Slippery up and sticky down! Elevator up and escalator down!
Those are the cliches we often hear about interest rates, and we’ve seen them play out in spades in recent weeks.
Investors panic on every hot inflation or economic report that might prevent the Fed from lowering rates, or worse – cause the Fed to increase rates.
This is partially because investors don’t want to lose money by being wrongly positioned (like Silicon Valley Bank was when it held too many low-rate bonds and went belly up), but it is more because our entire economy is addicted to “low-rate-monetary-heroin” (to quote George Gammon).
So, rates are always prone to shoot up very quickly, but they tend to come down very slowly – as there is less at stake for investors when rates are trending downward.
Rates Up 3/4% In Two Weeks!
Only two weeks ago, my 5% down conforming rate quote at the bottom of my blog was at 5.99% – a full 3/4% LOWER than where rates are today.
Rates shot up yesterday in response to a hot inflation report that was heavily influenced by shelter costs – which are not particularly indicative of what is happening overall in the economy. And, as a result, many macro observers (like George Gammon) expect rates to trickle back down…slowly.
So yes, I do suspect rates will trickle back down (like they are today) because the economy still has major weaknesses that bond investors readily recognize and they are clearly positioning themselves for a slowdown. If bond investors did not think a slowdown was coming, the yield on the 10 Year Treasury would be far higher than today’s 4.3% range.
BUT – I also think rates will fall for another reason that I will explain at the bottom of this blog.
Who’s Panicking The Most In The Face Of High Rates?
There are tens of thousands of investors, business owners, and politicians across the world who are in panic mode right now because rates are not dropping. Here are some of the industries and people who are the most worried.
- Mortgage Industry. Huge mortgage banks are dropping like flies while many remaining firms hemorrhage cash! This is because there is still far too much capacity in the industry, as high rates shut off refi volume and greatly inhibit purchase volume. No other industry is getting hit this hard.
- Real Estate Industry. High rates not only keep sellers from listing their properties (because they don’t want to give up their low rates), but high rates also keep buyers on the sidelines. The recent rate bumps almost immediately shut off a huge % of purchase volume, for example.
- Title, Escrow, Appraisers, Home Inspectors, and Transaction Coordinators. Every profession that is linked to the mortgage and real estate industry is also currently getting killed by high rates.
- Consumers. Credit card debt levels and interest rates are at record highs at the same time – crushing consumers at the lower end of the economic scale.
- Regional Banks. Regional banks are panicking for many reasons, as they (1) sit on low-rate bonds that are worth far less than face value; (2) payout over 5% for deposits to keep depositors from fleeing; (3) service loans that are at rates lower than what they pay depositors; and (4) watch their commercial real estate collateral collapse in value.
- Commercial Real Estate. Commercial real estate investors are not just panicking because apartments are overbuilt, retail is dying in many areas, and office buildings are sitting empty. Commercial real estate investors are also panicking because they have short-term debt that must be refinanced – and they’re desperately hoping rates fall before they have to pull the trigger. With today’s higher rates, a huge number of commercial real estate projects will not come close to cash-flowing after covering their debt obligations.
- Growth Stocks/Tech. Growth stocks (largely tech companies) outside of the “The Magnificent 7” (Alphabet, Amazon, Apple, Meta, etc.) need lower rates for not just growth but for mere survival. This is partially why the stock market reacts so strongly to rate movements.
- Janet Yellen/U.S. Government. Our Treasury Secretary (Janet Yellen) desperately needs lower rates too in order to make our massive deficits more affordable and palatable to an increasingly concerned public.
- Joe Biden. Mr. Biden and his administration well understand how much our economy relies on low rates right now, so they too will want to see them come down before the election.
- Other countries. U.S. interest rates influence rates across the world for a variety of reasons. And other countries have debt burdens every bit as bad as the United States’ and worse in many cases. It is worse for other countries because some have even higher debt loads (like Japan), but also because they can’t “print money” to service their debt like the U.S. can with its “reserve currency” status. In addition, if other countries have dollar-denominated debt, high U.S. rates make the dollar more valuable – which makes servicing that debt even more difficult (this problem is much more serious than most casual observers can begin to understand).
World Addicted To Debt
This IMF chart shows how debt levels have exploded across the globe over the last 40+ years. Total public (government), household, and corporate debt was just over 100% of total world gross domestic product (GDP) in the early 1980s when Fed Chair Volcker raised the Fed Funds Rate to a whopping 20%! Today, however, total debt levels are approaching 300% of total GDP. Volcker’s rate increases were painful as hell, but they did not crush the world economy because debt levels were so much lower overall. In contrast, if Fed Chair Powell raised rates to even 10%, the world economy would implode.
So – this is why I think rates will have to fall. Our entire world economy is literally addicted to debt. We need much lower rates not just to make existing debt affordable, but to also spur the creation of even more debt (for many reasons that I won’t set out in this blog for brevity’s sake).
Without low rates and constantly increasing debt levels, the entire world will slide into a depression like we’ve never seen – and both Ms. Yellen and Mr. Powell understand this. And – I would not want to be them.
