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Guest Post: 3 Myth's About Rising Interest Rates
Submitted by Lance Roberts of STA Wealth Management,
During my morning reading, I ran across an article by Howard Gold entitled "Why Diversification Isn't Working?" by Howard Gold wherein he discusses that investors are faced with having to choose between many bad choices. He stated:
"That's the problem many investors face now. Risky assets, like stocks, commodities, and real estate are moving in lockstep. Only long-dated bonds are swimming against the tide, and nobody wants them because of fears the Federal Reserve will eventually stop its massive bond buying and raise interest rates.
So, the choice appears to be throwing even more money into stocks, which are nearly five years into a bull market, or buying bonds, which we know will go down in price. Or keeping more in cash (with its negative real return) or stuffing money in the mattress. Or, God forbid, buying leveraged inverse ETFs as a 'hedge.' (emphasis added)"
The analysis by Howard Gold has become a mainstream staple within the financial markets that when the Federal Reserve "tapers," or eventually ceases, its current bond buying program that interest rates will begin to rise. However, there are three primary issues which should be considered that fail to support this widely held belief.
Interest Rates Will Rise
The first misconception is that when the Fed tapers its ongoing liquidity program; interest rates will begin to rise. However, there is no anecdotal evidence that would be the case as shown in the chart below.
In fact, the recent rise in interest rates should have been anticipated as that has been the case during both previous programs. It was not until the programs began to "taper," and eventually end, that rates fell as money flowed out of risk assets in search of safety in the bond bond market. This fall in rates also corresponded to economic weakness and expectations of an increase in deflationary pressures.
When the Fed once again begins to remove its accommodative support from the financial markets it will likely lead to a further decline in interest rates as "safety" is once again sought over "risk."
The Economy Will Be Recovering Which Will Push Rates Higher
The second misconception is that the Fed will begin to taper their current bond buying program as the economy strengthens enough to warrant the removal of those accommodative policies. However, as I discussed in "30% Up Years" the economy is already in the 7th longest expansion since 1879 as shown in the chart below.
The problem for the Federal Reserve has been that each time they have previously withdrawn financial accommodation the economy has flagged pushing interest rates lower.
The question that investors should be asking themselves is how much longer will the current economic expansion last given the lack of underlying drivers that have historically contributed to strong periods of economic growth. The Federal Reserve's programs have been effective in pulling forward future consumption to support the current economy. However, the extraction of those programs will likely reveal a the future "void" that has been created.
The Liquidity Trap
The last reason that interest rates are unlikely to rise is the realization that the Federal Reserve has become unwittingly caught within a liquidity trap. I discussed this is detail previously in "What Is A Liquidity Trap" wherein I stated:
"For the Federal Reserve they are now caught in the same 'liquidity trap' that has been the history of Japan for the last three decades. With an aging demographic, which will continue to strain the financial system, increasing levels of indebtedness and poor fiscal policy to combat the issues restraining economic growth it is unlikely that continued monetary interventions will do anything other than simply foster the next boom/bust cycle in financial assets. The chart below shows the 1-year Japanese Government Bond yield as compared to their quarterly economic growth rates. Low interest rates have failed to spur sustainable economic activity over the last 20 years."
The problem that the Fed has already witnessed, and something I have discussed several times in the past, is that even small incremental increases in interest rates has an immediate negative effect on interest rate sensitive economic activities like business lending and real estate.
The Federal Reserve has gotten itself trapped into creating an asset bubble in the equity markets because any reversal of policy leads to severely negative economic consequences. With the current economic recovery cycle already very extended in historical terms, along with the financial markets, it is unlikely that we have just begun a growth cycle that will allow the Federal Reserve to extract its support. The reality is quite the opposite, and the next asset rotation will not be from bonds to stocks; but just the opposite.
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Maybe the definition of "expansion" needs to be changed?
People tend to forget you know... we live on a FINITE world... with FINITE resources. And I don't see Richard Branson accepting Bitcoin to send you to the next gold-plated asteroid anytime soon. Infinite growth paradigm = fail.
Stop trying to ruin the party by interjecting with reality. Maybe this time the exponential curve will just keep shooting straight to infinity - that's what happens in theory, why shouldn't it happen in practice?
No shit. Did you invite him to the party, because I sure as hell didn't. I'll call the bouncers.
Here, try some of these hors d'oeuvres, they're great. I was at the market, couldn't decide between two appetizers, and the gal in charge said, Sheesh, just buy this fucking dip!
LOL It seems we're now permanently out of dips.
Im sure the whole crowd would run to the redemption counter is it wasn't for the gun on their head.
http://en.wikipedia.org/wiki/Gold_Reserve_Act
http://en.wikipedia.org/wiki/Anti-Gold_Futures_Act_of_1864
1980: On January 21st, the COMEX announced that it was suspending trading in silver and that they would only accept liquidation orders.
Can you blame them now?
"Row, row, row your boat, gently down the stream!"
It's "Myths", not "Myth's"
Who edits the headlines?
We occupy a tiny portion of an insignificant rock. Malthus was wrong and so will you be. We have barely started.
If you are talking about unlimited money printing as promoting "unlimited growth" though, you are completely correct. This too, however, will pass.
Lance, is there any limit on the amount of debt the government can float before the public starts to get worried and refuses to buy their debt for less than the rate of inflation? Or do we have to wait until the .1% completely strips the entire fucking country, everybody, the entire 99.9% of ALL their wealth, so that they can't buy bonds even if they want to because they don't have any fucking money - do we have to get to that point before the obvious becomes actually OBVIOUS - that lending money to a bankrupt, corrupt, insolvent, spying, lying, government is a risky business and it doesn't matter what the name of the fucking country is?
It's all about relativity and psychology, which is based on relativity. If the people with money to invest see the U.S. debt as less risky than the debt of other nations, then the debt of other nations is more risky. If the debt of nations is a safe thing to invest in, the lowest yield will fall to the least risky nations. What is safer? Gold? That's a joke. If the financial system collapses to the point that bonds are not paid, do you think people will accept gold for goods? Maybe in other countries, but certainly other national memebers - not for goods needed in the short term. The only valuable asset will be food, then alcohol, then shelter, then fuel.
All these adjectives you use are relative too. Bankrupt? Not until it can't pay the bills. Corrupt? All governments are corrupt - how much is too much? Insolvent? Obviously not yet since insolvency is bankruptcy. Spying? Do you think this country hasn't spied on its people since the beginning? That's a joke. It used to be that spies sat in bars and clubs the elite went to - now they filter electronic communications for keywords...what the fuck is the difference? Lying - yeah, no one ever does that anywhere else.
Ahh, good to know. So even though the rise and fall of empires, the cycles of financialization, the inevitable rise of the rentiers and courtiers and their inevitable downfall has recurred time and again through recorded history, this time it really is different? That's fantastic news. So I don't need to worry about this?
http://research.stlouisfed.org/fred2/series/BASE
And the apparent concentration of wealth in the hands of a very small number of individuals, coincident with a collapse in rule of law and individual freedom is just 'a phase we're going through, it's normal, don't sweat it, it will all blow over'. Great, good to know this is the best of all possible worlds Pangloss.
I didn't say it isn't part of a cycle. Because you know you are within a cycle, you think you know what part of the cycle you are in? I said it is about relativity. If the rest of the world embraces forced inflationary, expansionary measures within their monetary system, we have the ability to abuse it, so long as we abuse it less than them, relatively.
Anyone with true respect of cycles of human greed and power would have been shorting gold since it hit 1900 (the coincidental inflationary high from 1980).
As for your referenced chart - that is a joke. Any system based on compounded rates should look exponential. Since our financial system is based on compounded interest rates and inflation at a hopeful 2% per year, the fact the the monetary base was linear or flat for so long should predict a hugely exponential increase at some point.
My point is, you don't know if you are at the brink of a collapse, or the horizon of the next great expansion. Sorry, you aren't psychic as much as anyone wishes you were.
Ahh, I see, relatively flat for 20 years, then spiking vertical in 2008, when the FED decided to take control, bail out the banks at the public's expense, and send the fucking deficit rocketing through the fucking roof - that should be an expected byproduct of compound interest. Funny, usually those non log curves look exponential and not like fucking hockey sticks. Still, I feel a lot better that with your assurance that the US is the cleanest dirty shirt in the bunch - for a while all those fucking NSA spying revelations, military interventions, blatant thievery by the financial elite and blatant complicity by the so-called regulators was really getting to me. Great to know that it's all ok, makes me feel a lot better about not being as psychic as anyone wishes I was.
Never mind all that, Al. We have virtually limitless energy available now in the Bakken fields! It's all good now, we can rest easy! Bunz is right, all we have to do is print enough currency so that no one else on the planet can possibly digest it, and it'll trickle down to J6P! Rejoice!
do i need a /sarc tag?
Sarcastically restating points does not invalidate them. Good try though mate.
If you think this system of stagnation and rapid growth is new, please attempt to look at http://en.wikipedia.org/wiki/File:DJIA_historical_graph_to_jan09_(log).svg .
Every government for thousands of years has used spying, psychology, propaganda, and any other 'evil' you can think of to control its people. What are you trying to say is different at this point in time? Do you feel smart for noticing it while others don't care? That has also been done for centuries. I don't get what you think you can accomplish by pretending that the events you witness as worse than the past.
Actually I sarcastically refuted your bullshit that the current trajectory of the debt and money supply is just a normal exponential curve, shown on a linear scale. And I think if you look around you'll notice that quite a few people care about the abuses of power that are occurring with ever increasing frequency. Nice try again, though Pangloss. Glad to see you're living in the best of all possible worlds.
Lance,
"3 Myth's About Rising Interest Rates"
It's "Myths," plural, using an apostrophe would make it possesive.
MORON
lol
Its so weird, so hard to fathom - the more wealth and power the .1% sucks up and steals from the general public, the harder it is to generate any real economic activity (you know, making, buying and selling real stuff). Its almost as if taking away peoples' ability to make a decent living and save for the future robs them of the power to participate in those activities traditionally associated with real economic activity.
Yep I have posted this on fb many times, the best economic growth and employment is during slow or no money growth periods.
Go the FRED ST invert the M2 velocity, compare it to the employment participation rate. Things that make you go hmmmm
Nobody cares the state of the empire they rule over, so long as they rule over it absolutely.
I don't expect the fuckers at the top to care, it just pisses me off when the lackeys in the middle define the bounds of the discussion and then create a choice between two equally ridiculous and repugnant falsehoods.
"Its so weird, so hard to fathom - the more wealth and power the .1% sucks up and steals from the general public, the harder it is to generate any real economic activity (you know, making, buying and selling real stuff). Its almost as if taking away peoples' ability to make a decent living and save for the future robs them of the power to participate in those activities traditionally associated with real economic activity."
How quaint. Nobody has cared about real economic activity for more than 50 years. It's all about the bezzle, the slick trick, the quick fix and the gimmick.
I've been wondering what it would take to make Americans take to the streets in protest.I bet if anyone threatened to build a factory anywhere in America the protesters would be out in force the next day.
It's called the capitalist vacuum.
From my understanding rates will eventually rise no matter what the FED does but the rate of inflation will exceed the rise in rates. So we get the worse of both worlds, rates skyrocket on adjustable interest rates (good bye home/auto sales oh and bye bye being able to pay that tuition bill) and at the same time the price of goods like food/energy/clothes etc. rise dramatically. It will be gloriously fucked up beyond all reason.
And gold will finally go to the moon.
There is no trap for those who are liquid and have a tailhedge.
Did this clown used to be named Lance Link? Fool!! the rates will rise as no one in the world will buy our trash bonds... THAT is why it is already happening... sure the markets will crash on a taper, ans temporarily benefit bonds... but if the Fed does not buy our crap... and no one else does... what does this fool chimp think will happen to the rates...??
Don't ever disparage the Secret Chimp again!
Love me some Lance!
:D
What a load of Keynesian horseshit.
"Interest Rates Will Rise
The first misconception is that when the Fed tapers.....
(stopped reading)
This is the newest and most unusual motivation for continued QE – that to taper will drive interest rates lower. What will they think of next? The charts merely are indications of knee-jerk reactions.
If Roberts is right, he should get on the phone with Janet Yellen and warn her that Bernanke was wrong when he stated in one of last year’s press conferences (in Ron Paul’s words) “that the Fed wishes not only to drive down rates on Treasury debt, but also rates on mortgages, corporate bonds, and other important interest rates. Markets greeted this statement enthusiastically, as this means trillions more newly-created dollars flowing directly to Wall Street.”
As for “the economy is already in the 7th longest expansion since 1879, ”that’s just more proof that if you want to see something stated you just keep looking until you finally find it or manufacture it.
And as for an ”aging demographic,” yes, the median age of the U.S. is 37.1 years compared to 35.3 in 2000 and 32.9 in 1990; but you have to factor in
1) The large generation of baby boomers temporarily swells the median age as the oldest already have turned 67.
2) According to the U.S. Census Bureau (2013), the Latino population in 2012 was 53 million, making up 17% of the U.S population amd growing rapidly. (See Note)
3) The median age for Hispanics is 27 years while the median age for the U.S. population is 37 years. Tabulations of the Census Bureau’s 2010 American Community Survey (ACS) show the youngest of America’s Hispanic groups are Mexicans (25), Puerto Ricans (27) and Guatemalans (27).
Ignoring the dire plight of America’s savers and pensioners, and moving on to the giddiest of the giddy, the QEed and government-bailed equity investors, Matthew Craft on March 28, 2013, reported in an AP article:
“Like the Dow, the S&P 500 has now recovered all of its losses from the Great Recession and the financial crisis that followed. Investors who held on and put their dividends back into the market have fared even better. An investment of $10,000 in the S&P 500 on Oct. 9, 2007, would be worth $11,270 today.
Not so good, but... “Anyone brave enough to put $10,000 in the S&P 500 at the market's bottom on March, 9, 2009, would have $25,200.” (We know that Goldman Sachs thanks U.S. taxpayers for giving it the seed money and putting it in this group and allowing it to leverage on up using insider manipulation to become on September 23, 2013, a member of the Dow 30 components.) “Since March 2009, banks have more than tripled, gaining 212 percent, according to FactSet data. Those so-called consumer-discretionary companies have gained even more.”
But like into life, into the S&P some rain must fall. Wrote the AP in March:
“Since March 2009 (to March 28, 2013, when the S&P rose six points to 1,569) a total of 79 companies have dropped out. When companies leave, it's often because they have been bought by another member of the 500 club, [Howard] Silverblatt, [senior index analyst at S&P Dow Jones Indices] says. But S&P will also pull a company if its market value has shrunk drastically, or if it doesn't have enough publicly traded shares.
Some of the missing companies are well-known, mighty giants whose fortunes have faded. Sears, Roebuck was in the index at the beginning in 1957. But last August, Sears Holdings lost its spot to the chemical maker LyondellBassell.
On Dec. 17, 2010, Eastman Kodak and The New York Times Co. were unseated by Newfield Exploration and F5 Networks.”
http://bigstory.ap.org/article/sp-500-notches-record-how-did-we-get-here
http://www.rationalargumentator.com/index/blog/2012/09/
http://www.census.gov/population/pop-profile/2000/chap02.pdf
http://www.pewresearch.org/daily-number/median-age-for-hispanics-is-lower-than-median-age-for-total-u-s-population/
And, oh yes, P.S. The S&P experienced its biggest one-day loss on Sept. 29,2008, but it’s best day ever “came exactly two weeks later on Oct. 13, 2008, when governments in the U.S. and Europe announced sweeping plans to shore up the battered global financial system. “
Note: “The Federal government considers race and Hispanic origin to be two separate and distinct concepts. For Census 2000, about 13 percent of the total U.S. population indicated that they were Hispanic or Latino. The racial distribution of this group contrasted sharply with the racial distribution of the population as a whole. Nearly half (48 percent) of Hispanics indicated that they were White alone.”
You said it all... in 15 words, fonz.
Yeah but you say it so much better.
I just really appreciate your summary execution of the trail of error…
Or as Blaise Pascal would have said: “I have only made this letter longer because I have not had the time to make it shorter.”
Stock market has nothing to do with the economy anymore. High or low rates are the same in a world were no one has room for more debt.
Wow. Fail. So...is there any situation in history where a clever person or organization with access to capital hasn't been able to make a return on it? There is always a product where the reward outweighs the risk. You just have to find it and exploit it.
Shocking to see this wonderful article worth archiving receiving bad votes. Sheeple everywhere.
Ah the power to print money competitively ... I'm starting to see things plainer. The printing presses are controlled by those with the most physical capital an aggregate power. They control the media and the political parties, large consumer and business organizations and continually grow, in perpetuity and even accelerated with globalization.
The fed prints because it can. It will do so until it cannot make useful gains from printing (borrowing then investing).
When not enough people 'come along' for the ride or if too many come too fast they either short the market or talk about tapering to push non-insiders out.
Of course when the time comes there will be a massive liquidation of bonds because people will think taper means higher rates, we have been programmed... Really thou the insiders will buy up the initial high rate paper with their cash and then sell it as the rates go lower and lower... Think that a portfolio doubles in value if the rates drop from .005 to .0025
Markets are always yield driven, never nominal.. Learning this lesson too...
This article is so fact straight and rings true because I am so adamant about selling my double tax free 5% municipals.... I know to bet against myself 80% of the time...
The answer regarding when though I truly believe when the majority stop buying the slight dips and then a taper scare / bull trap set... Then rates take a nice decent, pms go up and stocks down though expect dividends to remain important!
Please don't conflate a "liquidity trap" with insolvency. Japan is insolvent.
I'd like to know what he means by "widely held belief" in reference to interest rates going up being a cause of tapering.
Furthermore, the first chart contradicts him. Rates were rocky during QE1, but we were also dealing with the initial stages of panic and the economy was still in recovery. But they did begin to fall before QE ever ended.
This is so blithe that you can actually see rates rise SHARPLY right before QE2! Paul Krugman pulled this same garbage (in less words mind you) in a blog post in the past.
EDIT: You also mean to tell me that Twist had no effect on rates during the QE2-3 transition?
Ahhhh....the safety of U.S. Treasuries. At first.
Why is it then that so often we discover Myths to be actual Facts that realy happened?
The 10-Year yield moved in no time from 1.63% low on May, 1th to 2.74% right now. http://www.bloomberg.com/quote/USGG10YR:IND