Lower and Lower Rates

Posted: Aug 27, 2014 12:01 AM

Structural deflation is alive and well, yet, hyperinflation looms on the horizon. The printing presses of the world continue to go into overdrive yet not a soo or a farthing gets to where it was intended or, maybe, it does and that’s the problem. The velocity of money continues to confound the experts yet it equates to the 1930’s. Currency devaluation continues to be the Central Bank’s main strategy yet it still is short of its goal. The preceding was all economic speak.

On April 1st Bloomberg polled 67 economists (of course, not yours truly) and all concurred that with the ultimate demise of Quantitative Easing interest rates could only go in one direction - up. WRONG!

As the world continues to come to a grinding halt, arguably, the world’s most observed economies, next to the U.S, Japan and Germany, find their 10-year paper below 1% and moving lower.

If you were a portfolio manager for pensions, funds, or private money and were required to maintain sovereign debt, the choice, on a pure numbers basis, would be simple U.S. 2.4%, Germany .93%, Japan .51%. U.S. wins.

Arguments will be given for the demise of the dollar as the reserve currency. It will be noted the arrangements between Russia and others to eliminate Petro Dollars. Trade agreements between China and Central America, in their own currencies, are another example of a reason to discard the dollar and the 10-year treasury. However, 2.4% vs. .93% vs .51%!

The difference in yields is the answer to the question of the day: Why does China continue to be a net buyer and at times at record levels?

As long as the worldwide slow down continues and according to Draghi, Abe` and others there seems to be no end in sight, the spread between German, Japanese and U.S. paper will continue.

No amount of economic speak can overcome the simple difference between 2.4%, .93%, .51%.

What also continues to attract the world’s money is the potential capital gain of the 10-year. The continued purchase of our debt sends prices higher and yield’s lower.

Most advisors get mired in the lower rate of 2.4% and see only loss of principal ahead. However, when comparing apples to apples 2.4 to .93 to .51 it is easily understandable for most, including the layman, why the world continues to be a buyer. It is, however, difficult for mainstream media, Keynesians and those misguided 67 to grasp.

And that’s no economic speak. It’s just plain common sense.