Rate Fearmongers Wrong Yet Again
For anyone worried about the prospect of "rising interest rates"- and I hear it so often I'm ready to throw a rock at Bloomberg TV- the 10 year Treasury just dropped into the 2.20% range- about where it was in February 2009, when the world was coming to an end, and before Quantitative Easing began. I had listened to this drumbeat so often, even I had my eye on the exits for mortgage REITS and other rate sensitive products we own. So, what happened? As always, a combination of things- Europe is now in another slowdown, partially because it didn't follow our stimulus policies, which despite criticism, wound up working better than the others. Interest rates in Germany and the Netherlands are now effectively negative. So that sends more funds here seeking higher yields, and of course, demand for our debt brings prices up and yields down.
Second, the dollar is now very strong, and this has all sorts of good implications. Since global oil prices are dollar denominated, oil prices are shrinking. A 27 month low, finishing at $87.39 a barrel yesterday. You may see gasoline as low as $3.00 a gallon in the coming months. Geopolitically, it puts a big squeeze on Mr. Putin- Russia needs oil at $100 a bbl. to keep its economy afloat. At these prices, Russia is losing 1.3% of its entire GDP in currency shortfalls. It may be a hard winter in Moscow. King Dollar is stronger than any missile.
And other commodities? See what's happening to corn, soybeans and wheat. Pretty deflationary. You can go back to ordering that steak again.
A couple of years back, I warned about the poisoning of economics by political prejudices. Here is a letter signed by 30 "economists" back in 2010, warning of the perils of Fed policy and inflation:
With the exception of Jim Chanos, the other signatories are charlatans.
As my dear friend Dr. Goose, of Limericks Economiques says:
Those in the habit of glancin'
At yields on sovereign financin'
Must plainly agree
The Yanks seem to be
The engine of global expansion.