There has been a turning point in the U.S. financial markets over the last two weeks. The U.S. Federal Reserve backed away from their promise to begin raising interest rates back up to normal levels. Instead, they revised their forecasts for: a lower growth rate, lower inflation, lower interest rates, and Chairman Yellen stated, “I can’t specify a timetable for next interest-rate moves.” This occurred before Britain voted to leave the European Union and the uncertainty that it has created across the world’s financial markets over the last three days.
So what is going on? Two of our largest trading partners, Japan and Europe, are both using negative interest rates to try to grow their economies, and weak U.S. economic data is indicating that the U.S. may also have to join them.
If the Federal Reserve is not going to raise interest rates any higher, and it now appears that they are more likely to move rates down than up, this is a red-flag that the U.S. dollar may be at a medium-term peak. A primary driver of currency attractiveness is the interest-rates paid in that currency. When interest-rates fell below zero in Europe, money began flooding out of Europe to where it is treated better, with higher interest rates in the U.S. The Federal Reserve claimed in December that it would be raising interest rates all year, and this attracted additional money from overseas. But now, if the U.S. does not raise rates or rates begin declining, then money will flow away from the U.S. to another currency where it is treated better.
Since the 2008 financial crisis, the U.S. has been in terrible financial shape. But in spite of this, money has been flowing here because many other countries have been in relatively worse shape. This money flowing into the U.S. has pushed up real estate prices on the coasts and gone into the stock market and Treasury bond markets. If U.S. interest rates begin declining then some of that money will begin to flow elsewhere, bringing down the prices in those three markets, along with the U.S. dollar in general.
What are some ways to prepare for money flowing away from the U.S.?
- Be prepared to sell off some of your stocks and bonds with gains.
- Be prepared for real estate values to soften on the East and West coasts.
- Begin looking for a stronger currency/country to place your money.
(A potential candidate that I am considering is the Russian stock market, with the ETF ticker symbol “RSX.” The Russian stock market has already been beaten down to a very low price. The Russian stock market index is trading at a low Price/Earnings ratio of only 4.9 while the U.S. stock market is trading at a very high ratio of 24.6).
Whatever your financial situation, keeping abreast of macro-economic events is a way to anticipate price trends to protect yourself and possibly profit from these price moves.