Are 3% Mortgages on the Way?
By Dr. Steve Sjuggerud
December 9, 2008
Could we see 3% mortgage rates here? Absolutely!
But be careful what you wish for...
Japan has 3% mortgage rates. Its economy busted in 1990. In nearly 20 years, it has not recovered.
Now, the U.S. economy is busting. But strangely, our government is doing exactly what the Japanese did...
We're propping up ailing banks. We're cutting interest rates to record lows to "juice" the money supply. And now, we're planning the greatest public works program in our lifetimes (most of our lifetimes, at least).
Japan did the same thing. Let me share one example of its infrastructure projects... A new study shows that only 7% of Japan's sandy beaches are "without artificial structures or other human activity." Japan now has the world's ugliest, most-paved, least-natural coastline, thanks to useless public works.
The idea was that government spending would get the economy out of its hole. So the Japanese government borrowed money and spent it.
I'm not sure why Japan's government thought spending taxpayer dollars to pour concrete on beaches would fix the economy. Sure enough, it didn't.
Paving the beaches (to prevent erosion) made erosion worse. So the new plan is to spend government money to remove the concrete. Brilliant!
And Japan's economy is still bad – nearly 20 years later. The stock market is down over 75% from its highs nearly 20 years ago. Short-term interest rates are essentially zero. Interest rates on 10-year government bonds are 1.4%.
The lesson from Japan is, this doesn't work. It only prolongs the crisis. How can we in America do the same thing and expect a different outcome?
But here we are, doing exactly what didn't work in Japan. Propping up mortally wounded banks and automakers is just the tip of the iceberg. And so far, we're getting the same result as the Japanese did.
Most Americans think interest rates have to go higher. Most Americans see interest rates at multi-generational lows and think they can't go lower.
Most investment analysts also think the massive injections of money by the government have to create inflation and higher interest rates. That is likely true... eventually. But you can go broke betting on that before it arrives.
My point today is, don't bet on interest rates heading higher right now.
Interest rates CAN go lower. Much lower, for much longer than you can imagine. Japan is living proof.
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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THE WORLD'S TOP "SAFE MONEY" STOCK
Right now, there's a big "should" vs. "is" story unfolding in the world's largest company, ExxonMobil (XOM).
XOM is one of the world's best companies by a country mile. Its efficiency at producing oil and choosing where to invest shareholder money is legendary. As our colleague Dan Ferris points out, the company earns double-digit returns on its assets even when oil prices are below $20 per barrel.
Here's where the "should" vs. "is" comes into play. Oil prices are down more than 50% since October. Stocks are down 24% since October. Given the destruction in both oil and the market in general, XOM "should" be plummeting. But shares are up slightly in the past two months.
It's a big bullish sign when a stock like XOM "should" fall but doesn't fall... It's a sign that a huge amount of smart money is buying shares. If you're looking for a "safe money" stock, look at ExxonMobil. In the midst of a horrid market for oil shares, it's holding like a rock.
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Confirmation of the worst economic contraction since the Great Depression sent yields on securities issued by the U.S. and European governments crashing last week to their lowest levels in a half-century or more.
The Treasury's benchmark 10-year note touched 2.50%, a level not seen since 1954, according to monthly data from the Federal Reserve Bank of St. Louis.
Even more stunningly, the Treasury's 30-year flirted with 3%, a level not seen in the modern era since 1977, when the U.S. government began offering that maturity. And it was back in 1956 that 20-year Treasury bonds last traded through 3%.
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– Randall Forsyth
Barron's
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In the base metals market, aluminium prices sank below the $1,600 a tonne level, reaching a four-and-a-half year low, amid mounting gloom about the outlook for prices and the future of the industry.
The benchmark London Metal Exchange three-month aluminium contract sank 2.2 per cent to $1,580 a tonne, the lowest level since May 2004. Aluminium has fallen 53.2 per cent since hitting a record $3,380 a tonne in early July.
Stocks of aluminium at LME warehouses increased by a hefty 19,500 tonnes and have risen to 1.86m tonnes, the highest level for fourteen years.
"The industry is struggling to cope with both an overhang of spare capacity and a huge level of unconsumed inventory," said Dan Smith, metals analyst at Standard Chartered.
About 65 per cent of aluminium smelters worldwide are estimated to be losing money at current price levels. |
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