Why I Was So WRONG About Interest Rates Rising – Part CCXXIX

If you Google the word “Wrong,” the below picture pops up in the results:

OK… that is a real photo taken at a holiday party (in a photo booth – thank you Danny Winkler) when I really did think rates were going to shoot up.

BUT, I am pretty sure I was not thinking about rates when that photo was taken. 😊

My message stands nonetheless – I was very wrong, and here’s why.

Why I Thought Rates Would Shoot Up

I was convinced rates were going to shoot up because I was repeating what I was reading everywhere by market observers who know much more than I do.

We were seeing some signs of inflation, unemployment numbers were at record lows, GDP numbers were strong; retail and manufacturing numbers were strong, and the stock market was on fire.

All of these indicators normally push rates up, as they make it much more likely that the Fed will push rates up to keep the economy from overheating.

Why Rates Fell

Even though rates are up a bit from Monday’s opening, they remain about 1/8 to 1/4 percent lower than where they were for most of December.

Here are some of the reasons why rates are so low once again:

1. The Iran Skirmish. Geopolitical strife almost always pushes rates down, as I mention often. And Iran was no exception.
2. Weak Trade Deals. The U.S. did sign trade deals with China and other countries, but they lacked substance and did not do much to foster actual free trade (something the markets perceive as necessary for strong growth).
3. Weak world economy. Slower growth in China, Brexit, a sluggish European economy, a moribund Japanese economy, trade restrictions and many other issues continue to worry investors. This concern often offsets the good news surfacing in the U.S.
4. Quantitative Easing/The Fed Is Buying T-Bills. This is a “biggie” and something I was not considering in December. The Fed is buying short term securities at the rate of about $1 billion per month, primarily in an effort to boost bank reserves. This extra liquidity in the market has the added result of both pushing up the stock market and keeping rates low – even though that is a bit paradoxical.
5. Coronavirus. This is another “biggie.” Investors know how much the SARS epidemic of the early 2000s adversely impacted economic growth. 2011’s Fukushima nuclear disaster in Japan had a similar adverse effect. The reason is because China and Japan are so integral to the world’s supply chains. B/c we trade three times more with China than we did during the SARS days, the Coronavirus has the potential to be much more damaging.
6. Tame inflation. Despite constant predictions of a return of inflation, it remains surprisingly tame – and nobody really understands why. Rest assured though that if strong inflation signals do return, rates will shoot up in response.

Uncertainty Reigns Supreme

Here is the big takeaway – nobody really knows what the heck is going to happen. Iran and the Coronavirus were completely unexpected; the Fed remains a wildcard; our politics remain a very wild wildcard; and nobody seems to understand inflation.

Rates could just as easily shoot up for unexpected reasons too, like we saw in 2014 and 2018.

So, here’s to making hay while the sun shines – Part CCXXIX 😊