Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.
When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.
Last week’s continuing trends:
- Rubber
- Soybean Meal
- Maize
- Chinese Yuan
- Japanese Yen
Last week’s reversing trends:
- Lean Hogs
- Russian Ruble
- German Bonds
- Indian Rupee
- German Equities
What we are taking note of:
While the US interest rates are staying positive (even if barely), negative interest rates persist in Europe and Japan. The epicenter of the wackiness has shifted to Germany.
As of today, more than 200 German banks (greater than 10% of the total) have instituted “penalty interest” on their accounts. If you deposit cash in the bank, they will charge you interest for the bother of keeping your money. The more money you deposit, the higher the interest you pay.
The rational response is to find better places to park your money. The Germans are conservative people and suspicious of the stock market. That leaves real estate, which has lately been on a tear.
To an American, it may seem unremarkable. Of course, house prices go up when interest rates are low. But in Germany, this is an unprecedented development.
Germans are a nation of renters. As late as 15 years ago, only 40% of Germans owned their house, the lowest rate in the European Union. The house ownership rate is creeping up to 50% now but still remains at the bottom of European tables.
The reasons go back 70 years. Allied bombing raids during World War 2 destroyed the majority of German housing stock, especially in the cities. To make matters worse, over 6 million Germans fled or were expelled from Poland, Czechoslovakia, and the rest of Eastern Europe to the newly created West and East Germany. Their governments had to quickly build housing for millions of homeless people. In the East, the government itself constructed Soviet-style apartment blocks. In the West, the government promoted multi-family construction by giving heavy tax incentives for buy-to-let investment. At the same time, the government provided strong legal protections for renters, including widespread rent control.
Germany does not offer American-style 30-year mortgages. The standard mortgage has only ten years to maturity, and the interest is not tax-deductible. In normal times, it makes little sense to invest in a house compared to renting an apartment, unless one is a farmer or very rich. But we do not live in normal times. The tsunami of money printed by the European Central Bank has to land somewhere, and the German housing market is absorbing more than its fair share.
Even though German goods inflation remains low, its housing prices are soaring. The world’s central banks are creating asset bubbles everywhere. So far, little of the newly created money flowed into incremental demand for goods and services. When that changes, inflation will be hard to control.
Germany House Price Index (25 Years)
