On today’s show we are taking a look at the the impact of the falling Euro on US real estate. A recent report by brokerage house Marcus and Millichap looks specifically at this question.
The Euro has fallen by more than 15% this year reaching a more than 20 year low in September.
Governments make decisions to be stimulative to the economy, or constrictive. In the US, the Federal Reserve is supposed to operate independently from the elected government and its mandate is to bring maximum employment to the nation and to maintain price stability. Since the start of the year, the Fed has increased interest rates five times so far this year and is on track to increase rates two more times before the end of the year. The Federal Funds overnight rate is currently between 3.25%-3.5%. But we expect that those rates will increase to more than 4.25% before the end of the year. In fact, with the latest inflation numbers, I would not be surprised to see interest rates hit 5% by the end of the year.
In contrast, Europe is in an economic crisis and an energy crisis. Having a war in your neighborhood casts a huge shadow over the entire continent, to say nothing of the human tragedy that the war is bringing to millions of people.
Governments in Europe have been trying to compensate for the higher energy costs by bringing fiscal stimulus to the population.
There are widespread protests in France over high energy costs. The French government has pledged 100B Euros to help ordinary citizens combat high energy prices.
This means deficit spending and increased debt levels in Europe. But when you look at monetary policy, the European central bank has only raised rates to 0.75%. So if you assume that within the term of the monetary instrument, say, the next 90 days, or even the next 365 days, you assume that neither the US, nor the European central bank will default on its notes, The US T-Bills are more attractive than their European counterparts. All other things being equal, there will be a flight of capital out of European bonds into US T-Bills. It’s that interest rate differential that is causing global investment dollars to flow out of Europe and into the US. The exchange rate between the currencies is merely a reflection of the supply demand situation.
Host: Victor Menasce