From all walks of life all around the world, most people were happy to close the books on 2020. The pandemic, international military saber rattling, wild asset market gyrations and a crazy U.S. presidential election are just the tip of the iceberg of the madness that 2020 brought. Reasonable people are hoping for a more benign 2021 and we are firmly in that camp!
The “everything rally” of the end of 2020 is showing asset markets that are quite disconnected from economic reality. Even as major-city lockdowns continue globally, stocks and real estate in particular, are showing no signs of stopping their rally as the Federal Reserve - and other central banks world-wide- continue to support markets. The Fed is accomplishing this by keeping interest rates artificially low and by conjuring new U.S. dollars and buying assets themselves. We have continually reported on this and here is a snapshot of the accumulating that the Fed has accomplished.
AGAIN! Is this telling us that the financial markets will never have to stand on their own again? Will the Fed support markets into perpetuity? These are obviously rhetorical questions, but it is completely counter-intuitive that all of these markets continue to get support when they are already at all-time highs. An obvious example is the Fed purchasing of Mortgage-Backed Securities. Since March, the Fed has purchased nearly $1 trillion of these assets which allows mortgage originators to make their fees and sell the debt to the Fed. This has kept mortgage rates at record lows which has fueled an amazing rally in residential real estate – and now the Fed has extending this program into the fall of 2021. This is one example of the Fed building these markets into bubbles.
Intuitively this would be destructive for the value of the U.S. dollar. To a degree, it has been- take a look…
However, with all of the trade talk being so negative of the dollar’s value, it really isn’t panic time yet. The dollar was weaker three years ago and we are seeing financial headlines about the “meltdown” of the dollar. We are not seeing this meltdown and U.S. interest rates are much closer to normal than the bulk of the rest of the developed world. We will keep the dollar on the radar for sure, but to this point we don’t see huge problems. However, keep in mind this is simply relative to other currencies whose controlling central banks are pulling similar stunts to the Fed. The dollar’s value vs. hard assets is declining and that will absolutely be a concern down the road.
Regards and good investing,