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Interest Rates Have Nowhere To Go But Up... Right?
Submitted by Lance Roberts of STA Wealth Management,
Earlier this week Daniel Druger and Liz McCormick wrote an article for Bloomberg entitled: "One Hundred Years Of Bond History Means Bears Destined To Lose." The crux of the article is contained within the following paragraph:
"With the longest-dated Treasuries now yielding less than half the 6.8 percent average over the past five decades, it’s not hard to see why forecasters say they’re bound to rise as the Federal Reserve prepares to raise interest rates following the most aggressive stimulus measures in its 100-year history."
The premise here is simple. With interest rates near their lowest levels on record, they have nowhere to go from here "but up." This is the consensus of virtually all of the analysts and economists on Wall Street which currently suggests that rates will rise to 3.88% next year on the 30-year treasury.
That was also the belief in June of 2013 when rates did spike on an emerging market bond rout. The majority of the mainstream media, and guru's like Bill Gross, claimed that the "bond bull market" was dead. At that time I wrote an article suggesting they would be quite wrong stating:
"For all of these reasons I am bullish on the bond market through the end of this year. Furthermore, with market volatility rising, economic weakness creeping in and plenty of catalysts to send stocks lower - bonds will continue to hedge long only portfolios against meaningful market declines while providing an income stream."
Since then rates have continued to be in a steady decline as real economic strength has remained close to 2% annually, deflationary pressures have risen and monetary velocity has fallen. The chart below is a history of long-term interest rates going back to 1857. The dashed black line is the median interest rate during the entire period.
Interest rates are a function of strong, organic, economic growth that leads to a rising demand for capital over time. There have been two previous periods in history that have had the necessary ingredients to support rising interest rates. The first was during the turn of the previous century as the Rockefeller's, Carnegie's, Mellon's, Vanderbilt's, and others wrestled for control of the American economy. Empires in rail, tobacco, steel and trade were built on the backs of human misery as economic output flourished.
The second period occurred post-World War II as America became the "last man standing" as France, England, Russia, Germany, Poland, Japan and others were left devastated. It was here that America found its strongest run of economic growth in it history as the "boys of war" returned home to start rebuilding the countries that they had just destroyed. But that was just the start of it.
Beginning in the late 50's, America embarked upon its greatest quest in history as man took the first steps into space. The space race that lasted nearly twenty years led to leaps in innovation and technology that paved the wave for the future of America. Combined with the industrial and manufacturing backdrop, America experienced high levels of economic growth and increased savings rates which fostered the required backdrop for higher interest rates.
Currently, the U.S. is no longer the manufacturing powerhouse it once was and globalization has sent jobs to the cheapest sources of labor. Technological advances continue to reduce the need for human labor and suppress wages as productivity increases. Today, the number of workers between the ages of 16 and 54 is at the lowest level relative to that age group since 1976. As discussed recently, this is a structural problem that continues to drag on economic growth as nearly 1/4th of the American population is now dependent on some form of governmental assistance.
Is Everyone Still Wrong?
This structural employment problem remains the primary driver as to why "everybody" is still wrong in expecting rates to rise. As I addressed previously in "Interest Rate Predictions Meet Rule #9:"
"As you can see there is a very high correlation, not surprisingly, between these three components (inflation, economic and wage growth) and the level of interest rates. Interest rates are not just a function of the investment market, but rather the level of "demand" for capital in the economy. When the economy is expanding organically, the demand for capital rises as businesses expand production to meet rising demand. Increased production leads to higher wages which in turn fosters more aggregate demand. As consumption increases, so does the ability for producers to charge higher prices (inflation) and for lenders to increase borrowing costs.
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."
Currently, there are few economic tailwinds prevalent that could sustain a move higher in interest rates. The reason is the higher interest reduces the flow of capital within the economy. For an economy that remains dependent on the generosity of Central Bankers, rising rates are not the outcome that "stock market bulls" want.
The chart and table below show what happens to the financial markets, and the economy, when interest rates increase.
The problem with most of the forecasts for the end of the bond bubble is the assumption that we are only talking about the isolated case of a shifting of asset classes between stocks and bonds. However, the issue of rising borrowing costs spreads through the entire financial ecosystem like a virus. The rise and fall of stock prices has very little to do with the average American and their participation in the domestic economy. Interest rates, however, are an entirely different matter.
While there is not much downside left for interest rates to fall in the current environment, there is also not a tremendous amount of room for increases. Since interest rates affects "payments," increases in rates quickly have negative impacts on consumption, housing and investment.
This idea suggests is that there is one other possibility that the majority of analysts and economists ignore which I call the "Japan Syndrome."
Japan is has been fighting many of the same issues for the past two decades. The "Japan Syndrome" suggests that while interest rates are near lows it is more likely a reflection of the real levels of economic growth, inflation and wages. If that is true, then rates are most likely "fairly valued" which implies that the U.S. could remain trapped within the current trading range for years as the economy continues to "muddle" along.
Will the "bond bull" market eventually come to an end? Yes, eventually. However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to the 1960-70's, are simply not available today. This will likely be the case for many years to come as the Fed, and the administration, come to the inevitable conclusion that we are now caught within a "liquidity trap" along with the bulk of developed countries.
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Let the fleecing of savers really begin... NEGITIVE RATES
And when the whole system implodes we will come in and steal what's left.
Happy (bank) holiday's everyone. :-)
Quite the rip today. Aka squeeze
We need to blow up some folks.
“The majority is never right. Never, I tell you! That’s one of these lies in society that no free and intelligent man can ever help rebelling against. Who are the people that make up the biggest proportion of the population — the intelligent ones or the fools? I think we can agree it’s the fools, no matter where you go in this world, it’s the fools that form the overwhelming majority.” – Henrik Ibsen (1828-1906) Norwegian playwright, theatre director, and poet.
Think about how stupid the average person is. Now realize that half the people are more stupid than that!
Agreed on the negative rates call.
They will go negative long before they go up. The system is so over extended that any increase in rates would be like throwing a rock into a jet engine.
Exactly.
Japan had their crash in 1989 and began their QE shortly thereafter. They've been on this deflationary path 20 years longer than we have.
If you want to see the US & EU's future; just look at that chart of Japanese interest rates above.
We are all Japan now...
Yea but Japan had the US to support them all that time, we don't have a sugar daddy to support us.
Demographics are what they are, how is your mandarin?
The Chinese have stopped having babies too, can't blame someone for that when they are living in the ant tribe. Ending the one child policy hasn't changed this since it wasn't necessarily what was hoding their birth rate down. At this point the only places populating future generations are the India, Africa and central america.
Indeed. When "they" come to steal what left, my tribe and I will welcome them in and simply ask them to stand on the "X" as it were.
Interesting times.
Does the author also care to count on how many times the very nature of the "dollar" changed over the period of that chart?
LOL!!!
Which way will interest rates go? Barring black swan events, I'm looking for DDNIRP. Double Digit Nirp.
the rates will not rise at all. for one thing the govt can't afford it, but the main reason is very soon they will make new laws that those with 401ks and the like will have to have such and such a % of their investments in these worthless papers the rest of the world is dumping en masse. with such a law in place they can steal another 8 or 10 trillion from our retirements and never have to offer a competative price for carrying the dirty paper.
It's my understanding that they have already started using Japanese pensions to buy US debt.
We NIRPed some folks.
How can this article get that high of a rating(4.2)? ZIRP and NIRP have never occurred before because the CB's have never had such a strong stranglehold on the markets. If CB's didn't exist, the economy would have already 'reset' at the average interest rate but, that would impoverish many a Crony Capitalist! There's going to be a 'reset' in the oil bidness simply because the FED stopped counterfeiting so much. The end of QE was a 'layoff' notice to oil workers.
That is assuming that 0% represents the lower boundary.
pods
Let's say......-10% (negative 10%)
Great.
Janet, my tax free check for $3 Million is six years overdue.
I have 100% faith in the fact that should ebworthen be given a "loan" of one billion at 0.01% he will most definitely have a "successful corporation".
Productive economies require that there are calories available for consumption as energy is required in order to actually build or do anything fucking real.
Remind me how any of these "rates" or "prices" are actually tied to anything fucking real again?
If you economy (or GDP) is simply based on shuffling paper promises around then I guess you can make thing look good for a while by simply "creating" more such promises (out of nothing) to shuffle around.
"Winning" -- So says Paul Krugman.
Increasing interest rates gives the people something to look forward to. Reminds me of that old Hollywood spectacle, The Ten Commandments: "Moses, stand up on that rock so people can see you and have hope". Problem is, it's Krugman on the rock.
"Productive economies require that there are calories available for consumption as energy is required in order to actually build or do anything fucking real.
Remind me how any of these "rates" or "prices" are actually tied to anything fucking real again?
If you economy (or GDP) is simply based on shuffling paper promises around then I guess you can make thing look good for a while by simply "creating" more such promises (out of nothing) to shuffle around. "
Indeed.
Ask just about anyone if they are being properly compensated for their labor/job and they will almost all say 'No.'
-Then ask them how they can be sure of the value of their labor/job in a situation where the currency that they are being compensated in can and is being freely printed/manipulated/devalued/countefeited...
IF the value of a currency is plastic/elastic then wages/compensation are in fact plastic/elastic as well.
Most People have no idea of what currency really is or how it is generated let alone valued.
Correct. Simply put, it is impossible to value or price anything correctly when price discovery is not allowed or has intentionally been destroyed.
On top of that, we now have a select few people/corporations that have access to free money (ZIRP).
This is, by definition, a "let the majority eat cake" monetary experiment.
hedge accordingly.
Currency vs money by m Maloney on u-tube helped me. I am just trying to figure out what is going on!?!?
Everyone will be wrong as long as the FRB manipulates the markets by buying Treasuries and the rest of the world still thinks the dollar is a safe haven.
People act as if those that have been wrong on rates are poor predictors. They are not.
It's just a rigged game.
"the rest of the world still thinks the dollar is a safe haven."
Stepping back from the picture a bit, perhaps the rest of the currencies were "set up" by planned, excessive debt issuance to ensure that USD would remain the safe haven if / when the shit hit the fan? (it has)
Ignoring that the very nature of the dollar has changed several times, perhaps. The last time we had a crisis of settlement (which is what this is really about) you could turn dollars in for physical silver. Severing that link bought the dollar more time than anyone thought was possible. Now what shall we "sever"?
Oh I agree. The CBs around the world are running a game on which nations to exploit.
And they have been buying time. But sooner rather than later someone is gong to refuse to dollar, and demand something more tangible.
I have to keep reminding myself that just because I am rational does not mean that others are. That is especially true for Central Bankers.
There will be a steep price for someone here.
it raining banksters......
http://www.dailymail.co.uk/news/article-2866973/Banker-dies-impaled-rail...
https://www.youtube.com/watch?v=l5aZJBLAu1E
Ouch...falling is one thing but man on a stick iz another
SO LETS C...
a 200 point drop at the open based on REAL NEWS out of China...
followed by a v-shaped rocket reversal on NO NEWS while the CIA torture campaign details r being released showing what a shitbag country the US has become...
yeap, makes all the sense in the world...
Rates set to rise any minute now! Hey we're all super serial up in here you people!
correct for all the wrong reasons
This statement from the article: Interest rates are a function of strong, organic, economic growth that leads to a rising demand for capital over time.
ummm, How can interest exist in our current system without accumulating more debt?
By transferring real assets to issuers of paper promises for future income streams some significant portion of which the principal will never be re-paid let alone the interest as promised..
It is my belief that a significant amount of mathmatically unpayable interest is hidden in plain sight.
The perpetually rolled 'Federal Debt'.
The Debt of States and Municipalities.
The Debts of all other public and corporate/private entities that will never pay down/off their debts.
WHO really believes that the 'Federal Debt' is ever going to be paid off ?
'Debt' that is be design at origination NEVER to be paid off is not in fact Debt.
TPTB just want the interest on the national debt.it will never be payed down or off...... We're Fu**ed I tell ya!!
Some bureaucrat will just move the x axis down accordingly.
They're still playing pretend games. I think I heard the phrase "massive tax increase" in there somewhere.
And those higher rates will bankrupt the US Treasury, as the interest on our monstrous debt eats us alive, even while our economy continues to stagnate!
Hence the reason those rates will never rise in earnest. The world economy would screech to a defening halt and the debt maintenence would then begin it's parabolic march upward (it's already begun actually).
It's a classic debt trap.
This is a good article. The only caveat....They are saying that the bond market will always follow the wishes of the Federal Reserve. There will be no rebellion in that market and rates will stay low as long as the powers want them to. The bond market is much much larger than the US stock market and dances to a different drummer. At some point, even without growth, increases in Cap Ex. and wage inflation investors will say enough is enough and demand a higher interest rate. What that will be only Mr. Market knows. I have 0 positions in bonds, long or short but I am having a difficult time believing that the Fed will maintain control and adjust rates however they seem fit for however long they want to.
So far though, they have won the game.
and if one entity ends up owning the entire bond "market"?
Please, the dollar will die or be fundamentally changed before "wage inflation investors will say enough is enough".
math and the laws of physics and Nature are what they are.
The Chevy Cruze at under ten grand new will take out the bulk of the auto industry.
Three engines including a diesel.
If they throw in a hybrid too that thing will get a 500 miles a gallon instead of "the mere fifty" the current diesel gets.
That would be with mechanical drive systems.
Pricing like that will have a tremendous impact on the economy at large. "Houses for a buck" kinda cheap...
And for the record, I have been bellowing here for years now that the Fed cannot raise rates and will not raise rates voluntarily. They can't. We are already bankrupt and the obscene interest costs even at a 2% fed rate would be a disaster for the markets. They can expound all they want, beat their chests and tell us in mid 2015 they will start raising rates. They might try 25 basis points but as soon as they do the stock market will implode. And 5 years later here we are still at the same place with 0 structural growth. It is all a Ponzi scheme and at some point will end.
Rates will not rise on the words of the Fed, they will rise on the rebellion of investors. When the Pied Piper decides it is time to get paid back, Game, Set, Match!!
so low interest rates signify the start of the long-term death spiral.
Rates will be zero/negative for the next 40 years+ unless some large country gets destroyed and needs to be rebuilt.
ZIRP. Happy 6th Birthday on 12/16!
No mention of supply and demand. QE has distorted it.
Think ECON 101 folks. Massive increase in supply without the matching increase in demand means prices drop.
The gvts around the world are not balancing their budgets. Not even close.
"Massive increase in supply" -- Supply of what? Be specific. A massive increase in the supply of paper/digital claims on real goods and services? Yes. All good so long as those claim don't actually start seeking out those real goods.
Rates go up? Not possible. That will mean cutting welfare and disability (fake) payments because we'll have to pay massive interest payments on the national debt. This will get the Obama voters REALLY angry. Looting, blocking people from driving to work, and burning of neighbor's businesses to begin at dusk...
With the financial world upside down, I've learned to adjust. The key is having a steady income of some (any) sort and a solid credit rating, though I started with a shitty one, lied about my income (only inflated it by 100% for the fucking banksters), and continued to improve it.
Here, in a nutshell, is what I've done the past six years.
Credit score went from 620 to 710.
Kept earning enough to pay bills and have a little extra left over for buying silver.
Got a 0% interest CC. Used it (bought silver). Paid it off with another 0% interest credit card. Paid that off. Got another HUGE 0% interest CC. Am paying that off, meanwhile got two more 0% interest CCs, which I haven't used, but are 0% interest until December of 2015 and May 2016.
I now have a lot of silver, steady income, paid off house, cheap land (and small apartment) in the country to farm, more credit than I'll ever need, and, in less than a year, I'll start collecting SS.
This 0% interest rate policy is working for me, though it took some getting used to. I'm still going to continue buying small amounts of silver every month (dollar cost averaging) and farming, living very frugally, which is actually quite enjoyable. BTW: I am a smoker and I've grown my own tobacco, harvested it, cured it, cut it and smoke it, and, it's excellent.
Stay away from investment advisors and tax traps (tough to do in NY, but, doable).
during normal environments this analysis is completely correct. But what happens with the supply of debt oupaces demand? Global debt to global GDP is over 300%. And especially when contries like the US were actively swapping long term debt for lower cost short maturity debt, we may indeed see a huge supply of debt coming to market. under this assumption, rates will be forced up due to low demand. Then....POP. start over. Can you imagine if rates went back to "average"? or even average for the 90s.....an w/o the benefit of a stronger market? In my small opinion, this is the only time when people will wake up...when rates rise because the supply of debt outpaces the demand for debt.
I'd love ot see a breakdwon by global maturities of debt. too complex, but i'm sure the answer is in there somewhere.
As long as interest rates are tied to economic performance, they'll stay low. And since the whole world is so deep in debt that most current income must vanish to repay debt on inflated assets (mostly homes, but also stocks on margin), there isn't enough cash lying around to create sufficient demand to cause massive inflation on that basis (just slightly high inflation like now).
So, as long as the predators-that-be keep the world economy in depression (the fact) while they pretend the economy is merely "underperforming", interest rates can be low.
However, at some point even those morons we call human beings may notice the magnitude and consequences of the astronomical and ever-growing debts, and realize all these currencies are utterly worthless fiat. And THAT is when the avalanche occurs. Who will lend their cash at 2% or 5% when they realize what they receive in return will be worth-much-less, if not worthless? Nobody.
As stupid as humans are, the time will come when a sufficient number of marginally astute humans will say "yeah, I think I'd rather hold something real than all this fundamentally worthless paper". And then, rates rise, then soar, then go vertical, then... nobody will lend you money, because everyone who had any available savings either lost it all or converted it into something real.
But true enough. UNTIL a few people realize the value of the paper they hold is illusionary, a radically crappy world economy will keep interest rates low... no matter how "fantastic" the mainsteam media claims the economy is.
Very good.
Food for thought: At what point, if ever, will people and businesses tell the money printing governments to screw off and use gold (not inflatable) as a money standard once again? Let the governments print. Don't participate.
I wish I knew. So do lots of others.