The economic melt-up: has it started yet?

It’s a certainty in-progress: interest rates will rise in the near future. The Federal Reserve has pledged to keep rates low until at least mid-2015. They are pumping some $1 trillion into the economy annually through their quantitative easing program to achieve this promise. But the Feds can only do so much. They have managed to defeat deflation. They have pumped up asset prices. Bonds, stocks and real estate all have strongly recovered. Jonathan Roof, vice president of private banking for Mutual of Omaha Bank, 4514 E. Camp Lowell Drive, feels that these economic conditions could soon spark a sudden, massive moving around of money. “At some point, the music stops in this game of financial musical chairs. All that money needs to find a productive home,” Roof said. Because interest rates are so low, investors are “increasingly nervous” about principal losses as the stock and real estate markets soar. There is some $10 trillion parked in U. S. bond and money market accounts earning near-zero returns. The six-month Treasury bill rate is below one-tenth of one percent. Missing out on a stock market nearing a five-year high “will make many money managers apprehensive of retaining their assets under management. Nationally, it is clear that real estate is surging off of generational low valuations,” he said. In just three years, the M-2 money supply has expanded $2 trillion, according to the January 2013 Mutual of Omaha Construction Update. In recent weeks, M-2 surged another $181 billion, representing an annual rate of almost $2 trillion. Yet the Producer Price Index (PPI) and the Consumer Price Index (CPI) show little current inflation. Some experts argue that the indexes are being engineered to not show the real inflation rates. However, the major reason inflation is so low is that the velocity of money, the rate it moves through the economy, is frozen. “We have a huge money glacier, called the bond and money markets, with all that cash in a solid unmoving wall, preventing it from flowing into the main street economy. Now we are facing another kind of global warming, the warming of the money glacier,” Roof noted. One of the hitches with today’s economic system is that massive shifts of money are now triggered with little warning. Global communications are so instantaneous that financial news travels around the world in a moment and triggers very quick reactions. “As we experienced with the Lehman melt down, the flash crash, and even our own real estate bubble, markets now move sharply almost overnight,” said Roof. For investors, the key to weathering the storm is to be “properly positioned” before events strike. The government’s handling of the nation’s fiscal cliff crisis sent a key signal to investors. Basically, politicians delayed solving our debt and deficit problems. The tax increases on the wealthy and tax cuts for the middle class will increase the national debt by about $1 trillion over the next 10 years. The spending cut sequestration was delayed until the end of February. Because governments around the world, including the U.S., are printing money, that devaluates their currencies. A counter move, suggested by bank officials, is that investors consider hard assets, such as stocks and real estate. For 2012, the S&P 500 gained 16 percent. Late in the year, CoreLogic reported home prices across the nation were up 7.4 percent. In Arizona, home prices spiked 21 percent over 2011. “When we look at the sharp increase in Arizona house prices, understand that the increases were not across all price ranges. The increases were most notably in the low end of the market, on a median basis. Prices had declined so precipitously in the lower end, due to foreclosures and employment distress, that these were the areas that bounced back quickest,” Roof explained. Unfortunately, the “beleaguered” home owner did not benefit from the rebound. Large institutional investors bought most of the distressed product as investment properties.

Interesting article. I reformatted:

But the Feds can only do so much. They have managed to defeat deflation. They have pumped up asset prices. Bonds, stocks and real estate all have strongly recovered. Jonathan Roof, vice president of private banking for Mutual of Omaha Bank, 4514 E. Camp Lowell Drive, feels that these economic conditions could soon spark a sudden, massive moving around of money. “At some point, the music stops in this game of financial musical chairs. All that money needs to find a productive home,” Roof said. Because interest rates are so low, investors are “increasingly nervous” about principal losses as the stock and real estate markets soar.

There is some $10 trillion parked in U. S. bond and money market accounts earning near-zero returns. The six-month Treasury bill rate is below one-tenth of one percent. Missing out on a stock market nearing a five-year high “will make many money managers apprehensive of retaining their assets under management.

Nationally, it is clear that real estate is surging off of generational low valuations,” he said. In just three years, the M-2 money supply has expanded $2 trillion, according to the January 2013 Mutual of Omaha Construction Update. In recent weeks, M-2 surged another $181 billion, representing an annual rate of almost $2 trillion. Yet the Producer Price Index (PPI) and the Consumer Price Index (CPI) show little current inflation.

Some experts argue that the indexes are being engineered to not show the real inflation rates. However, the major reason inflation is so low is that the velocity of money, the rate it moves through the economy, is frozen. “We have a huge money glacier, called the bond and money markets, with all that cash in a solid unmoving wall, preventing it from flowing into the main street economy.

Now we are facing another kind of global warming, the warming of the money glacier,” Roof noted. One of the hitches with today’s economic system is that massive shifts of money are now triggered with little warning. Global communications are so instantaneous that financial news travels around the world in a moment and triggers very quick reactions. “As we experienced with the Lehman melt down, the flash crash, and even our own real estate bubble, markets now move sharply almost overnight,” said Roof. For investors, the key to weathering the storm is to be “properly positioned” before events strike.

The government’s handling of the nation’s fiscal cliff crisis sent a key signal to investors. Basically, politicians delayed solving our debt and deficit problems. The tax increases on the wealthy and tax cuts for the middle class will increase the national debt by about $1 trillion over the next 10 years. The spending cut sequestration was delayed until the end of February. Because governments around the world, including the U.S., are printing money, that devaluates their currencies.

A counter move, suggested by bank officials, is that investors consider hard assets, such as stocks and real estate. For 2012, the S&P 500 gained 16 percent. Late in the year, CoreLogic reported home prices across the nation were up 7.4 percent. In Arizona, home prices spiked 21 percent over 2011. “When we look at the sharp increase in Arizona house prices, understand that the increases were not across all price ranges. The increases were most notably in the low end of the market, on a median basis. Prices had declined so precipitously in the lower end, due to foreclosures and employment distress, that these were the areas that bounced back quickest,” Roof explained. Unfortunately, the “beleaguered” home owner did not benefit from the rebound. Large institutional investors bought most of the distressed product as investment properties.

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