The Federal Reserve’s zero interest rate policy (ZIRP) and quantitative easing (QE) helped to rebuild US household net worth. But it was rebuilt with asset bubbles that invariably burst.
And courtesy of Kevin Smith at Crescat Capitalm here is a chart of asset bubbles and household/corporate debt as percentage of GDP. The most vulnerable? Canada, China and Australia.
Canada, Australia and China represent 3 of the lowest 5 countries in terms of % of stocks with negative annua free cash flows.
Shrimp on the barbie, mate?
For the first time since the New York Federal Reserve began its monthly Survey of Consumer Expectations more than five years ago, respondents see parity between short-term home-price growth and overall inflation. U.S. housing-market expectations one-year ahead worsened for the sixth straight month in December, edging down 0.05 point to a median 3 percent, while that for inflation remained about unchanged at 3 percent. The bank’s internet-based survey uses a rotating panel of approximately 1,300 household heads.
In a positive technical sign for bond bulls, the U.S. 10-year Treasury yield has formed a so-called death cross pattern. This occurs when the 50-day moving average crosses below its 200-day counterpart. While many traders are skeptical of its relevance, others argue it presages further weakness in the benchmark yield. “It should indicate long-term yields will continue to head lower as we move through the first quarter,” wrote Miller Tabak + Co. equity strategist Matt Maley, in a note to clients.
As The Fed continues to unwind its balance sheet, 10-year Treasury yields, on average, have been falling (not rising).
Since early November 2018 when the 10-year Tteasury note yield hit 3.24%, both the Treasury yield and 30 year mortgage rate (MBA) have plunged.
Partly to blame is the slowing economies around the globe, particularly in Europe (check out Ford’s announcement of job cuts in Europe: Ford Motor Co. will shed thousands of jobs at its European operations as part of a bid to return the business to profitability with a broad restructuring that could include shuttering factories).
And then there is that 13% YoY decline in China Passenger Car Sales.
So, despite global zero-interest policies (except for the US), global economies are slowing.
It is difficult to push US interest rates higher when the global economy is slowing down.
To be sure, there are a whole host of wild cards that could send interest rates rising again: 1) US-China trade agreement, 2) ending the US government shutdown, 3) resolution of the neverending BREXIT issue, 4) France and Germany’s struggles to raise energy prices (Paris Accord?), etc.
The implied probability of a Fed rate hike in this global environment is pretty low.
And both the US Treasury actives curve and Dollar Swap curve remain kinked.
Will The Fed emulate Frank Booth from “Blue Velvet” and provide more oxygen to markets?