Questions - Outcomes

Very very affordable mortgages are arguably the most effective policy the government has enacted to pull the economy out of the recession. But many people worry that mortgage rates are going to rise this year, possibly quite a bit and thus the improving economy could hit the skids. How likely is this to occur?
There are three reasons interest rates are so low.
-First there is demand for US government bonds and buyers are willing to accept the low yields they offer at this time. They are deemed safe in an uncertain world and some foreign countries such as China are accumulating US dollars from their trade surpluses that need to be parked somewhere reliable. These low rates are setting the floor in the market.
-Second, our Federal Reserve is buying new mortgages as they are being originated in a kind of subsidy that is intended to help the economy by creating financing and lowering the cost of home ownership. This policy is an indispensable aspect of the emerging recovery.
-Third, the inflation rate is very low and therefore interest rates should be low.
Unemployment over 10% is the biggest single influence at this time over interest rates. Such high unemployment means the government cannot back off from helping the economy and the mortgage supports must continue. It isn't wise and it is politically impossible to alter this policy for the visible future. As 2010 begins we are hearing that jobs creation is the biggest economic priority for the Obama administration. A recovery in housing is a key requirement and for jobs to be created the US is going to need those cheap mortgages for sometime.
High unemployment means labor costs aren't going to rise and inflation is going to be muted. Inflation should not be pushing on these rates for sometime and this is another reason for interest rates to stay low.
The third factor may not be so favorable. Investor demand for US government bonds could become an issue. It may take higher rates to keep them buying. Why? The huge deficits we continue to run are going to undermine that market as the quantity of US bonds in the world exceeds the demand. Will this happen and if so will it be later than sooner? We'll see. It isn't in anyone's interest for the US economy to crater and it seems adjustments to the bond market are going to be orderly. This is a factor that will push rates higher theoretically. In reality, it has yet to be seen.
So the interest rate market seems set for a moderate increase in rates but given how unlikely employment is to improve a great deal or inflation to rise, we are going to continue to see what are historically very good deals on mortgages. Get one today if you can!

On the gas!

The stock market has attained a level of price with respect to 2010 earnings that is fairly close to past market levels. So is the profit opportunity already realized?

I don't think so because if you are looking for a place for money that needs a return, try to build a shorter term ladder these days. Available interest rates on the one year tranche are less than 1% if you are credit risk averse.

Money is flowing into the financial system generally as well. Try to refinance residential real estate. Is it virtually impossible as some reports have made is seem? No credit standards are just sensible like they used to be and loans are being readily made. What is different is rates and the ability to lever up. 4.25% on a 15 year mortgage is cheap and available. Is there a reinvestment opportunity for some in this setup? Yes very much so and it is going on now.

With realistic loan underwriting and cheap money, we have a potential for a sustainable healing to take place in the economy even as the direction of the business cycle points up. Given the improving trend and flows of cheap capital, I think it is hard to see how one can be bearish despite the bad news and debt issues. Most importantly the low interest return on fixed income is encouraging to flow towards assets with much higher potential returns and risks.

While this has caused stocks to rebound, and some in particular still look very good, it has most of all resulted in investment money flowing towards commodities.

Some commodities like oil are strong despite having no current shortage whatsoever, yet a strong case can be made there will be. Gold on the other hand, is migrating to a role it used have. Arguably gold is now primarily a store of value or in other words a currency in of itself. What price is that worth? You don't know? How can anyone?

It has been proposed that gold will become a currency of exchange in an electronic medium. If you have used Pay Pal you see the beginning of the idea. Instead of dollars in a Pay Pal account, what if there were gold credits? What if I sold you a laptop for 1/2 an ounce of gold on your gold Pay Pal account. Would that be too far out to imagine? No not all.

So cheap interest rates are the gas and where it all goes isn't within the control of those who apply the gas. Home prices or financial asset prices will benefit collaterally, but the charts show gold at new all time highs almost everyday now. The gas is flowing and where it goes seems to be the most salient investment news of all.