Wednesday , 7 December 2016


Expect Interest Rates Of Only 1% to 4% For Next 20 Years – Here’s Why

It really should not be surprising that there is such a “fear” attached to a bump up in interest rates given the litany of commentary suggesting that the “Great Bond Bull Market” of the last 30-years is over. If you want to read the condensed version of this week’s newsletter, HERE it is:

“Interest rates are not going to significantly rise in the near term to any meaningful degree. In fact, it is very likely that interest rates on Government issued Treasuries will remain range bound between 1% and 4% for the next 20 years.”

Now, you can go back to what you were doing, OR you can read my reasoning as to why I believe this to be the case HERE (below is a snippet of what is included in the article).

The above are edited excerpts (as is the following copy) from an article* by Lance Roberts (StreetTalkLive.com) originally entitled The Interest Rate Conundrum which can be read in its unabridged form HERE.

The Fundamental/Economic Case

There is a very high correlation, not surprisingly, between three economic 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 as illustrated in the chart below.

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 and,
  • producers have the ability to charge higher prices (inflation) and lenders to increase borrowing costs as consumption increases.

Interest-Rates-GDP-Inflation-062615

In the current economic environment, however, 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.

Whether you agree with this premise, or not, is largely irrelevant to this discussion. The current “bullish” mantra is the “great bond bull market is dead, long live the stock market bull.”  Is that really the case, though, because when the bond bubble ends bonds will begin to decline in price, potentially rapidly, in turn driving interest rates higher. This is the worst thing that could possible happen for stock bulls because the stock market is ultimately a reflection of economic growth.

For those of you who still doubt that rising rates are bad for stock market returns, let me put the situation into graphical form for you. The chart and table below show what happens to the financial markets, and the economy, when interest rates increase.

Interest-Rates-Then-Now-062615

Interest-Rates-Then-Now-062615-2

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.

What would be required to diminish the impact of bursting bond market bubble is:

  • a slow, and controlled, unwinding of the bond market over an extremely long period of time. The Fed would have to step up interventions on a massive scale to offset the selling of the bond market to curtail the rise in rates.
  • Even with that, I would expect a rather sharp economic deceleration as the housing market grinds to halt and overall consumption declines…

However, while bond prices are near historic highs, with interest rates near lows, it would certainly seem as if bonds are in a bubble. However, if interest rates are a reflection of economic growth, inflation and wages, as the first chart above suggests, then rates are likely “fairly valued.”

To learn all about The Technical Case go HERE.

*http://streettalklive.com/index.php/newsletter/current-issue.html

Related Articles from the munKNEE.com Vault:

1. Interest Rates Will Be LOW For the Rest Of Our Lives! Here’s Why

The argument that the past 10 years of low interest rates has just been an anomaly which will normalize to higher levels in the next couple of years is not going to unfold. Interest rates will be perpetually low for the rest of our lives! Here’s why.

2. When the Bubble Bursts It Will Cause Deflation & Drive Widespread Social Unrest – Here’s Why

Should we be concerned when tepid economic growth and low inflation are accompanied by increasing public and private debt? Are we borrowing just to stay alive? [As I see it,] national governments will increase national debt loads in order to stay in power until one or more of them default. Then their will be financial panic which will most certainly be deflationary. Here’s why.

3. We Will Experience the Anguish of Severe Inflation In the Coming Years – Here’s Why

The Fed’s buying of U.S. Treasuries by creating currency (paper money) out of thin air is inflationary (either now or long term) and those that do not accept this premise are, with all due respect, daft, and is sure to result in a momentous growth in the value of hard assets such as gold and silver. Here’s why.

4. We’re Doomed! Rising Interest Rates Will Cause Our Financial System To Implode

We’re doomed! Even if the economy were growing at a faster pace, it wouldn’t come close to offsetting the interest payments on our ever-expanding debt. As such, any sort of credit shock – either rising rates or a decline in the rate of debt expansion – will cause the system to implode. Let me explain why that is the case.

5. Inflation: Will It Remain Dormant Or Escalate In Coming Years?

In spite of the indications presented here I’m willing to bet that both growth and inflation will prove to be even higher than expected in the years to come. Here’s why.

6. High Inflation IS Coming – It’s Just A Question Of When – Here’s Why

There have been many econoblog posts of the form, “ha, ha, the people predicting inflation have been wrong so far, when will they give up?”. Let me try to explain why we know high inflation is coming eventually.

7. U.S. Gov’t Ensnared in a Debt & Interest Rate Trap

Should the Fed raise interest rates at some point in the future, as is widely expected, such higher interest rates might bring far worse consequences than can be achieved by simply staying the course. While some small, even token, rate hike would be tolerable, a return to historical norms could reap consequences in the general economy far beyond the direct effect on the federal government’s fiscal status. The fact is that the federal government is ensnared in a debt and interest rate trap of its own making from which it will be difficult to extricate itself.

8. Interest Rates Play A MAJOR Role In the Behavior Of the Stock Market – Here’s Why

To understand how the stock market behaves it is imperative to realize that the stock market is overwhelmingly influenced by interest rates. It’s difficult to overstate this key fact. Interest rates are the bone and marrow of the stock market. More specifically, the stock market is ruled by long-term and short-term interest rates creating an overriding framework for what drives the market in which different sectors do better or worse at different points in the economic cycle. This article explains the behavior more fully.

9. True or False: There Is A Direct Relationship Between Interest Rates & Stock Prices

Events and conditions do not make investors behave in any particular way that can be identified as shown in this analysis of the supposed relationship between interest rates and stock prices. So much for the popular claim that “Interest rates drive stock prices”!

10. What Does Current Money Velocity Say About A Future Rise In Interest Rates?

With all of the things in the world to worry about, how much should we worry about a sudden sharp increase in UST yields? The short answer is not much and here is why.

11. Bonds Getting Slaughtered, Interest Rates to Rise Dramatically, Economic Bubbles to Implode

What does it look like when a 30 year bull market ends abruptly? What happens when bond yields start doing things that they haven’t done in 50 years? If your answer to those questions involves the word “slaughter”, you are probably on the right track. Right now, bonds are being absolutely slaughtered, and this is only just the beginning. So why should the average American care about this?

12. Current Distortion of Interest Rates is Unsustainable & Will Have Dire Consequences

Interest rates have been manipulated to keep them extremely low in an attempt to stimulate the economy but…unless deficits are dramatically reduced…. interest rates will eventually rise and government interest expense will double or triple from the amounts being paid today. That potentially triggers a debt death spiral, where government has to borrow more than otherwise expected. It also raises the credit risk and could ratchet interest rates up again. It has happened to Greece, Portugal, Spain and other European countries already this year and could well happen in the U.S. too.

13. Eventual Rise in Interest Rates Will Be Downfall of U.S. – Here’s Why

Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign. The question is: when is sooner or later? The purpose of this article is to examine that question. Words: 2600

14. Niall Ferguson: U.S. Playing “Russian Roulette” Assuming Interest Rates Will Remain Low

Countering Krugman’s argument that today’s low interest rates show that no one is worried about lending money to us and, therefore, that we should borrow and spend our way to prosperity, Ferguson argues that today’s interest rates are irrelevant. When countries get into trouble, he says, they get into trouble quickly – the way Greece and other European countries have.

15. U.S. Financial System Will Die When Interest Rates Rise! Here’s Why

Right now, interest rates are near historic lows. The U.S. government is able to borrow gigantic mountains of money for next to nothing. U.S. consumers are still able to get home loans, car loans and student loans at ridiculously low interest rates. When this low interest rate environment changes (and it will), it is going to absolutely devastate the U.S. economy. Without low interest rates, the U.S. financial system dies. [Let me explain.] Words: 1529

16. Five BIG Reasons Interest Rates MUST Rise

Brace yourself for one of the greatest interest-rate surges in decades — beginning first in the long-term Treasury markets … later spreading to shorter term Treasuries … and ultimately enveloping nearly every loan, debt, credit, and money market instrument on the planet. This rise may not begin with great fanfare, nor will it immediately upset the apple cart of the economic recovery, but with the march of time, it WILL gain momentum and reach critical mass. Words: 614

17. Rising Interest Rates Could Plunge Financial System Into a Crisis Worse Than 2008 – Here’s Why

If yields on U.S. Treasury bonds keep rising, things are going to get very messy. What we are ultimately looking at is a sell-off very similar to 2008, only this time we will have to deal with rising interest rates at the same time. The conditions for a “perfect storm” are rapidly developing, and if something is not done we could eventually have a credit crunch unlike anything that we have ever seen before in modern times. Let me explain.

18. A Rise in Interest Rates Would Derail An Economic Recovery – Yes or No?

[While]… I am not currently predicting an acceleration in inflation [I believe]…that the risk of interest rate instability is very real [given that] core inflation is already above a key benchmark that the Fed has staked its credibility on,. It should be of concern to investors that, despite economic growth being so anemic and overall resource utilization being so low (including human resources), there is currently very little margin for error on the inflation front. [In this article the author evaluates the danger that rising interest rates could potentially have on the U.S. economy.] Words: 2050

19. Rapid Rise In Interest Rates Will Collapse U.S. Financial System – Here’s Why

There is one vitally important number that everyone needs to be watching right now, and it doesn’t have anything to do with unemployment, inflation or housing. If this number gets too high, it will collapse the entire U.S. financial system. The number that I am talking about is the yield on 10 year U.S. Treasuries. Here’s why. Words: 1161; Charts: 2

20. Interest Rates to Remain Low As Far As the Eye Can See? Perhaps, BUT

Everyone knows that interest rates are going to rise in the future so the real question is not whether they will rise, but when and by how much. [This article analyzes when that will most likely be.]

21. Higher Interest Rates Will Come Once These 4 Economic Conditions Are Met

4 economic conditions need to be in place for interest rates to rise ahead of – and independent of – the Fed’s forward guidance. The economy met only one of those conditions to date but will likely meet all four by the end of the year…What follows is a status report on the four conditions.