09/25/2016 - The Roundtable Insight: Erik Townsend & Mark Valek With Barry Habib – Where Are Interest Rates & Real Estate Prices Heading?

Hedge Fund manager Erik Townsend of Macro Voices is joined by Mark Valek and Barry Habib in discussing the possible consequences of the recent FOMC meeting and the likely effects on the future.

Mark, born 1980 in Moedling, Austria is Chartered Alternative Investment Analyst (CAIA) charterholder and Certified Portfolio Manager (CPM). He studied business administration and finance at the Vienna University of Economics and Business Administration. In 2002, Mark joined Raiffeisen Capital Management. He was ultimately part of the multi-asset strategies team, with total assets under management of more than EUR 5 bn. His responsibilities included fund selection of alternative investments and as well as inflation protection strategies. In this role, he was fund manager of an Inflation Protection Fund as well as fund manager of various alternative investment funds of funds. In 2014 he published a book on Austrian Investing („Österreichische Schule für Anleger – Investieren zwischen Inflation in Deflation“)

As founder and CEO of MBS Highway, Barry is also Chief Market Strategist for Residential Finance Corporation, a leading national mortgage banker. Barry has also enjoyed a long tenure as a market commentator on FOX and CNBC Networks. He can be seen presenting his Monthly Mortgage Report on “Squawk Box,” the early-morning CNBC business news show. Barry also serves as a professional speaker on the financial markets, housing, negotiation, technical trading analysis, sales training, building relationships and motivation. He is also co-creator and currently Principal Managing Director of Health Care Imaging Solutions.



The Federal Open Market Committee announced that there will be no rate hike in September. There was initially a big spike up in everything, but most of that retraced. This tells and confirms a lot of things. We did not think the Fed was going to rate hike in September, but what they did was show us that December looks like a likely hike. Last year, they want to “get one in” before the end of the year, and they’re going to want to get one in before the end of 2016.

Of the seventeen Fed members participating, we saw that fourteen believed there would be a hike before the end of the year. It’s very likely that we’ll see a rate hike in December, which means that the equity market do similar activity to last year: as far as yields and mortgage rates go, we’ll more than likely see an improvement.  Historically, every time the Fed hikes rates you see money flowing into the bond market initially.

The Fed would like to hike rates but have some problems doing it. Even if they should hike rates in December, the curve and the expected rate path by now is so flat that it could be the end of this anticipated hiking cycle.



We could see a US 10 Year Treasury 1% yield if we’re headed to a recession, which is at a 50% chance over the next 24 months. Outside of an event like that, it’s difficult because things have changed around the world. We broke below 0 yield, which theoretically made upside potential and capital depreciation endless and the amount of negative yield could be infinite in theory. Now we’re seeing this move back toward 0, and this means that maybe capital depreciation and downside in yield truly is limited and in absence of an event, this means yields won’t go much higher since we don’t have much inflation, but they’re going to go much lower.

In the last weeks we saw a little raise in interest rates on the long end. A blow off event is more likely, from a bond price perspective. A major bull market usually ends with a blow off. The thing that will end this bull market is inflation. The latest move in correction in long term bonds was triggered from less than expected from ECB or Bank of Japan. We need these low interest rates, and they can’t afford to decrease those. ECB will likely enhance their stimulus program after March 2017 and Bank of Japan may try to also taper down. The debt situation will prevent them from stopping these QE programs and they will have to increase once more, which could bring this blow up in Treasury or bond prices.

For the time being, it’s going to be difficult for the banks to justify pushing rates below zero because they haven’t been yielding the desired result.



There been talk of banning cash. But it seems like a far cry. It was pretty obvious a few months ago in Europe where more and more people came out with all kinds of arguments against cash. Now they’ve gotten rid of the biggest Euro note. They will have a difficult time decreasing the cash in circulation. If you can cut the amount of outstanding debt by negative interest rates over the years, that’s a very elegant way of getting out of it.

The US is looking at the PCE at 1.6% year over year, but not the ten months in a row of the CPI being over 2%, which likely more accurately reflects real inflation.

We know the Fed is horrible at forecasting. Now you’ve got a group of Fed members that promised it’d be easy to exit QE, but now they’re saying it’s here to stay for a while.



Lots and lots of people are saying the equity market is tremendously overvalued and we’re going to enter a recession. If one hits, the equity markets are expected to go down. In reaction, central banks will continue with their intervention policies. If it’s a big one, then equities really have to tank in nominal terms, maybe even real terms, and what could really tank is the Dollar. It’s been expecting this rate hike cycle since the last four years when they announced the tapering of the third round of QE. They were able to stop printing money and raise interest rates about 25 basis points. If this turns around, all these expectations that made the Dollar the relatively greatest currency could turn sharply.

The stock market is frothy. They have high PEs, but that’s hard compare historically at because there’s been a change in options based accounting so PEs are suppressed artificially compared to other periods of time, and record stock buybacks that make PEs look better. People are buying stocks today because they have no other choice because of yield. The stock market has a way of inflicting the most pain on the most people at the worst time. We’re probably going to see a lot of problems that it’s going to cause. It’s a matter of when, not if.

Real estate in the US has a lot of legs still. There’s high demand and very good demographics, enough to surpass Baby Boomer rates. There’s very low supply, and low rates of home ownership. We have a really strong real estate market overall, and it’s going to remain strong for years to come. Things are the same in Europe. With the negative interest rate, the middle class is flocking into real estate. These population isn’t favorable toward investing in securities, but they love real estate. Part of that is because they did well in real estate but tended to invest in securities at the wrong times. Real estate had steady increase over the last few years, which is a function of interest rates, and as long as the environment is like this the fundamentals for real estate look good. But due to the indebtedness, investors should be cautious about investing too much as this asset class which can be easily taxed.


Abstract by: Annie Zhou <a2zhou@ryerson.ca>

Disclaimer: The views or opinions expressed in this blog post may or may not be representative of the views or opinions of the Financial Repression Authority.