He talked about US interest rates moving in roughly 25 year super cycles. The following is Bill's chart to make the point.
He feels that interest cycle has bottomed (this is logical) and that we will be starting a 25 year up cycle in rates, if it has not already started.
He thinks that borrowing costs could double from current levels. This kind of ties in with my thoughts about rates. Just last week I mentioned some sort of reversion to a historically normal level for the ten year treasury in the mid sixes to low sevens seems plausible in the next couple of years.
That ten year treasuries will yield 10% at some point in our lifetime hardly seems like an outlandish prediction.
To be very clear this is a multi year idea, maybe even longer than that. There is a path to higher rates based on how the fundamentals are shaping up as well. If the deficits stay high, rates have to go up. If there is less demand for dollars in the next few years, that too will put upward pressure on rates as well.
The investment relevance for this could be that if treasuries ever do yield 10% we may want to own more than we do now, but we can't know for sure until/if it happens.
10 comments:
I agree with your comments, Roger.
However, Bill Fleckenstein writes today in his Contrarian Chronicles that he believes the Fed is done raising rates for this cycle. Bill is a pretty bright guy although his track record is spotty (whose isn't?). I guess my point is that predicting interest rate trends is one of the most difficult, if not impossible tasks an investor faces. I'm torn right now about whether or not to start increasing my bond maturities which are clustered on the short end right now.
Federal Reserve Policy Destroys the Value of Your Savings
July 10, 2006
For years officials at the Federal Reserve Bank, including Chairman Bernanke himself, have assured us that inflation is under control and not a problem-- even as the price of housing, energy, medical care, school tuition, gold, and other commodities skyrockets.
The Treasury department parrots the Fed line that consumer prices, as measured by the consumer price index (CPI), are under control. But even many mainstream economists now admit that CPI grossly understates true inflation. The most glaring problem is that CPI excludes housing prices, instead tracking rents. Everyone knows the cost of purchasing a home has increased dramatically in the last ten years; in many regions housing prices have more than doubled in just five years. So price inflation certainly is alive and well when to comes to the largest purchase most Americans make.
When the Federal Reserve increases the supply of dollars in circulation, both paper and electronic, prices must rise eventually. What other result it possible? The supply of dollars has risen much faster than the supply of goods and services being chased by those dollars. Fed policy makers have more than doubled the money supply in less than ten years. While Treasury printing presses can print unlimited dollars, there are natural limits to economic growth. This flood of newly minted US currency can only increase consumer prices in the long term.
Mr. Bernanke has stated quite candidly that he will use government printing presses to stimulate the economy as necessary. He is famous for joking that he would endorse dropping money from helicopters if needed to prevent an economic slowdown. This is nothing short of an express policy to destroy our money by inflation. Every new dollar erodes the value of existing dollars based on simple supply and demand. Does anyone really believe the Treasury can make us rich simply by printing more money?
The coming dollar crisis is not likely to be “fixed” by politicians who are unwilling to make hard choices, admit mistakes, and spend less money. Demographic trends will place even greater demands on Congress to maintain benefits for millions of older Americans who are dependent on the federal government.
Faced with uncomfortable financial realities, Congress will seek to avoid the day of reckoning by the most expedient means available-- and the Federal Reserve undoubtedly will accommodate Washington by printing more dollars to pay the bills. The Fed is the enabler for the spending addicts in Congress, who would rather spend new fiat money than face the political consequences of raising taxes or borrowing more abroad.
The irony is that many of the Fed’s biggest cheerleaders are the same supposed capitalists who denounced centralized economic planning when practiced by the former Soviet Union. Large banks and Wall Street firms love the Fed’s easy money policy, because they profit at the front end from the resulting loan boom and artificially high equity prices. It’s the little guy who loses when the inflated dollars finally trickle down to him and erode his buying power. Someday Americans will understand that Federal Reserve bankers have no magic ability-- and certainly no legal or moral right-- to decide how much money should exist and what the cost of borrowing money should be.
by Ron Paul, Congressman
http://www.house.gov/paul/tst/tst2006/tst071006.htm
George,
GULP!
Thanks for digging this up and posting it.
Ron Paul certainly says some very good things here, things that very much need to be said, but nearly ruins it at the end. The Fed does not "decide" how much money should exist, they (among other things) just try to make sure the bills the legislative and executive branches generate get paid when there is insufficient revenue w/o damaging the source of that revenue (the economy) in the process. The aforementioned branches of government have been on a credit binge, as perhaps have too many individual citizens if it comes to that, and blaming the Fed for the consequences of excessive credit creation requires a logic curiously akin to blaming McDonalds for making us fat.
"retired," I'm no authority on bonds (so the usual grain of salt), neither do I have any clear sense of whether the Fed will pause here or not, but inflation still appears to a large enough issue that another rate increase could be in the cards. I'm looking closely at increasing maturity myself within the next few months but now it just seems a bit premature. IMHO and FWIW.
Did I hear on cnbc that Bill Gross was predicting a bull mkt for bonds in the near future? If so, some strongly divergent views.
If the retirement of the boomers is at hand, and people in and nearing retirement shift more to bonds to protect their capital, wouldn't that point to a coming bull market for bonds as the demand for them increases?
Joel Greenblat, of The Little Book that Beats the Market, also writes in that fine book that rates will probably return to historic highs.
wow..just saw reference to Joel Greenblat...http://www.indexuniverse.com/index.php?section=6&id=1520&utm_source=newsletter&utm_medium=email
Eddie,
you could be correct. the point is very plausible.
if it does not pan it it will be due to foreign flows demanding higher rates given our structural issues and/or boomers realizing that too much in bonds is a bad idea.
Two points, that are related. First. New etf,FTV:
"The result is a “value-based” ETF that reflects firms’ underlying profitability … a factor that has historically had a strong tie to performance. Over the past ten years, for instance, the index has delivered returns of 17.94 percent per year, compared to just 9.16 percent for the S&P 500 Value Index."
Second point. Boomers are going to mess around with hopeful strategies like this one to grow money, but when the downturns arrive, and they will come, fear will guide them to return to the strategies of their parents. Bonds. I stronly feel that fixed income is going to have a larger allocation. If this is correct, I'm not sure how this will affect either bonds or equities. Segal from Wharton has written about it. I think he predicts with boomers no longer making monthly contributions to their 401ks then equities are in for a long and deep fall. All the more important for our middle class to grow; we need new wall st participants. Ohh, then there's the privitization of socical security.
Post a Comment