There are three prices that determine the movement of the economy: energy, wages and money. During the period 2022/2023, The US Federal Reserve (FED) has raised its interest rates, the most violent of the last 40 years.
The impact of this true financial tsunami is felt in all markets, especially in the durable goods market, and is generating enormous distortion. In 2023, the US real estate market shrank by 36%, an unprecedented drop since the mortgage crisis in 2008which was the largest since the Great Recession of 1929/30. In addition, the USA began to suffer trade deficits several months ago, caused by the appreciation of the dollar in comparison with other currencies.
In the best Latin American style, The current administration has only relied on the interest rate as an anti-inflationary policy, far from implementing a reduction in spending and other measures to encourage competition and reduce inflation. The explanation for the disaster it caused consists of several elements in a fairly short period of time: For the first time in a long time, job creation is slowing down in the USA. The European monetary authority reduced the interest rate of the Euro, which encourages a further appreciation of the dollar.
The disproportion of the yields of US Treasury bonds compared to the cost of money in other currencies caused a monumental bicycle ride by the largest investment funds and financial operators, (the carry trade (domestic currency is child’s play in comparison) especially by borrowing Yen whose rate has been 0%. They borrow in that currency and put it in US treasury bonds earning billions without doing anything. Unsustainable.
When on Sunday night The Bank of Japan raised the rate by 0.25 points, causing panic among bicycle owners and they began to unwind their positions.although still in smaller percentages but enough to warn about the end of the cycle. The proximity of the elections with the appearance of a new Democratic candidate generated the logical uncertainties about who will be the next president.
Now, Jerome Powell, president of the FED, seeks to avoid a financial and labor crisis in the country by lowering reference ratesBut it is not only homes that are benefiting from the rate cut that is expected to begin in September and intensify towards the end of the year. Demand for storage space has been growing steadily, driven by factors such as increased mobility and the reduction in the size of homes. Today, occupancy exceeds 92% and, with a revival of the real estate market, demand could skyrocket.
In the context of a shift that promotes real estate income over treasury bonds, investing in self-storage offers attractive advantages for investors seeking fixed income. In addition to offering effective diversification in an investment portfolio, less susceptible to fluctuations in the traditional real estate market, it has a very low risk of vacancy and is backed by a property whose value will most likely increase with the application of the new FED reference rates.
The effects are already being seen and this is just the beginning. The rate on 10-year US Treasury bonds is in the 4% range. The inflation outlook is oriented around 2%, so short-term rates should converge to the 2.5% to 3% zone. to be sustainable and not deepen a recessionary cycle that is already a very likely scenario.
The markets’ off-the-record view is that the Fed, once again, fell asleep. He should have cut the free rate party short much earlier to avoid the bubbles it caused and at the same time he should have started lowering rates already at the end of 2023.
A similar oversight was responsible for the mortgage crisis of 2008, when the purchase of financial assets was promoted without a clear vision of the risks involved in the event of an increase in interest rates. When the market panicked, instead of providing liquidity, the supervisory bodies let the investment bank Lehmann fail, which deepened the crisis.
Source: Ambito
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