia 2.44
New Zealand 2.45
Hong Kong 2.03
South Korea 2.00

In other words, we have the highest of any major advanced economy!

While this certainly could continue to be the case, at some point I think people collecting 0.25, 1%, etc a year in other countries will decide instead to move their cash here and buy US Bonds. That will lead to... lower mortgage rates and higher RE prices!

They really should have bought our bonds years ago. They could then have not only earned higher interest rates, but could have taken advantage of the dollar's recent appreciation.

Submitted by FlyerInHi on December 17, 2018 - 1:48pm.

I believe the higher rates in USA is because of our ballooning debt.
I mean, if we can’t cut deficit spending during good times, how will wil do so during the downturns.

I believe California will be affected by the deleveraging campaign and currency comtrols in China.

Submitted by pencilneck on December 17, 2018 - 4:10pm.

I ponder this once in a while. Or a variation of it.

Traditional monetary theory holds that lower interest rates juice the economy by making borrowing easier. Higher interest rates subdue borrowing and have a dampening effect on the economy.

However, this only works perfectly in closed systems. In global systems some investors can game this by borrowing low in one semi-closed economy and invest in a higher rate area (so-called "carry trades"). If enough money flows to the areas with higher rates, traditional monetary theory will be turned on its head.

Submitted by evolusd on December 18, 2018 - 12:05pm.

My clients ask about my rate expectations often. I've always pointed to other developed countries as an anchor for our rates. However, if we don't get our deficit under control, the spread could widen due to perceived increased risk.

Submitted by FlyerInHi on December 18, 2018 - 1:05pm.

The Fed is expected to raise rates yet again.

Submitted by The-Shoveler on December 18, 2018 - 2:46pm.

If the Fed is truly data driven they won't IMO.

More and more analyst are saying they should not.

As long as the debt is in your own currency the National debt is not as big a deal as lot of people make it out to be IMO.

Submitted by spdrun on December 18, 2018 - 3:25pm.

I say go for it. Housing bubble needs to pop. Bonus points if the privacy-robbing tech industry falls alongside it.

A recession can be a good thing. At the end of the day, recessions are the only times when carbon emissions have gone down and income inequality has fallen.

If a recession could swing the US far to the left nationally (public health insurance, more public transport spending, more restrictions on employers' working hours/time off) this would also be wonderful.

The US elected a chaos president -- the backlash against him should be spectacular if the economy dumps.

Submitted by henrysd on December 18, 2018 - 9:38pm.

Market priced in 70% chance of interest rate hike tomorrow even with many call for no-hike, so Fed might have to preserve it credibility with go-ahead hike tomorrow. 1 and 3 month treasury bills already baked in the hike into rates. I think they will issue a reduced guidance for 2019 and 2020. Current guidance is 3 hikes in 2019 and 1 in 2020 and new guidance is likely to go down to 1-2 in 2019. I think there is a chance the recession can be pushed back further by a few more years if one hike tomorrow then pause for 2 years without changing.

My take is those people who expect a housing market crash will probably be disappointed for the next a few years. Not all recessions cause housing downturn. A new recession will prompt Fed to reduce rate to 0 again or even to negative territory and a new round of QE will push 10 year treasury rate down below 1%.

Submitted by FlyerInHi on December 19, 2018 - 1:15am.

Not expecting a Great Recession housing crash but a cyclical housing downturn.

I was watching Ian Bremmer and he said that if China convincingly wins the AI race, it will be the end of western liberal democracy. A black swan event in the tech sector would crash housing in California. Something to be mindful of in the next couple decades.

Submitted by gzz on December 19, 2018 - 12:53pm.

Flyer, why do you think a downturn is more likely than another bubble?

We still have a growing population and economy with extremely low new construction. Tech is the world's most important industry, will continue to gobble up a larger share of world GDP, and its immovable center is the bay area.

The amount of wealth there is so huge it is crazy prices aren't even higher. So many people worth $50+ million with only 5% of their net worth or less in real estate, when the American norm and tradition is more like 20 to 50%.

Even at their current high prices, the Bay Area isn't that expensive compared to Manhattan, London, Dubai, Hong Kong, etc. And incomes are higher when you consider the value of stock options.

Related point: San Diego prices have gone up less on a percentage basis not just than SF/LA, but also less than cities like Denver, Austin, Seattle, Portland, Miami, and DC.

While we still aren't cheap, there is no longer much of a premium in San Diego compared to other tier 2 cities.

Submitted by gzz on December 19, 2018 - 12:57pm.

Fed raises short term rates again.... long term rates don't change, still around 10-month lows.

We are talking about recession risk. Do the NY/DC elites on the Fed hate Trump so much they'll try to force a recession? I am not that cynical, but can't rule it out entirely.

Submitted by The-Shoveler on December 19, 2018 - 1:00pm.

Well that should just about kill it (the expansion).
IMO anyway.

Submitted by FlyerInHi on December 19, 2018 - 1:40pm.

gzz wrote:
Flyer, why do you think a downturn is more likely than another bubble?

Yes, I stick to my recession 2020 prediction. Late 2020-2021. Central banks are rolling back easy money. Slower growth in China is not because of the trade war (trade has continued to grow ahead of the holidays) but because of monetary policy. The trade war will begin to affect growth here and China if no deal is made in 90 days

Submitted by The-Shoveler on December 19, 2018 - 4:09pm.

"While this certainly could continue to be the case, at some point I think people collecting 0.25, 1%, etc a year in other countries will decide instead to move their cash here and buy US Bonds. That will lead to... lower mortgage rates"

Looks like gzz was right (well at least for the moment).

Long live King dollar!! LOL

Oh well should keep inflation down.

Submitted by FlyerInHi on December 19, 2018 - 11:13pm.

Yes, the strong dollar and its status as a reserve currency is a public good to the world.
But that means we will have large trade deficits well into the future.

That’s why China has Belt and Road. They’d rather park their savings in infrastructure project that gain them influence and new markets than US bonds. The return on Belt and Road is not great but it helps absorb excess capacity and improves the world.

Since the 1990s the Mexican peso lost 1/2 its value to the USD. With USMCA, Mexico will be integrated more into the US economy. That’s why you see lots of Chinese and Korean investments into Mexico.

Submitted by gzz on December 20, 2018 - 2:41pm.

Flyer, I lived in Mexico for 6 months doing study abroad when the peso was at almost exactly 10. Made doing conversions quite easy. Last time I was there it was a difficult 17.7. I just did 15 or 20 and rounded, but it wasn't very precise.

Shoveler, it is nice to be called right!

I am feeling cocky now as I gradually sold off all my stocks over 2017-2018 and in October purchased a whole lot of taxable munis near their 52-week low, which have now gone up about 8% while stocks have dropped 15%.

Nobody talks much about taxable munis, probably because the market for them is small and they aren't great for rich people in the highest brackets. But if you are interested, check for GBAB and BBN.

Tax-free muni funds often held Puerto Rico debt and lost serious money on them. The taxable funds didn't, probably because PR didn't issue taxable munis, and meanwhile have been paying out about 7% a year since they were created with no default losses.

Main difference between the two is BBN is a tad more leveraged and thus rate sensitive so will go up and down with rates more than GBAB.

Submitted by gzz on December 31, 2018 - 11:37am.

Rates fall again today below 2.7% for the 10 year. Lowest since January 2018. Market now predicts no fed raises in 2019 and one rate cut in 2020.

We are now 0.4 to 0.55% below the highest rates from May and Oct/early Nov. Time to think about a refi for anyone who purchased then.

Submitted by spdrun on December 31, 2018 - 1:22pm.

Year-end last-minute portfolio balancing... let's see what happens when the reality of the government shutdown, bear market, and flat yield curve start hitting next year. This should be amusing to watch -- Happy New Year!

All it takes to transform a "good" economy to a "bad" one is a bit of confidence loss, and that's coming...

Submitted by gzz on January 1, 2019 - 2:56pm.

Not a bear market yet by the standard 20% decline measure. We got really close though.

I see stocks and RE both performing in the mid single digits in 2019.

For US stocks, weak profit growth is the negative, low valuations and lack of better alternative investments is the positive.

The Trump tax cut was a large, single, permanent boost to corporate profits. Valuations just don't reflect that giant boost to profits anymore.

I was a bystander to both the mid-year bull market and subsequent sharp fall as I was 0% in stocks. So this isn't my motivated thinking.

Regarding consumer confidence, Americans really get a mental boost from low gas prices. Our Cal gas tax obscures this. But in much of the USA, gas is in the $1.70-$2.00 range.

Submitted by spdrun on January 1, 2019 - 3:31pm.

S&P and NASDAQ both cracked 20% down last week. NASDAQ was down closer to 24% in fact. Let those bears ROOOOAAAAAAARRRR BABY!

Submitted by FlyerInHi on January 3, 2019 - 7:36pm.

gzz wrote:
Flyer, why do you think a downturn is more likely than another bubble?

gzz... I’m interested in your thinking of another housing bubble. What do you think of secondary markets like Phoenix?

We could have a recession without much RE decreases, especially in areas that have not recovered to peak yet. You seem convinced real estate will just power through any downturn.

The thing about real estate is that it’s all about location and it’s not easy to find good locations. Out of chance, I identified a good location for some apartments and waiting may not give me a better location.

Submitted by The-Shoveler on January 4, 2019 - 9:41am.

The last recession was an exception IMO,

Mostly recessions do not affect home prices much except in hyper local situations directly affected by the downturn.

Sometimes it even causes housing to go up because interest rates generally are lowered once the downturn is detected and people are looking for anything to put their money into that is not a stock LOL.

Submitted by FlyerInHi on January 4, 2019 - 1:07pm.

I identified a property that is already down 7% from last year compared to exact same comp. I might be able to negotiate down 10%.
I’m ok if the next recession drops it another 10%. But I will mad at myself if I lose 30%.
It’s an apartment building and I will remodel the units one at a time. And location is important.

Rents are high now in the top 10 cities. I’m thinking rents will continue to be high as urbanization and urban/rural bifurcation continue while construction doesn’t keep up with population growth.

But who knows? What if the next financial crisis is worse than the last one? Combine that with hard Brexit and the collapse of China. China, with the Fed, but more than the Fed, saved the world by increasing money supply.

Submitted by gzz on May 30, 2019 - 6:24pm.

Update: new figures are listed 2nd.

USA 2.86 2.18
Canada 2.06 1.55
Germany 0.25 -0.18
UK 1.26 0.90
France 0.73 0.23
Spain 1.40 0.76
Holland 0.41 0.01
Switzerland -0.24 -0.49
Japan 0.02 -0.09
Australia 2.44 1.48
New Zealand 2.45 1.70
Hong Kong 2.03 1.37
South Korea 2.00 1.74

Seems to be that loaning money to high income California residents with 30% or more down payments at 3% is a great deal. Let’s go 3% 30 year mortgages!

The Swiss yield curve by the way bottoms out at the 2 to 4 year range, where interest rates are below -0.8%.

The Swiss 50-year rate is 0.153%, meaning whoever gets your bond when you’re dead in 2069 will have earned less than 8% in compounded interest over those 50 years.

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