One of the biggest factors is the price of oil. As the U.S. emerges with its new found status as the leading energy provider in the world, energy markets have been flooded and the price of oil has plummeted. This may have initially been in retaliation to Putin’s posturing in 2013-2014 that was an attempt to embarrass Obama, but sometimes unintended consequences can be a blessing. The cheap oil may allow citizens throughout the U.S. to drive more, causing more demand for automobile tires, parts, maintenance, etc. This may help the economy get back on its feet.
However, other forces are looming on the horizon that may make 2015 a difficult year. The U.S. stock markets are at all-time highs, yet U.S. productivity numbers have been highly suspect—with many investors moving wealth out of electronic and paper fiat currency and into hard assets. They started buying real estate in prime locations about 18 to 24 months ago, with more far-sighted investors buying as early as 2010. Manhattan has seen a huge spike in real estate prices, and places like California and Maui have been popular places to move funds into single-family homes and high-end condos.
This influx of wealth out of the stock markets and banks and into real estate helped caused the 2013-2014 real estate bubble. The movement of wealth out of Wall St. and into hard assets was helped along by four hedge funds that purchased over 45,000 single-family homes in the U.S. Increased demand for real estate, with a steady supply, usually equates to increased real estate prices.
That is exactly what we saw in the U.S. during 2013-2014. As this bubble starts to deflate in 2015, there are many financial instruments that can cause huge problems for U.S. investors. For example, corporate bonds may implode if there is an interest rate increase, as their prices decline and may cause a recession.
The U.S. Federal Reserve Bank (FED) has wound down their quantitative easing programs and they are not buying as many mortgage-backed securities and treasuries as they did in the past. Just when all the pundits thought the stock markets were on the way into the abyss, Japan starts a quantitative easing program of their one—thereby prolonging any market adjustments. As their QE program starts to fizzle, who steps up? Yep, the European Central Bank. They look like they are going to start a QE program of their own. Again, probably pushing out any market adjustments further into the future. As China and Japan reduced their purchases of U.S. treasury debt, who steps up? BELGIUM! Where they are getting the money is the $64 question.
The FED wants to increase interest rates in the future, but may have a difficult time with the trillions of U.S. dollars in corporate debt that will be adversely affected by any type of interest rate increase.
China is in the middle of a big mess of their own. The State Government has been in effect “refinancing” local government debt to hide the fact that their productivity is much lower than their numbers indicate. With the amount of wealth management products leveraged to the hilt, they may be in for a rough road in 2015.
The European Union will have continuing problems with Greece. They are in the midst of electing a leftist leader who may well have problems dealing with the European Union. Greece’s exit from the European Union and the Euro seems more likely in 2015 than at any time in the past. Spain and Portugal look to have problems as well in 2015, since they cannot print up their own money but must rely on the Euro, they will be heavily dependent on the European Central Bank and International Monetary Fund for loans to keep their economies going. Austerity programs have not been too popular in the southern countries where they are incurring more debt than they can repay.
The U.S. dollar have been strong against other major world currencies. Some experts believe that the U.S. dollar is the best of a lot of bad choices.
Inflation fears have been reduced so far, so gold has stayed down in price. Gold prices have been artificially held down as many governments stock up on gold reserves. Some gold investors are concerned that Russia will have to dip into its gold reserves and sell some of it to survive the winter’s low oil prices. This could have a short-term dampening effect on the price of gold.
So where does that leave investors? That’s right: REAL ESTATE. And where is the safest place to park their money? Yep, the good ol’ U.S. of A.
We’ll talk about U.S. and foreign banks in a future post and take a look at why keeping a lot of cash in the bank may not be a good idea either. But for today, like Will Rogers said, “Buy land, because they ain’t making any more of it.”