Why can’t we have low rates?
I see real estate agents and loan officers on social media claiming low rates are just around the corner for the last 12 months. Why do they keep getting it wrong?
Well, first off they are in sales. No one in sales tells you this is a bad time to buy and they will always find a response to an objection or concern. Second, they are in sales and don’t have a good understanding of what economic conditions are needed to have lower rates. So what are these conditions that are needed to have a low-rate environment?
1. You need low inflation and we don’t have it. Inflation has broken out again in the last two months and will be back to 4%+ by the end of the year at the current rate. No self-respecting investor would accept low rates in a higher inflation environment. Basic economics.
2. More liquidity and we don’t have that either. The Fed is shrinking the balance sheet sucking out the money supply.
3. Bank strength. Well, we are 0-3 now, as banks are still seeing deposits falling, AOCI losses, rising defaults, higher capital requirements, holding low yield loans and assets, rising costs, higher insurance fees from FDIC, and higher deposit rates all while the Fed took away their bread and milk speculating on QE. What bank would hand out negative rates in that environment?
4. Low demand for borrowing. This one is tricky because it is counterintuitive and has to do with rate fallacy. As demand for borrowing rises so do rates. With more people asking for money, the banks can become choosy and increase rates. Borrowing like all other assets and commodities is bound by the laws of supply and demand. So far borrowing demand has slowed but not fallen. Consumers are racking up credit card debts and corporate issuance is still rising.
Now the 10y has its own problems with the current and growing issuance of maturing government debt and deficit spending. As the gov continues to spend and roll over debt they are slowly inundating the market with debt (high demand for borrowing). This in turn sucks out liquidity and crowds out others that also want to borrow raising rates.
5. Low Risk and low uncertainty. Self self-explanatory and no one can argue we have either.
6. Credit loosening. Well if (1) is reducing your ability to have money to lend and cutting off your speculative action, (3) is weakening your balance sheet, (4) high demand gives you an opportunity to raise rates, and (5) your risk is higher then tightening standards and being picky makes sense.
1-6 are not aligned with the stars even under cloudy skies. Making claims that low rates are just right around the corner is plausibly implausible in the short term but everything is transitory so one day they will be right.
