As we come to the end of 2013, one of the most important economic issues investors are focusing now is what the interest rate picture looks like for 2014, and how this is going to affect their personal assets and the US economy in general.
If we take a look at the 10 year T Note Yield chart below, we can see that a bottom around the 2.15% level was made in the middle of June, 2013. Since then yields have risen to the 2.88% current levels as of Friday, December 13.
This is a staggering increase in short-term interest rates that signals bond investors are demanding a higher yield in US Treasuries to compensate for the increasing risk of US record sovereign debt levels and the Fed's expanding balance sheet with no end in sight.
Increasing US Credit Risk
According to Michael Pento, Pento Portfolio Strategies LLC's latest weekly commentary, the US economy is increasing its debt burden not reducing it.
"Thanks to the nearly-free money offered by the Fed during the past several years, publicly traded U.S. Treasury debt has soared by $4 trillion (46%) since the spring of 2010. debt has increased by $1.6 trillion (8.2%) during that same timeframe. And, in the third quarter of 2013 consumer debt jumped by $127 billion, to reach a total of $11.28 trillion-the largest quarterly increase since Q1 2008. Household debt was up across the board with mortgage debt, auto loans, student loans and credit card balances all increasing substantially.
The significant increase in aggregate debt outstanding in the economy equates to a substantial increase in the credit risk of owning U.S. sovereign debt."
As short-term interest rate rises, it puts more pressure on the short end of the market by creating a very difficult environment for the Feds to continue to maintain a zero interest rate base policy. Financing costs grow substantially for the private sector and the interest rate payments on the tail end of our sovereign debt could explode exponentially.
Rising Inflation Risks
As we come to the end of free money created since the beginning of the 2008 recession, the Fed's balance sheet has exploded from $2.3 trillion to just under $4 trillion - a staggering 70% increase. The inflationary risks in the system have increased drastically as banks hold record levels of reserves and as interest rates begin to rise it puts more pressure on the government and thus enforce the banks to inject more liquidity into the economy. The rate (Velocity) at which this money is distributed to main street and the economy could bring more surprises as people panic and chase fewer cheap goods available and we go into an uncontrollable price acceleration or inflationary spiral as the US dollar implodes.
How High Will Interest Rates Rise?
Michael Pento remarked:
"The bottom line is the interest rates offered on sovereign debt are mostly a function of the credit and inflation risks associated with owning that debt--not the level of growth in the economy, no matter what Wall Street likes to claim. Given the above data, it is clear that the 4% yield on the Ten-Year Note seen back in early 2010 will be eclipsed. Since inflation pressures and the solvency risks to the nation have increased by an average of about 50%, it would seem logical to assume the Ten-Year Note should trade 50% higher than where it was back in early 2010. This would put the Ten-Year in the 6% range, which is still about 100 basis points below the forty-year average. Of course, this is providing the Fed is actually going to end its artificial manipulation of long-term interest rates next year."
Regardless of the staggering amounts of money the Fed has pumped into the economy ($85 billion monthly), the economic growth in terms of GDP has not made that much improvement.
The net result is that the economy has been growing at an annual rate of less than 2 percent. (The latest estimate, that the economy grew at an annualized rate of 3.6 percent in the third quarter, overstates the strength of demand because half of that increase was just because of inventory accumulation.) Weak growth has also meant weak employment gains. The decline in unemployment, to 7 percent, as announced on Friday, has largely reflected the decreasing number of people looking for work. Total private-sector employment is actually less than it was six years ago.
Is the US economy strong enough to provide the Fed an exit strategy?
In a recent article, Dr. Marc Faber made the following comments published in Seeking Alpha regarding the Fed's exit strategy.
"Basically we have the same things since November 2008 when QE was introduced the first time. At that time they were talking about an exit strategy. You will never hear about an exit strategy today. They talk about maybe tapering. When they started in 2008, my argument was, believe me we are going to go to QE 99. We are never going to stop the program because when governments introduce new programs under the excuse of urgency to fix something usually these programs stay in place for a very long time. And all this talk about tapering, maybe they'll do a kind of cosmetic tapering at some point, like actually I have to say as of today this year alone, the FED's have bought more than $1 tn worth of treasuries and mortgage backed securities because they not only have this $85 bn of asset programs but they also have the accruing interest to invest. So they bought much more than they have made public. Now, can they go down from a purchase of $85 bn?… Yes, it's going to be cosmetic. As soon as the economy weakens again, as soon as there is an economic crisis, they will go to $150 bn a month or more."
Could gold and silver be an alternative hedge against this monetary and economic implosion coming?
Historically speaking, gold and silver have always served as a source and as an alternative strategy to protect the purchasing power of a currency. The Fed in 2008 realized that the only way to save the world economy was to provide record levels of stimulus as a safety net, and worry about the consequences of such policies down the road. Five years later, we're finding ourselves in more debt across the board, with an anemic economic growth, a distorted unemployment picture and a wider gap between the 1% wealthy and main street than any other time in American history.
The central banks have been successfully allowed to manipulate the price of gold and silver - and more pronounced recently in the last couple of years. This has been done as an Herculean effort to distort the real picture of what is happening to our country politically and economically. By manipulating the prices of gold and silver in the futures (paper) markets and selling record levels of contracts with non-existing product behind them (illegal to common traders), central banks can manipulate prices to stay at artificially low levels until markets forces prevail and adjust prices to unimaginable levels unprecedented in the history of precious metals. It seems that time might be very near and you have to prepare for this outcome.
Let's take a look at the gold and silver futures markets and see what we can anticipate for next week of trading.
The December gold futures contract closed at 1238 . The market closing below the 9 MA (1281) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral.
With the market closing below the VC Weekly Price Momentum Indicator of 1242, it confirms that the price momentum is bearish. A close above it would negate the bearish signal to neutral.
Cover short on corrections at the 1216 to 1194 levels and go long on a weekly reversal stop. If long, use the 1194 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1264 to 1290 to levels during the week.
The December Silver futures contract closed at 19.66. The market closing below the 9 day MA (20.89) is confirmation that the trend momentum is bearish. A close above the 9 MA would negate the weekly bearish short-term trend to neutral.
With the market closing below the VC Weekly Price Momentum Indicator of 19.81, it confirms that the price momentum is bearish. A close above it would negate the bearish signal to neutral.
Cover short on corrections at the 19.13 to 18.60 levels and go long on a weekly reversal stop. If long, use the 18.60 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 20.33 and 21 levels during the week.
Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts
Trading Derivatives, Financial Instruments And Precious Metals Involves Significant Risk Of Loss And Is Not Suitable For Everyone. Past Performance Is Not Necessarily Indicative Of Future Results.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GLD, SLV, GDX, GDXJ, PSLV, PHYS, AGQ over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.