Higher Interest Rates: Not a Question of 'If' but 'When' 23 comments
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After reaching a yield of nearly 3.9% in early August, the 10-year Treasury yield has fallen back to 3.35%. Since mid-May, the 10-Year T-Note yield has fluctuated between 3.25% and 4.0%. We would be surprised if the yield drops below the bottom of this range, except perhaps on a very short-term basis coincident with a possible stock market correction this fall. Conversely, we think it is just a matter of time before Treasury yields move above the 4.0% level on a sustained basis.
Our conviction is that the inflationary efforts of the government will eventually overwhelm the deflationary effects of private sector deleveraging. Higher inflation and interest rates are therefore not a question of if but when. On any longer-term basis, the Treasury bond market seems to be badly mispricing risk. Does anyone seriously think that government bond prices won’t at some point begin to reflect concerns about the fiscal condition of the U.S.?
Given that it will be exceptionally difficult to discern the precise turning point when Treasury yields move higher, we think it is prudent to avoid interest rate risk in the government bond market. Even if inflation expectations remain benign for a period of time, Treasury bond prices could begin to fall under the sheer weight of the supply of government debt that is being issued. Moreover, the true market impact of this supply has yet to be felt due to Federal Reserve debt monetization operations. One estimate we have seen is that the Fed bought a huge 38% of long-dated Treasury issues from March through July. Given that the Fed announced in August that it is planning to conclude its direct purchases of U.S. government debt by October, the market’s true appetite for U.S. government debt at these yield levels remains to be seen.
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As your tiltle is obviously based on your 'convicton' rather than any real macroeconomical or saving-investing process, you may had better titled your article 'Our conviction is that Higher inflation and interest rates are therefore not a question of if but when. '
Just look at Japanese government bonds yields for the last 20 years, and you will realise that issuance-size and 'monetizing actions', debt to gdp ratio or fiscal deficits play only a marginal part in the yield determining process...
"Our conviction is that the inflationary efforts of the government will eventually overwhelm the deflationary effects of private sector deleveraging."
----------------------...
Assessing a complex quantitative phenomenon in a single breezy sentence is not particularly informative. It is at the intersection of massive debt, massive overcapacity, and collapsing demand that our interest rate future will resolve.
I'd like to see more numbers -- "conviction" doesn't mean much.
Argument from incredulity is similarly uninformative, when author writes:
"Does anyone seriously think that government bond prices won’t at some point begin to reflect concerns about the fiscal condition of the U.S.?"
"Does anybody seriously think" is not a convincing argument for any proposition. The historical fact is that we've had similar fiscal issues, which were followed by a completely benign outcome:
The United States ended World War 2 with an accumulated debt equal to %140 of GDP, after which followed thirty years of relatively high taxes, low inflation, and excellent growth together with debt reduction.
So its not a questi
For centuries, history books will record the changes going on now and analyze the causes and changes in power as to why they were so hidden and then so suddenly emerged.
The U.S. can't grow the private sector even if we have 4% growth (mostly from government intervention) fast enough to keep up with the growth in debt and interest on debt. That will lead to the eventual collapse of the dollar when the foreign lending dries up and they have no choice but to cut their losses with the dollars they still hold.
As fast as they are moving to non-dollar trade deals and currency swaps and spending dollars on mines, oil fields, commodity stockpiling, IMF Bonds, real estate, they will still too many dollars to not take a hit. But, they have no choice as staying with the dollar will eventually cost even more.
We have boxed ourselves in with decades of flawed monetary and economic policies and we can't reform them without the reforms causing a deep depression. If we don't reform, we may delay it for awhile and then have an even deeper depression. However, voters don't want the pain now.
The only reason we did so good after WW II, in spite of the bad policies we had was that we had virtually no competition. We were about the only intact, developed nation with industrial might after the war. The world had to buy from us as they rebuilt. But, by 1968, we were already borrowing $1 for each $1 of GDP growth as the world began to compete again. We have gone down hill ever since with a huge speed up when Nixon ended the Bretton Woods gold standard with the dollar.
From that point on we have seen our buying power decay and the loss of our economic power in the world and our middle class. We have seen our infrastructure that was the pride of the nation, decay to a ranking of "D" with the best ranked at "C" because we no longer have tax revenues enough to maintain it. We have spent so much on defense and social programs we are bankrupt and can't even keep up with debt. In fact debt was the only way the consumer kept his spending up for the last 15-20 years as savings went from 11% or so to zero and now is starting to creep up.
Notice that during the "cash for clunkers" it ticked down again. Just what we didn't need, more consumer debt and a pull forward of demand for cars. Auto companies are already reducing sales expectations for next year due to this. That probably means another round of layoffs next spring.
Current ramp ups in business may be due to summer road construction and preparing for Holiday selling periods. The inventory has to be made now for that Holiday season and if the consumption is weak, that inventory will not only sit in warehouses but, the layoffs will resume.
This is a credit based expansion society that hasn't had this type of recession since the last one in the 30's. All since then have been "inventory recessions." Yet, this is not going to be like the 30's due to the falling dollar and the loss of our economic power and industrial base and many other things that are different now.
We have created a situation where we can only delay the inevitable collapse of how we have been running the nation. We will have to totally rebuild from the local level up but, we can and we will and we will be strong again if we return to our core values.
(thats before Clunkers)...business spending has dropped 30%..businesses have done almost all the cutting they are going to do.....
Nonetheless, it may be a positive thing for our country to realize how we have squandered our wealth and continued to lead ourselves into this delima.
Sure, we can look out for our individual wealth, but what good is wealth if it is not collective. There is an increasing burden in our society to help our neighbors and our communities. I'm not writing of finances and the ability to get credit, but a renewed focus on the local communities as we help each other through the next decade of "unkown" conditions.
By that measure if we were to take the Q1 2009 reported US GDP of $14,097.2 billion and divide Q1 2009 total US debt level of $60 Trillion by that GDP number we would get an astonishing record Debt to GDP ratio of 425%.
This is unprecedented and is showing that the US economy is being crushed by the debt that is growing in absolute terms thanks to all kinds of US Government and privately owned Federal Reserve’s liquidity injection and asset prop-up schemes while at the same time the GDP is shrinking. Hence the conclusion is logical that these efforts are not working while they are piling on unprecedented levels of debt outstanding that are not possibly going to be payed back, and therefore will be defaulted on by definition. This is going to blow up in a quite dramatic deflationary bust event soon enough. One can only surmise whether it will be some kind of a credit event such as default by major US coroporation(s) or fear driven bond price drop that may lead to jump in interest rate. But in any case this is going to be deflationary as debt bubble begins to crack at the seams in earnest. It is only a matter of time. By the way, in the week before Labour Day of 2009 gold prices spiked up to nearly $1000 which is indicative of credit stress as investors flee to safety of gold from even the safest U.S. Treasuries. Gold as we know is nobody’s liability and therefore rises during credit stress situation in the economy. Surely this spike was not caused by rising inflationary expectations as gold performs abysmally during periods of inflation as any one can verify it by looking at the gold price decline since 1980 through early 2000’s when economy was in its boom years.
As a side note, the above mentioned Federal Reserve spreadsheet pegs U.S. Federal debt only at $6.7214 Trillion which is obviously excluding the Treasury debt that various Agencies of the Federal Government are holding and therefore make it appear as if the Government ows it to itself. The $60 Trillion figure is therefore a conservative estimate.
ndainfo.wordpress.com/.../
the FED can't afford to see Obama to get sent back to Chicago so soon and face a re-energized Ron Paul Republican party.
On Sep 06 03:20 PM RECESSIONPROOF wrote:
> "when" is still a very important question, because "if" you short
> bonds before "when" its right time to short, then "when" can cost
> you too much "if"
TK
On Sep 06 02:34 PM Jan Paul wrote:
> You can't compare what is going on now to anything in our history.
> As economic power continues to shift from developed nations to emerging
> markets, a new chapter in history books is being written.
>
> For centuries, history books will record the changes going on now
> and analyze the causes and changes in power as to why they were so
> hidden and then so suddenly emerged.
>
> The U.S. can't grow the private sector even if we have 4% growth
> (mostly from government intervention) fast enough to keep up with
> the growth in debt and interest on debt. That will lead to the eventual
> collapse of the dollar when the foreign lending dries up and they
> have no choice but to cut their losses with the dollars they still
> hold.
>
> As fast as they are moving to non-dollar trade deals and currency
> swaps and spending dollars on mines, oil fields, commodity stockpiling,
> IMF Bonds, real estate, they will still too many dollars to not take
> a hit. But, they have no choice as staying with the dollar will
> eventually cost even more.
>
> We have boxed ourselves in with decades of flawed monetary and economic
> policies and we can't reform them without the reforms causing a deep
> depression. If we don't reform, we may delay it for awhile and then
> have an even deeper depression. However, voters don't want the pain
> now.
>
> The only reason we did so good after WW II, in spite of the bad policies
> we had was that we had virtually no competition. We were about the
> only intact, developed nation with industrial might after the war.
> The world had to buy from us as they rebuilt. But, by 1968, we were
> already borrowing $1 for each $1 of GDP growth as the world began
> to compete again. We have gone down hill ever since with a huge
> speed up when Nixon ended the Bretton Woods gold standard with the
> dollar.
>
> From that point on we have seen our buying power decay and the loss
> of our economic power in the world and our middle class. We have
> seen our infrastructure that was the pride of the nation, decay to
> a ranking of "D" with the best ranked at "C" because we no longer
> have tax revenues enough to maintain it. We have spent so much on
> defense and social programs we are bankrupt and can't even keep up
> with debt. In fact debt was the only way the consumer kept his spending
> up for the last 15-20 years as savings went from 11% or so to zero
> and now is starting to creep up.
>
> Notice that during the "cash for clunkers" it ticked down again.
> Just what we didn't need, more consumer debt and a pull forward of
> demand for cars. Auto companies are already reducing sales expectations
> for next year due to this. That probably means another round of
> layoffs next spring.
>
> Current ramp ups in business may be due to summer road construction
> and preparing for Holiday selling periods. The inventory has to
> be made now for that Holiday season and if the consumption is weak,
> that inventory will not only sit in warehouses but, the layoffs will
> resume.
>
> This is a credit based expansion society that hasn't had this type
> of recession since the last one in the 30's. All since then have
> been "inventory recessions." Yet, this is not going to be like
> the 30's due to the falling dollar and the loss of our economic power
> and industrial base and many other things that are different now.
>
>
> We have created a situation where we can only delay the inevitable
> collapse of how we have been running the nation. We will have to
> totally rebuild from the local level up but, we can and we will and
> we will be strong again if we return to our core values.
"...after which followed thirty years of relatively high taxes..."
I'd rather have the high interest rates.
Of course unforeseen events such as major war or economic collapse of Japan could produce a worldwide flight to the dollar and soaring bond prices since the U.S. still has the strongest military in the world. But barring world catastrophe, the most likely trend of long U.S. treasury prices seems down.
I would not want to be holding a large bond portfolio given these headwinds of historically high bond prices and mounting downward pressure from loose government fiscal policy.
I don't know the WHEN (just like everyone else), but the US Treasury market is the biggest bubble I have seen in my nearly 3 decades in the industry.
When that final US bubble bursts, it will NOT be pleasant.
On Sep 06 09:07 AM Erwan Mahe wrote:
> 'Our conviction is that the inflationary efforts of the government
> will eventually overwhelm the deflationary effects of private sector
> deleveraging. Higher inflation and interest rates are therefore not
> a question of if but when. '
> As your tiltle is obviously based on your 'convicton' rather than
> any real macroeconomical or saving-investing process, you may had
> better titled your article 'Our conviction is that Higher inflation
> and interest rates are therefore not a question of if but when. '
>
> Just look at Japanese government bonds yields for the last 20 years,
> and you will realise that issuance-size and 'monetizing actions',
> debt to gdp ratio or fiscal deficits play only a marginal part in
> the yield determining process...
> Upside is, lower housing prices mean, even with marginally higher interest rates, housing is reatively still affordable...so long as interest rates don't rise catastrophically, there's some reason to hope higher rates won't create a headwind for a future housing recovery. >
But it seems to me as if there is still a pretty big problem with letting housing prices fall much. If anything, I believe the government would love to inflate them at least a little bit. After all, they are pretty sizable holders of mortgages on properties, many of which are significantly underwater. They are also guarantors of a number of financial institutions holding massive amounts of mortgages and mortgage backed securities. Dropping prices would hammer an already reeling FDIC which is trying to keep up with the record numbers of banks and other institutions they are in the process of liquidating.
Although letting prices drop would certainly make properties more affordable for people and businesses again, doing so would create a lot of pain and instability in the financial markets, and perhaps have a profound effect upon the deficit and debt, and hence interest rates. If it did cause a big jump in interest rates, that, of course, could wipe out much of the benefit of falling prices, from the standpoint of those wishing to purchase properties.
For those already owning them, it probably wouldn't be beneficial, other than perhaps lowering property taxes, but then again, that would hammer the state governments already reeling from big drops in income...