On January 11, 2020, Hugo Chavez Frias was sworn in for a third term as Venezuela’s president, promising to expropriate strategic sectors of the economy, specifically public utilities and oil properties and to generally run rough-shod over property rights and the rule of law.

	President Hugo Chavez

This is unadulterated good news for the US domestic bond markets.

With socialist or left-leaning governments emerging from the corrupt soup of democratic politics in Bolivia, Chile, Brazil, Nicaragua, and Venezuela, wealthy people throughout Latin America have reason to look out for their wallets.

Building dollar reserves abroad through false invoicing of exports or through the black market is good business and prudent behavior when facing a growing trend towards socialist expropriation of property.

Frightened capitalists in ‘democratic’ regimes help keep the dollar the unofficial ‘world currency’, boosting the US trade deficit, and, as an inevitable result, sending money into the US fixed income market, pushing bond prices upwards.

Lighting a Candle to Saint Jimmy

Countries throughout Latin America are now entering the end game of the ‘democratization’ movement of the continent, which started with US President ‘Jimmy’ Carter’s ferocious attack on the Brazilians that had engineered an ‘economic miracle’ in that country in the 1960s and 1970s.

US bondholders, I suppose, should light a candle to Jimmy Carter, America’s worst president.

Every time he hugs and kisses a socialist dictator, encouraging a developing country to take the socialist road to misery and poverty, capitalists throughout the world shudder and millions more move into offshore dollar accounts that have kept US interest rates falling for a generation.

So I say, thank you Jimmy Carter, thank you Hugo Chavez, for helping to keep US interest rates low.

The Democratic Party and its supporters have indicated a willingness to enact legislation that will reduce demand for bonds, while increasing supply: a recipe for lower bond prices and higher yields.

There are few signs that the weakened Republican Party, now in the minority, will put up effective resistance.

Here are some signs, portents, and expectations:

• Increased Minimum Wage: No matter how you cut it, increasing minimum wages is inflationary and Federal Reserve Chairman Bernanke seems to be genetically programmed to increase short term interest rates at any sign of inflation. This would put negative pressure on short-term bond prices.

• Protectionist Trade Measures: Labor unions may seek payback for supporting the Democratic Party with protectionist legislation that will tend to cut back imports. This could decrease the supply of foreign dollars that support the bond market. Decreasing the supply of less expensive foreign goods also contributes to inflation — another signal to Chairman Bernanke to raise short-term interest rates.

• Support for Fannie Mae: With Democrats in control, Fannie Mae should be out of regulatory limbo, able to increase issues of mortgage-backed bonds, now competing with asset-backed securities from commercial banks that moved to take over the market while Fannie Mae was repairing its balance sheet.

• Support for Stock Buybacks: Democratics have long-favored reducing corporate income taxes, since large companies are their favorite tax collectors. Democrats have avid supporters on Wall Street, including corporate executives, speculators like George Soros, fund managers, and investment banks, all of whom stand to benefit from stock buybacks. Reducing corporate income tax gives executives money to spend on buybacks to jack up the value of their options, as seen with the Jobs Creation Act. Recent increases in stock buybacks have been financed by bond issues, putting pressure on long term debt markets.

• Support for Defined Benefit Pension Plans of Unionized Civil Servants: The real payoff for trade unions will come in increased benefits for unionized civil servants, which means higher costs for states and municipalities, higher local taxes, and new bond issues. See: “Municipal Bonds and the Democratic Takeover of Congress“.

The Trade Deficit Still Rules

The key to the bond market, of course, is the trade deficit.

It seems unlikely that the Democrats will reverse long-term policies that favor the trade deficit, at least not immediately, so this powerful source of demand for bonds should continue.

It’s too soon to expect retiring Baby Boomers to move into bonds, especially while the stock market is bolstered by buybacks. The Democratic Party supports tort lawyers (who have begun to show interest in class action suits involving buybacks), but this is unlikely to impact the buyback trend in the short term.

All in all, it would seem that the outlook for bonds is less positive with a Democratic Congress, but not to a degree that suggests an immediate change in long-established trends.

As the graph below shows, there has been a boom in the sale of new, single-family homes in the US since the late 1990s.

In recent weeks, common wisdom bandied about on financial talk shows is that this housing boom was somehow caused by Federal Reserve Chairman Greenspan’s reduction in short-term interest rates during the years 2000-2004.

But is this reasonable?

Might there not be some other explanation?

Consider Demographics Rather Than Interest Rates

The thing that strikes me about the graph of new home sales (besides the boom of the late 1990s) is that the addition of new homes to the US housing supply has been more or less stable for over thirty years, fluctuating around only 600,000 new homes a year.

	New Home Sales Began To Take Off in the 1990s

In 1999, the stock of single family homes in the US was about 112 million units. That means that the supply of new homes, for over thirty years, was less that one percent of the number of homes in use at the end of the century.

New Immigrants and Internal Migrants Need Homes

Compare this to the statistics on legal immigration, which, since the end of World War II, has grown from about one million a year, to over nine million a year by 2000. See the graph in the article, “America Grows With Legal Immigration“.

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