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July 1, 2010:
From the Newswires
WASHINGTON (AP) – “Mortgage rates have sunk to the lowest level in more than five decades, but consumers aren't rushing to refinance their loans or buy homes. Mortgage company Freddie Mac said Thursday the average rate for 30-year fixed loans sank to 4.58 percent this week."
"That's down from the previous record of 4.69 percent set last week and the lowest since the mortgage company began keeping records in 1971. The last time they were cheaper was the 1950s, when most long-term home loans lasted just 20 or 25 years.” (1)
What should investors learn from today’s news report? It’s interesting to note that with interest rates at generational lows households aren’t re0financing their homes in droves and corporate America isn’t borrowing money to expand or maximize profits.
The answer to this question is no mystery for Richard C. Koo, author of
“The Holy Grail of Macroeconomics: Lessons from Japans Great Recession” (Wiley)
The reason nobody can take advantage of low interest rates is because everyone is paying down debt. The housing bubble which popped in 2007 has created an economic condition Koo refers to as a “balance sheet recession”. No monetary policy can repair a balance sheet recession; government spending can help, but what is needed is time.
The world needs time to pay down debt and repair its household and corporate balance sheets.
Hopefully Americans can get financially fit sooner than it took the Japanese. Richard C. Koo states that it has taken the Japanese over 15 years to repair their balance sheets. The Nikkei 225 is still down 76% from its all time high reached in 1989.
In our opinion, the worst part about a balance sheet recession is how it will going to impact the 76 million Americans entering retirement. For those elderly people living on fixed income investments, earning a yield of less than 2% could put a serious dent in their standard of living.
The only way to escape the negative effects of a balance sheet recession is to initiate covered call writing strategies. Covered call writing adds a much needed income component to an equity or fixed income portfolio in order to survive this type of recession.
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