January 12th, 2015 5:11 PM by Nick Rapplean
There is--and not just because of some terrorists in Paris--many causes for concern in our world today. And there's an irony here that we should note carefully. You've doubtless noticed that, for the past few months, stories kept popping up in the financial press asserting that the Fed might start to push interest rates higher sooner than we'd expected because of the strength of the American economy. But while investors worried about the onset of rising rates, our interest rates actually continued to decline. In fact, the yield on a 10-year Treasury note fell below 2% once again--a feat few analysts expected.
What made Treasury rates fall? It's relatively simple. Worried about European economies, which may be flirting with future recessions... and convinced that low oil prices will be with us for a long time, threatening the economies of several oil-producing nations (including Russia), many investors have moved their money to safe havens--like U.S. Treasury securities. Unsurprisingly, the cost of an ounce of gold, another safety zone for investors, has been rising.
The above-mentioned irony in all of this is that the European Central Bank is discussing the launch of a program in which it prints money with which to buy up government bonds. Sound familiar? It should. This is a complex version of our own Fed's quantitative easing program, which we recently concluded.
What makes it particularly complex is that, where the U.S. quantitative easing program bought mortgage-backed bonds from the U.S. government, a European version would have to somehow divvy up the purchases of bonds from various member-countries, somehow making the investments in those countries fair to all. Skepticism runs high, and so other alternatives are being examined.
Many economists, meanwhile, feel that the European Central Bank is simply acting too slowly. In the last quarter, the European economy grew at a rather weak 0.9% rate. During the same time, it grew by 5% in America. We should be watching Europe with great care, therefore.
A further irony, though, can be found in evidences of increased strength in the U.S. economy--including the real estate sector which, I believe, is extremely important to our hopes of a continuing recovery. As Gerard Baker, editor of the Wall Street Journal, said in Thursday's issue, "The U.S. economy has entered 2015 with the strongest momentum in at least a decade."
This view received a pointed confirmation Wednesday, when payroll processor ADP reported businesses had hired 241,000 workers in December. As the investment director at U.S. Bank Wealth management said, "The increase offered more evidence that the economy in the United States was on steady ground, and it gave investors another reason to jump back into the market after five consecutive days of losses."
This is fairly upbeat news greeting those of us who are finally emerging from the Holiday Season. It has pushed the yield on the 10-year Treasury back above 2%--though only by two basis points. But it leaves us wondering if the weakness abroad will successfully throw wet blankets on what appears to be growing strength in the U.S. economy.
Importantly, you can see that our economic strengths suggest a healthy real estate market. All the more reason to watch the European weakness, the American strength and, notably, the number of new homes being built. As Sherlock Holmes said to his partner, "The game is afoot, Watson!"