CNBC Confused As To Why Interest Rates Are Falling

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

It was interesting over the last couple of days to watch a series of both hosts and analysts scratching their heads and fumbling for answers over the recent decline in interest rates.  After all, how could this be with inflation creeping up due to much stronger economic growth? More importantly, asset prices are clearly telling investors to get out of bonds as the "great rotation" is upon us as we launch into this new secular bull market, right? IF they asked me, here would be my answers to their questions.  First, a little history.

In June of last year, as interest rates were spiking, there were many calls stating that the "great bond bull market was dead." Those calls even included the great Bill Gross.  The idea of the "great rotation" was born and spread through the media and the financial industry like wildfire. However, at that time I wrote an article entitled: "5 Reasons To Buy Bonds Now" stating:

"For all of these reasons I am bullish on the bond market through the end of this year.


However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to the 1980's, are simply not available currently. While there is certainly not a tremendous amount of downside left for interest rates to fall in the current environment - there is also not a tremendous amount of room for them to rise until they begin to negatively impact consumption, housing and investment.  It is likely that we will remain trapped within the current trading range for quite a while longer as the economy continues to 'muddle' along."

Of course, since then housing has rolled over, growth of consumption has slowed, and economic growth has remained quite anemic with first quarter growth coming in at a negative 1% annualized rate.

But despite the evidence, mainstream analysis continued to err to the side of flawed analysis.  I have continued to revisit this issue over the last several months reiterating my belief that interest rates remain "trapped" at lower levels due to an inability for the economy to absorb higher borrowing costs.

Reiterating Bond "Buy" - 35 Years Of History Confirms

"Bonds are currently exhibiting some of the best valuations that we have seen in the last couple of years with the technical indicators stretched to extremes.  Exactly the opposite is true with the stock market with valuations (based on trailing reported earnings - the only true measure of valuations) pushing levels normally associated with bull market peaks, prices at extreme extensions and earnings peaking.  This is the time when investors should be thinking about taking some profits by 'selling stocks high' and adding some relative safety by 'buying bonds low.'  After all - it is what we are supposed to be doing as long term investors."

Interest Rate Predictions Meet Bob Farrell's Rule #9

"Interest rates are not just a function of the investment market, but rather the level of "demand" for capital in the economy.

However, in the current economic environment this is not the case. The need for capital remains low, outside of what is needed to absorb incremental demand increases caused by population growth, as demand remains weak. While employment has increased since the recessionary lows, much of that increase has been the absorption of increased population levels. Many of those jobs remain centered in lower wage paying and temporary jobs which does not foster higher levels of consumption."

The recent breakdown in interest rates is simply a continuation of the thesis that I have been laying out over the course of the last year.  However, let's look at a few of the most common arguments to see if they are supported by the data.

"Stronger Economic Growth Will Lead Interest Rates Higher"

That statement is only true if there is a sustainable AND INCREASING rate of economic growth over time to offset the drag caused by rising interest rates.  The chart below clearly shows this to be the case.


It is important to notice that even during the rising economic growth of the 50's and 60's that increasing interest rates led to a slowdown in economic activity.  This is ALWAYS the case which debunks the entire argument of most mainstream analysis that the economy can handle higher interest rates. It may appear to do so in the short term, but higher borrowing costs erode the economic underpinnings.

"Rising Inflation Will Pull Interest Rates Up"

This is another "cart before the horse issue." Inflation is a function of stronger economic growth which leads to rising wage growth which allows consumers to buy "more" stuff which leads to higher prices. Let's add to the chart above to see the relationship between all of these variables.


As you can see, wage and salary growth has the highest correlation to economic growth. With a sustainable trend in rising economic growth which leads to a corresponding trend to higher wage growth, inflation and interest rates will be remain subdued. As stated above, interest rates are a function of demand for credit.  The demand for credit comes from increased levels of aggregate demand that leads to the need for higher production. Increased demand for credit by businesses increases monetary velocity through the economy which leads to rising inflation.  Currently, those variables do not exist.

"The Stock Market Can Weather Higher Rates"

While asset prices can rise in the short term, particularly when fueled by massive Central Bank liquidity injections, in the longer term stock prices are a reflection of the value of the stream of future cash flows. Rising interest rates increase borrowing costs for businesses which reduces future profitability.  This is why there is a very high correlation between increasing interest rates and falling asset prices as shortterm "exuberance" eventually meets "economic reality."  (Read More On Chart & Table Below)



"Interest Rates Will Rise When The Fed Stops QE"

This is simply wrong. Interest rates rise when the Fed is intervening in the markets as money rotates out of "safety" and into "risk." This rotation is primarily a function of the "carry trade" as recently discussed by Jeff Saut:

"Hedge funds have been borrowing money in Japan (again) at very low Japanese interest rates, obviously denominated in yen. They then convert those yen to, say, the Brazilian real, Argentine peso, Turkish lira, etc. and buy Brazilian bonds or Turkish bonds using 10:1+ leverage. Accordingly, when such countries jacked up interest rates overnight, their bond markets collapsed. Concurrently, their currencies swooned, causing the 'hot money' investors to not only lose on their leveraged bond positions, but on the currency as well.  If you are leveraged when that happens, the losses add up quickly and those positions need to be sold. So the bonds were sold, and the pesos/lira/real that were freed up from those sales had to be converted back into yen (at currency losses) to pay back the Japanese loans. And as the bonds/currencies crashed, the 'pile on' effect exaggerated the downside dive."

The chart below shows clearly that interest fall as the Fed begins extracting liquidity from the markets not vice-versa.


It is also important to notice that the deviation between stock prices and falling interest rates is soon corrected as well. While stocks have not seen a correction as of yet, the fall in interest rates suggests that the underpinnings of the financial market is weakening, and the risk of a decline has risen.

The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered, wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically.

This is a point that seems to be lost on most economists who forget that the Federal Reserve has been pumping in trillions of dollars of liquidity into the economy to pull forward future consumption. With the Fed now extracting that support, it is very likely that economic weakness will resurface since the "engine of growth" was never repaired. The point here is that as a contrarian investor, when literally "everyone" is piling on the same side on any trade it is time to step back and start asking the question of "what could go wrong?" 

One other point to consider. As investors, we are supposed to buy when investors are fearful and sell when investors are greedy. This is advice passed on by every great investor of our time. If that is the case, then what does this really say about the quality of advice from mainstream sources that continues to espouse the chase of stocks and shunning of bonds?

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DoChenRollingBearing's picture

Fortunately I am not an economist, so I cannot offer a good opinion as to WHY interest rates are so low.

I have read (Antal Fekete and others) who say that ever-lower rates destroy capital.  Capital destruction now has many causes here in the USA.  A big story.  Capital destruction SUBTRACTS value.

Capital Destruction.


nope-1004's picture

..... and PONZI was his name-o!!


Say What Again's picture

I stoped at; "CNBC is Confused..."

Is that news to anybody?

Headbanger's picture

I thought it was about Liesman admitting he's a she or something.

knukles's picture

Liquidity Trap.
No more, no less.


Rates will be visiting a Japan scenario at a marketplace near you!
Booyah, motherfuckers!

Harbanger's picture

Nope.  CNBC is more confused than Marie Antoinette.

JRobby's picture

Why isn't Steve Liesman quoted at all?

Keyser's picture

He had his head stuffed up his arse and was unavailable for comment. 


disabledvet's picture

Because he earned his Nobel Prize while studying the collapse of the USSa....err, R, USSR.

Forward to our doom!

centerline's picture

Yeah, that about summed it up for me.  No need to continue.

TideFighter's picture

I am confused as to how they keep their doors open.

Panafrican Funktron Robot's picture



Capital destruction is not actually occuring.  Here is the brass tacks:

1.  Capital valuation by 2007 was absurdly high, due to various financial bullshittery.

2.  That bullshittery had a high speed collapse.  A deleveraging scramble ensued, which for some reason was referred to as a crisis.

3.  Gov. stepped in and said "yeah, stop that fire sale shit, we'll just rapidly devalue the dollar in order to return your tangible assets to 2007 values".

4.  Gov. kept doing this as various bullshittery collapses continued to go off, both domestically and internationally.

5.  Some dude from Japan refers to this whole scenario as a balance sheet recession.  We are in the Japan scenario, which has no way out except to allow capital to return to it's true, market-based price.  

6.  The whole moniker "capital destruction" implies a problem that needs a solution.  The only thing being destroyed is bullshit.  I'm o.k. with that personally.  

OC Sure's picture


You are sooooo close:

"Fortunately I am not an economist, so I cannot offer a good opinion as to WHY interest rates are so low.

I have read (Antal Fekete and others) who say that ever-lower rates destroy capital.  Capital destruction now has many causes here in the USA.  A big story.  Capital destruction SUBTRACTS value.

Capital Destruction."

The intervention to lower rates is done by created counterfeit. The banks have done no productive work to produce the currency; therefore it is counterfeit, not money.

Counterfeiting is theft. It is not that the capital is destroyed. IT IS STOLEN. Stolen by whom? Whomever passed off the counterfeit. At whose expense? Everyone who now uses the depreciated currency.

The tyranny of modern economics is tricksy but follow the counterfeit to its origin and you will find some very fat cats.


Berspankme's picture

Someone just ask Obanana. He's a fucking expert on everything.

CrashisOptimistic's picture

In that entire article there was not a single mention of oil being north of $100 all year long.

DoChenRollingBearing's picture

Oh, stop worrying! (/s)

Here is something that should warm your heart (/s):

A two year chart of the S&P 500:$SPX&p=W&b=5&g=0&i=t05511161699&r=1401392305584

I am no technical analyst, but, um, well, um, something...

And for everyone's handy reference a two year chart on W TX crude:$WTIC&p=W&b=5&g=0&i=t48349363449&r=1401392497021

Berspankme's picture

Someone just ask Obanana. He's a fucking expert on everything.

alien-IQ's picture

Let's keep pretending any of this matters.

nope-1004's picture

+1.  Ponzi facade by the Fed and USG.


icanhasbailout's picture

"Inflation is a function of stronger economic growth"


I'm just going to stop right here because I've used up my snark quota for the day.

QQQBall's picture

i think Obomber is angling fo rSNAP and disability due to concussisons suffered during his short sports career. $25,000,000 thrown away on child sports safety. What a fucking queer prez.

nosoeawe's picture

of course CNBC is confused, they are ran by a bunch of needle dick, weanie armed, fucking morons and just another dead end alley for the shit eating banksters to disseminate their financial fiction to the illiterate, dumbed down maggots 

JRobby's picture

Yea, but why wasn't Steve Liesman quoted?

maskone909's picture

the rationale that bond yields should go up during a strong economy never made sense to me. 

Hal n back's picture

and I thought credit risk had somehting to do with the interest rate the debtor paid.


QQQBall's picture

someone ask Gartman :)

QQQBall's picture

Hedge funds are making the Yen carry too complicated. Bernanke bought bonds and destroyed purchasing power in the same currency with a couple of mouse clicks

the not so mighty maximiza's picture

I am confused why CNBC is even still on the air, did they not make most of their viewers broke over these past few years.    The ratings are showing that. 



ebworthen's picture

The next crash is being engineered; can you hear the hammer on anvil and see the sparks?

The Depression ended only for equities, the rest of the economy is a steaming crock of crap.

Interest rates only matter for the little people who use credit cards and have student debt.

Why do you think they re-jiggered bankruptcy laws and made student debt unshakeable?

All a part of crushing the middle class and destroying an educated prosperous populace.

That's why we need so many immigrants too; the pews and voting booths must be filled!

Not to mention a quasi-slave class to clean house, cook, and support big Ag.

There are no markets and no correlations, only the kleptoligarchy and its proboscis sucking the blood out of a nation.

Rainman's picture

How can they move all these sticks and bricks with 5% 30y mortgages during the Spring sales season ....?

Such thinking is soooo 20th Century . Don't over think things like 'why ' .


gatorengineer's picture

Interest rates have to stay low, and they are manipulated to be low because housing would entirely collapse if they were raised.  


the current manipulation of the rates, is an attempt which will fail to kickstart housing.  The 30 year is a 4.10% right now which is a 20% off sale in rough terms for a mortgage payment off of the recent 5 percent.  More significantly this is a 20% reduction in the income required to carry this mortgage and still not be a subprime buyer..... 

buzzsaw99's picture

they are unaware that the bond market is rigged? seriously?

lasvegaspersona's picture

Here is a winning strategy: borrow at .25%, lever UP!!!, buy notes that pay 2.5% accept the smiles of a grateful government and go to the beach. (a private beach, not one where you have to mix with the little people, unless the hot chicks are playing beach volley ball at Moonlight Bay, in which case going to a public beach is OK just this once....see when you follow my strategy you have more important things to worry about than those things that trouble the masses that borrow at 25.9% on their overdrawn credit cards.)

I'll give more good advice later on stocks and commodities later. I have a pedicure...(in Bangkok) on my schedule...honey did that kid from Facebook call?

I Write Code's picture

IOW borrow short lend long what could go wrong?

(this is a trick question kids, it used to be required that you knew the answer before they let you make any decisions in investing or banking, of course that was in the olden days)

I Write Code's picture

Hey, I think a lot of ZH locals have some pretty fair understandings of the answer, but it's complicated and ugly so it's beyond what the MSM can do or wants to do.

It's a lot like Wiley Coyote being confused, halfway down, as to exactly why he is falling off the cliff.  A little late now, feral dude.

LawsofPhysics's picture

Beware the "untaper"...

buzzsaw99's picture

not only is the untaper coming i'm willing to bet you know which month it will be coming

gatorengineer's picture

why would they untaper?

Interest rates have taken care of themselves.  

Inflation is running a little hot

Unemployment will be negative soon

Winters over

To Untaper would be an admission of economic failure

Its an election year, and no way before November do they do anything.

Dollar is already down



Would like a serious explanation as to why they would untaper..........





disabledvet's picture

Ummmm "why untaper when gasoline prices will shoot up to 25 DOLARES....tomorrow."

Of course "Larry Phucking Kudlow said that's growth positive and to short treasuries down to your last Jew cuff link bitch."

NYPoke's picture

CNBC still confused as to why their rating fell.

Notsobadwlad's picture


1. The system is systemically designed to fail.
2. The system is being manipulated to fail.
3. A group of psychopaths and sociopaths have grabbed what they can for themselves and inadvertantly caused the system to fail.
4. The system is not failing, it is just another lie.

Take you pick. In the "very" big picture, it is unimportant.

mayhem_korner's picture



The QE tapering effect on interest rates is short-term, as it causes rotation into bonds.  Take away the buyer of only resort for any extended period and Treasuries yields will get bid up.  Either that or S&P 500.  Maybe both.

wmbz's picture

When I see the letters CNBC I alway think of a drooling retard blowing snot bubbles and eating boogers!

Serenity Now's picture

Interest rates go up when there is too much growth in the economy.  Higher interest rates tamp down that growth, encouraging saving and discouraging borrowing.  This decreases the money supply (M), which leads to lower demand (D), which leads to lower prices (P).

Interest rates go down when there is not enough growth in the economy.  Lower interest rates bolster growth, by discouraging saving and encouraging borrowing.  This increases the money supply (M), which leads to higher demand (D), which leads to higher prices (P).  

Have you seen any growth lately?


robertocarlos's picture

Except the money supply can contract due to defaults on debt.

Serenity Now's picture

Oh, it can and it is.  I say that all the time.  POOF.  Deflation.

But I was taught to analyze only one component at a time.  Here I was analyzing interest rates.  If I goes up, M goes down.  (All other things being equal.)

But if M goes down (say due to debt disappearing into the thin air that it came from), it doesn't necessarily follow that I goes up.  It's not an inverse relationship.

I see the economy as M going down due to debt default, faster than M is going up due to I being low because of low growth.  

My theory (and I could be wrong, of course) is that I will remain low because growth will not return, other than fits and starts until it hits the limits of oil and falls again.

No/low growth = low interest rates.