Take It To The Bank: Interest Rates Won’t Rise, Report 11 Feb 2018

How Not to Predict Interest Rates

We continue our hiatus from capital destruction to look further at interest rates. Last week, our Report was almost prescient. We said:

The first thing we must say about this is that people should pick one: (A) rising stock market or (B) rising interest rates. They both cannot be true (though we could have falling rates and falling stocks).

We write these Reports over the weekend. At the time of last week’s writing session, Friday’s close on the S&P was 2757 (futures). Monday this week saw a crash, with the S&P down to 2529 at the low point in the evening. That is a drop of -8.3%.

We are not stock prognosticators, and we will neither tell you “short the market” nor “buy the dip”. We have a different point to make.

Rising interest rates, by a variety of mechanisms, cause stocks and all asset prices to go down. We have touched on a few in this Report. One is that investors have a choice between the risk-free asset—the Treasury bond—and anything else (note: the Treasury bond is not risk free, but if it defaults then everything else will be wiped out in the collapse). Why would they accept a lower yield on stocks along with the greater risk? Another is that corporations can borrow to buy their own shares. Management may do this if the interest rate is lower than their shares yield. But they can sell shares to pay off debt if the shares have lower yield than the interest rate.

Let’s look at a few more.

Consider home buyers. It is well understood that most people are monthly payment borrowers. That is, they have a budget for the mortgage payment and fit the house to that budget. If the typical middle class family can afford $2,500 a month, that’s it. When the 30-year fixed mortgage rate was 3.4% in 2013, this family could afford to finance $565,000. Today, at 4%, the amount is down to $525,000.

Interestingly, the 30-year mortgage rate illustrates our ongoing theme. Demand for credit is soft. In a time when 12-month LIBOR was under 0.8%, the 30-year mortgage rate was 3.4%. Now that LIBOR has risen to 2.3%, a gain of 1.5%, the 30-year mortgage is going for 4%, or only 0.6% higher. If the mortgage had increased by the same 1.5%, it would be 4.9% and this family would be down to financing $472,000.

And it gets worse. In a falling rates environment, many people take Adjustable Rate Mortgages (ARMs) with a balloon payment at the end, which is another form of duration mismatch. So the relevant 2013 comparison is not 3.4% but 2.6%. At 2.6%, someone willing to use an ARM—we will call him the marginal home buyer—could finance $625,000.

In rising rates environment, we assume that most people will want to fix their mortgage rate. And now there is a consensus, from Fed propagandists to the gold bugs and everyone in between. Everyone thinks that rates are rising. So the relevant comparison for amount financed between 2013 and today is $625,000 to $472,000, a drop of -24%.

Let’s move on to the automakers. At least in the US (we don’t know if this occurs in other countries), they are advertising 0% to finance a new car for 72 months. Of course, the carmakers cannot borrow for free. Let’s assume they are playing the duration mismatch game, and using 1-year maturities, because it’s a lower rate. The disadvantage of financing a 6-year loan with a 1-year liability is that you must roll the liability five times, on each anniversary. The advantage is that the rate is lower.

In any case, their cost of borrowing has increased substantially. In late 2014, 1-year LIBOR was 0.56%. It has risen relentlessly since the end of 2014. Today, it is 2.31%, a gain of +1.8%. This adds $18 million a year of cost, for every billion financed.

Ford sales for the last 12 months are over $150 billion. Even if a quarter of their sales were financed this way, the increase in cost of borrowing over the last three years is $690 million. That covers a year’s worth of sales. But since the company has to carry this debt for up to 6 years, assume annual increase in interest expense is double that (it would be complicated to calculate and we would need more information, but double seems conservative), or $1.38 billion.

Rising interest has added costs which are a big in relation to the automakers’ annual profits, Ford makes around $5 billion a year.

This situation—rising rates to the car companies, but zero interest to consumers—helps proves our case that we are in a falling-rates regime. A falling rates dynamic has soft demand for credit, which increases only when the interest rate ticks down.

The car companies rightly fear what would happen to sales volume if they tried to pass through even just the increase in the cost of borrowing. If they offered 1.8% financing, they would sell fewer cars. Many fewer.

If the rate ticked down enough for them to offer financing at -1%, then that would really boost sales!

This same thing is playing out in all consumer durables, from four-wheelers, to furniture, to boats, to kitchen cabinets.

And likely in commercial real estate. When a landlord finds a creditworthy tenant who is willing to sign a 5-year lease, the landlord may spend some money building out the space to the tenant’s needs. The cost of this has to be amortized in the rent. How much should the landlord be willing to spend, and how does the landlord calculate amortization? A higher interest rate means it’s harder to subsidize the cost of accommodating the tenant’s needs. But if there is a high vacancy rate, the landlord may be caught between a rock and a hard place. Either don’t do it, leave the space empty, and default on the mortgage. Or do it, add to the monthly debt service burden, and risk default—in hopes of increasing the chance of finding other tenants for the other empty spaces in the building.

The rising cost of borrowing is squeezing landlords, making them less willing (and able) to borrow more for new projects.

Now let’s get back to that most people expect rates to rise. Last week, we discussed the causes and effects of the rising cycle (which last occurred 1947-1981) and the present falling cycle since 1981. We said it would take either a miracle or a calamity to reverse and cause a rising cycle. A miracle would be rising productivity and rising profits. A calamity would be rising time preference. And rising rates would cause a calamity—a cascading series of defaults.

However, the idea of rising rates persists. One idea we have seen discussed this week is the effect of rising debt. Massive growth in the national debt is likely coming to America, thanks to a deal between the party of spend more and the party of tax less. This will likely cause an increase in money supply. Because of this, it is argued, interest rates must rise.

Let’s look at that. Here is a graph of the M2 money supply and US government debt along with the interest rate on the 10-year Treasury (all data courtesy of the St Louis Fed).

For this time period, we see that M2 and debt are highly correlated, and anti-correlated with interest. We have indexed debt and M2 as we are only trying to show the correlation.

We went back only to 1981, not because it’s the start of the current falling rates cycle, but because the data does not go back farther. If we had looked 1947 to 1981, we would see debt going from $258 billion to $998 billion, an increase of 287%. At the same time, M2 went from $146 billion to $1.8 trillion (courtesy econdataus.com), or 1,133%. Due to a change in sources in this data set, the change could be overstated by perhaps 400%.

The point remains, the rising cycle and the falling cycle both have rising government debt and rising quantity of dollars. That’s just how a centrally banked fiat currency works. It’s a feature, not a bug. But it does not always have rising rates. It can have—and does right now—falling rates.

Therefore, we emphasize our conclusion. You cannot say that rising debt or rising quantity of dollars will cause rising interest rates. Rising debt/M2 has not correlated with interest rates for 37 years.

If you think that as of 2018 a new correlation will begin, we encourage you to describe your theory. And please write to us. We would love to look at a new theory.

The above ideas are an application of Keith’s Theory of Interest and Prices in Paper Currency.

Geocentric vs Heliocentric

Before Copernicus, people believed that the sun and planets revolved around the Earth. But it was pretty complicated to explain the retrograde motion of the planets. And it led to a question. What would cause an object to slow down and reverse? Nothing on Earth behaves like this.

The heliocentric model of Copernicus is much simpler. Each planet goes around the sun in a circle (later they realized the orbits are actually not circles but ellipses).

Today, we have a dollarcentric view analogous to the geocentric view of the Medievals. Analogous to retrograde motion of planets, is the question of whether gold or stocks are outperforming. According to the dollarcentric view, the S&P stock index fell from 2,757 to 2,619, or -5% this week. And gold fell from $1,333 to $1,316, or -1.28%. So most people say stocks underperformed. And most gold bugs are excited, because this (supposedly) supports a case that gold is going back into a bull market. For reference, silver fell from $16.56 to $16.32, or -1.45%. So silver underperformed gold. Which would not be supportive of the gold bull market thesis.

When the markets realize that the dollarcentric view is wrong, we will have a revolution in monetary science, just as Copernicus ushered in a revolution in physical science.

We should be saying that the dollar went up, from 23.3mg gold to 23.6mg. And stocks fell from 2.07oz to 1.99oz gold.

This should not be a radical idea. Even dollar advocates admit that the dollar goes down—indeed the stated goal of the Fed is 2% decline per annum. And they also admit that there can be long leads and lags, years or decades. So this unit, which is an ever-stretching rubber band subject to unpredictable volatility is supposed to be the unit of measure.

And gold, which is not subject to central planning, is just one alternative of many investments—all to be measured in centrally planned rubber bands.

You cannot understand the solar system, if you are trying to measure the backward motion of Venus against the forward travel of Mars, using the Earth as the center. And you cannot understand the markets if you try to measure the upward motion of gold against the downward motion of stocks, using the dollar as the center.

Gold standard aside, this revolution is necessary, and we believe that it’s coming. It will have to, as our currency becomes more volatile. Those stuck believing that our gyrating, failing currency is the center, while it goes off the rails, will not be able to grasp what happens.

Supply and Demand Fundamentals

Let’s take a look at the only true picture of the supply and demand fundamentals for the metals. But first, here is the chart of the prices of gold and silver.

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio (see here for an explanation of bid and offer prices for the ratio). The ratio rose.

Here is the gold graph showing gold basis, cobasis and the price of the dollar in terms of gold price.

The uptrend of the cobasis (scarcity) continued this week. Not surprising with falling price. The Monetary Metals Gold Fundamental Price rose $14 this week, to $1,386. Now let’s look at silver.

The same thing is happening in silver (though beware the effect of the control roll, this is the March contract which hits First Notice day in a few short weeks). The Monetary Metals Silver Fundamental Price fell 30 cents to $16.93.

We promised to write an article about the silver price and basis action of Friday last week (Feb 2). We did not do that, so please see the chart below.

What we look for when analyzing intra-day price moves is the behavior of the price in relation to the basis. Friday’s action is similar to many of our previous intra-day Forensic Analysis, where we see that price and basis move together, in this case both falling.

This is a picture of selling primarily in the futures markets, or to put it another way, that futures selling led the spot market lower. It is a common pattern because speculators in futures market predominantly operate on margin/leverage compared to the spot (physical) market, where a higher proportion hold fully paid up positions.


© 2018 Monetary Metals


TeethVillage88s Mon, 02/12/2018 - 10:08 Permalink

USA is a Money Center Bank Economy, therefore we rely on refinancing and new financing to make the Import Economy Work. So Interest Rates have to remain on the Low Side.

Also of course we Extract Wealth in the form of Usury, Taxes, Fees, Planned obsolescence, Mandatory Utility Payments by everyone. Last count of Taxes & Fees was 98 Different Types.  Another Reason we need Low Interest Finance is the Planned Inflation in the Economy which has effected everyone and everything.  No more Frontiers Men like Daniel Boone, Davy Crockett, Jim Bowie... Independent Pioneers are no more since you can't leave your family behind to explore, live off the land, or in anyway be independent of Government.

Total--Interest on the Public Debt, Table 5 Monthly Treasury Report

2016 Total--Interest on the Public Debt = $457 Billion

2015 Total-- Interest on the Public Debt = $430 Billion
1998 Total--Interest on the Public Debt = $363.824 Billion

IRS, Total Outlays—Internal Revenue Service, under Treasury, 2016 = $133 Billion (Extracted Taxes handed out as Credits)
IRS, Total Outlays—Internal Revenue Service, under Treasury, 1998 = $33.2 Billion

jaxville TeethVillage88s Mon, 02/12/2018 - 11:47 Permalink

I'm not so sure about that.  The Fed and other central banks can play with /adjust rates within certain parameters.  If they go too far either way they risk the markets for debt pricing them into irrelevancy. The US Treasury needs to sell a lot of debt in the years ahead.  Do you think institutions will continue to buy that paper with all it's risk for next to no return?

  Rates must reach normalized levels but because they were held below for so long they will overshoot them. 

 In spite of that I still think that precious metals are the best place to be.  It is also good to have some cash as long as it is liquid so you can take advantage of deals caused by higher rates.  Liquidity is important so you can exit your cash position once monetary inflation causes ALL commodities to start rising in price.

In reply to by TeethVillage88s

philipat jaxville Mon, 02/12/2018 - 22:54 Permalink

OK so who is going to buy the approximately $2 Trillion (with a "T") that the UST is expected to issue this fiscal year? Foreign buyers don'r care about the US debt problems and will not buy Treasuries if the rate of return is deemed not adequate to offfset the risk (including a declining Dollar). If the answer is The Fed will moentize the debt, which is most likely, that would be infaltionary and place further downward pressure on DXY, which in turn would result in higher rates?

PS. Weiner is an Establishment shill asshole...

In reply to by jaxville

All Risk No Reward Lost in translation Mon, 02/12/2018 - 18:41 Permalink

>>I thought interest rates serve to price in risk - did I misunderstand?<<

Know, you understood the JP Morgan's good reason.

You do not understand his real reason. Instantiating money with interest is engineered to enslave society to the Supra-national Money Power Mega-Corporate Global Fascists.

You don't have to believe me, or Henry Ford when he said:

“The one aim of these financiers is world control by the creation of inextinguishable debt.”
~Henry Ford

It works like this:

If the Money Power lends $20 to anyone in society, after one year, $21 is owed due to double-entry bookkeeping adjustments that added $1 interest liability to the borrower and a $1 interest asset to the Money Power balance sheet.

At the end of one year, $20 is possessed by the borrower, $21 is owed, and the lender controls the $1 asset on their balance sheet.

Even though the balance sheet for the society is balanced at $21, the non-Money Power entity has been conned and is no AT THE MERCY OF THE MONEY POWER BORROWER.

This works for $20, $20 million, $20 trillion, or any dollar amount lent into existence.

Let me explain the real reason for an inflation target, even though it is illegal according the penalty-free Federal Reserve Act in Section 2A (look it up).

$20 can't pay back $21, so the Money Power's ability to steal is limited to $20 in collateral. But they want to steal the globe through this prima facie debt-money fraud, SO THEY LEND ANOTHER $20 INTO EXISTENCE.

Now the first borrower can work or sell an asset to the second borrower and their debt is now payable.

But, two things also happen.

1. The debt grew exponentially - from $1 to $2. We see debt growing exponentially in all BIS debt-money controlled countries (including Israel!!!! Ordinary Jews are ENSLAVED TO THIS FRAUD, too!).

2. The money supply inflated... from $20 to $40.



"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
~Lord Acton

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
~Napoleon Bonaparte

"Let the American people go into their debt-funding schemes and banking systems, and from that hour their boasted independence will be a mere phantom."
~William Pitt, (referring to the inauguration of the first National Bank in the United States under Alexander Hamilton).

How To Be a Crook

Poverty - Debt Is Not a Choice

Renaissance 2.0 The Rise of [Debt-Money Monopolist] Financial Empire

Debunking Money

Krugman (and each MIT economist professor - THEY KNOW AND THEY OCCULT!) is a Goebbelsian propagandist as he covers the crimes of wolves with his fake sheep suit and lisp.

Krugman to Lietaer: "Never touch the money system!"

And It's Gone

People with good intentions but limited understanding are more dangerous than people with total ill will.
~Martin Luther King, Jr.

"Although the so-called "moral issues" were raised, in view of the law of natural selection it was agreed that a nation or world of people who will not use their intelligence are no better than animals who do not have intelligence. Such people are beasts of burden and steaks on the table by choice and consent."
~Silent Weapons for Quiet Wars

In reply to by Lost in translation

crazytechnician TeethVillage88s Mon, 02/12/2018 - 12:35 Permalink

Interest rates are a lagging indicator of how much new fiat money is being loaned into existance. If demand for credit and loans is low then money creation is low thus currency debasement is low. Therefore rates will stay low. If demand for credit is high then new money creation is high and central banks will push up rates to slow down the debasement. Once you reach a point where demand for new money is extremely low , we will see deflation. That is when negative rates will happen. But they won't be called negative rates , they will be called bank bail-in's.

In reply to by TeethVillage88s

LawsofPhysics brianshell Mon, 02/12/2018 - 12:58 Permalink


The only thing that matters in a biosphere with finite resources is what is the demand for real resources, productive assets, and anything that is required for a high standard of living!

Everything else is snake oil bullshit, time for all these useless paper/digit-pushing middlemen to be turned into something useful, like fertilizer.

"Full Faith and Credit"

same as it ever was!!!

In reply to by brianshell

brianshell crazytechnician Tue, 02/13/2018 - 03:21 Permalink

You have a business. You need more capital. You take on a partner. Your partner shares in either the gain or loss.

Why would you accept a partner that only shares the gains?

Perhaps I failed to clarify the source of the paper. If a lender can create money from thin air but requires fungible collateral in mortgage, what risk has the lender taken?

The money, that is currency, is simply a note accepted between parties. The note has no value. It is the contract and its liabilities that have value.

In reply to by crazytechnician

crazytechnician brianshell Tue, 02/13/2018 - 14:48 Permalink

They deduct it from the equity value of the bank. IE that means they will have to sell their shares on the open market to cover their loss. Ergo the bank loses capital value. If their loan losses exceed their total book value then it's either a bail-in , bail-out or Asta La Vista - Leyman or BCCI style. It's all coming....

In reply to by brianshell

mtl4 TeethVillage88s Mon, 02/12/2018 - 13:35 Permalink

The first thing we must say about this is that people should pick one: (A) rising stock market or (B) rising interest rates. They both cannot be true (though we could have falling rates and falling stocks).

Sorry but this is incorrect because if gov't bonds crash and money parks in stocks then you most certainly can have both A and B at the same time but I guess if you just promote PM's then it's always a great time to buy.

In reply to by TeethVillage88s

lucyvp mtl4 Mon, 02/12/2018 - 20:39 Permalink

If gvt bonds crash, the entire bond market goes.  If the entire bond market goes, over-leveraged companies will not be able to borrow to expand operations, or roll over their gobs of existing debt.  If the fed's can't borrow more money, how many gvt purchases from private industry get cancelled?

care to tell me I don't understand???  I'm always willing to learn new stuff.

In reply to by mtl4

new game TeethVillage88s Tue, 02/13/2018 - 06:30 Permalink

what about china and japan? we in the late stages of cooperation of this great world wide ponzi scam of fiat race to bottom of devalue to carry on the dynamics of financing vast quantities of unpayable principle. in the past the principle was payoffable.

so, it will be an economic weapon 'shooting' this above thesis down. already, SA, russia and several other countries are restraining their purchases of T's. and add the crazy spending and who will be buying this excess supply? da fed, the buyer of last resort. qe anyone? ask ben, he will answer that question with a whole lotta history of bullshit...

In reply to by TeethVillage88s

aqualech Mon, 02/12/2018 - 12:41 Permalink

What happens when the Chinese and others decide that Treasuries are just some hot potatoes that are getting harder to hold every week?  They will unload them even at a loss if it looks like losses are accelerating. 

Will that keep rates down? /sarc

InnVestuhrr Mon, 02/12/2018 - 15:20 Permalink

Good post UP TO the sales pitch for Shiny Shit, which earns NO INCOME.

In the 10+ years that the immanent-doom-porn carnival barkers and shiny-shit profiteers have been hyping that we should sell our financial assets to instead buy their no-income shiny shit, I stayed invested in CEFs paying 8+% yields.

Compare the investment results of

(a) 10+ years owning no-income, but very high expense, shiny shit


(b) 10+ years owning CEFs paying 8+% yields per year = lots of real income that paid all my expenses PLUS additional savings every year AND after 10 years I have received in income a WHOPPING 80% of the cost I paid to buy the CEFs, and in 2 more years of income I will have received in income a WHOPPING 100% of the cost I paid to buy the CEFs, so that after 12 years ALL THE INCOME IS FREE *AND* I still own the CEFs !!!

Shiny shit is where money goes to stop working, stop earning, and DIE.


GreatUncle Mon, 02/12/2018 - 16:32 Permalink

I would have agreed a decade ago you cannot have both stocks and interest rate rises.

But the 3rd magic ingredient is now? Why the wonderful QE of course or call it liquidity.

Relative concept if the rates rise, create more liquidity than rate rises are destroying and stocks will still keep going up.

The rules changed.


conraddobler Mon, 02/12/2018 - 20:20 Permalink

Rates will rise long enough to destroy the economy and cause a cry for lower rates.

I agree overall they can't rise it's basic math if they do rise the world will implode on itself.  I've heard it theorized that out of chaos order is achieved, some new world kind of order or something.

I am guessing if you blow up the global bond market and everyone and everything is starving then you might have a better go of implementing literally anything that solves such a mess.

skipweston Mon, 02/12/2018 - 23:41 Permalink

Dear Monetary Metals, have you been living under a rock ?
From the Watchman Letter: https://steemit.com/@skipweston

After Brexit the Central Banks change their policies of purchasing not only their own Bonds through QE
but also other assets. The ECB began purchasing Corporate Bonds for the first time.
This was breach of their monetary authority. The Central Banks only authority is monetary policy and Sovereign Bond Interest Rates. No one is questioning this over reach because the Government and Media is covering up the fact that the economy is not growing. The real 10 year average of the GDP is the same as post Great Depression GDP under 2%.


Why did Morgan Stanley receive 7 Trillion in US Treasury Interest bearing Credit Swaps between 2009 to 2010 ?
Why did the FED Bailout the Wall street Banks in 2008?
Why did the FED purchase 4.5 Trillion in assets/ toxic mortgages for the first time in its history ?
In 2014 why didn't the FED raise interests rates when they reached their unemployment target of under 6% ?
In 2016 why did the ECB start purchasing corporate bonds ?
Why is Deutsche Bank real value -480 Billion, yet it still exists ?
Why is the 275 Trillion Global Debt the highest in History ?
Why are Interest Rates the lowest in 5000 years ?
Why does the Banking System use Derivatives to suppress Gold & Silver prices ?
Why has the Derivatives Market exploded to $2.4 Quadrillion ?
Answer: The Global Financial System is Insolvent.

The Private Central Banks are propping up the Markets so Retail Investors, Pension Funds, Foundations, and Hedge funds get suck into the record breaking Stock Market. In 2018 the Central Banks will collapse the system per their game plan on more centralized power using the IMF. The largest wealth transfer in history will destroy millions of Investors Wealth.

francis scott … Tue, 02/13/2018 - 00:21 Permalink

Nothing says an economy is growing like Topsy like the expectation of

higher interest rates.  So if you want to say that a stagnant economy

is growing, start rumors that higher interest rates are coming.