The Fed as expected cut short-term rates, the Fed Funds Rate, by ¼% last week. Chairman Powell stated, “It’s not the beginning of a long series of rate cuts. I didn’t say it’s just one.” Thus, many people are expecting the Fed will cut short-term rates by ¼% again in September, effectively undoing their two final ¼% rate increases in the 4th quarter last year. The Prime Rate now sits at 5.25%.

But they also announced the end of Quantitative Tightening 2 months early and they will reinvest all payments from their mortgage bonds and instead purchase Treasuries. They will not be purchasing more mortgage bonds. Thus, I expect the spread between the 10 Year Treasury Bill and 30 year mortgage bonds will increase.

So, why did the Fed take these 2 steps? They say it’s because of global uncertainty and the trade war with China. Mark J. Grant, Chief Global Strategist at B. Riley FBR Inc. who was recently named a “Bloomberg Prophet,” one of fifteen, globally, said this “It is my viewpoint that what is happening globally will force the Fed’s hand. It is fair to say that the U.S. is now under (financial) assault from many other governments in the world, and that our central bank, the Fed, is going to be forced to protect American interests and the Fed must cut rates to keep the Dollar from strengthening too much.

According to Bloomberg there is now $14 TRILLION in global debt yielding or paying an interest rate less than 0%! Joining this “club” in July included Austria, Sweden, and France. And the German 10 Year Bund is down to an all-time low of <0.50%>. This means you buy a $10,000 10 Year Bund you will only receive back $9,950 ten years from now! Further 40% of global bonds are now yielding < 1% according to Bloomberg.

This tells me three things. First, inflation is DEAD in Europe and Japan and that central banks can’t inflate consumer prices any longer, but these central banks will continue to cut rates and probably begin Quantitative Easing again soon. Second, our Fed must lower our rates to keep the dollar from appreciating too much. Third, you can’t fight the central banks in each country as they ARE THE MARKET. Thus, the saying, “You can’t fight the Fed.”

So, what does this mean for you and I and our clients?

  • It SUCKS to be a traditional saver of money in a bank or credit union as interest rates will go lower. In fact, in many European banks individuals and companies with more than $2 million in the bank must pay their bank money to keep their money there!
  • And it will be even worse for pension funds and their members. Lower rates or yields on bonds, Treasuries, and corporate debt will force nearly every pension fund into “bankruptcy” in essence. They will never be able to fulfill their promises to their retirees and current employees paying into their pensions.
  • The Fed Funds Rate is now at 2.25% and I can see it falling < 1% and to 0% again possibly during the next recession whenever it happens.
  • Thus, borrowing from your home equity line of credit will become more affordable.
  • Student loans and car loans will become more affordable too.
  • Barry Habib, one of the smartest bond men in the country is predicting that our 10 Year Treasury Bill will drop to roughly 1.2% in the near future. It closed Friday at 1.85%.
  • Personally, as more and more countries debt is yielding < 1% and even 0% I believe our 10 year Treasury Bill yield could drop to below 1%. Especially since the Fed will be using mortgage bonds that have paid off early due to lower rates to buy even more Treasuries. Thus, pushing Treasury yields even lower.
  • If that happens we could see 30 year fixed mortgage rates down to 3% or possibly in the high 2’s in the next 2 or 3 years.
  • How should we invest our money? I expect that the stock market will continue to soar as it has for 10 years because of the Fed.
  • Second, buy more real estate as hard assets are appreciating faster than money in the bank ever will. And if mortgage rates keep dropping housing affordability will improve and we will see more first-time home buyers purchase a home, but will also cause more long-term buy and hold investors like myself to buy more investment grade real estate. 
  • Robin Harding, a columnist with the Financial Times said, “If it’s not possible to build more homes, then houses will behave like assets in fixed supply, and soar in price.”
  • Third, buy more REITs if you want to invest in commercial real estate and don’t have millions of dollars.