Don’t Fool Yourself — Interest Rates May Top 10%

Larry here, with an important message about interest rates. My colleague Mike Larson is the rate maven, but I too study them in great detail, and have indeed tracked them back literally thousands of years.

In my columns, I previously told you — back in the middle of 2012 — that interest rates had bottomed according to the very reliable 64-year rate cycle.

And sure enough, in July 2012, rates bottomed. Since then, they have zig-zagged higher. Much higher, from a low of 1.38 percent on the benchmark U.S. 10-year yield, to 2.73 percent as I pen this column.

How high can interest rates go?

That’s almost a doubling of the 10-year rate, a 97.8 percent increase to be precise.

And mind you, that happened entirely while the Federal Reserve promises to keep rates low.

The big question on the minds of most investors and chief financial officers at companies all over the world is: how high can rates really go?

Will they ever get back to the highs seen in 1980/1981 when the 10-year yield hit 15.82 percent?

Will they some day go higher than that?

Or will they rise to somewhere in the middle of the two extremes of the most recent 64-year cycle (1980 high to 2012 low = 32 years, perfect half-cycle revolution).

A simple historical chart will help. Take a look. The chart you see here shows the 10-year yield from April 1953 on.

Click for larger version

Using normal Fibonacci numbers — widely used for technical analysis — tells you that the 10-year interest rate could easily get back to the 8.60 percent level. And that would merely be a normal 50 percent retracement of the yield decline since 1980/81.

The more likely scenario is a 61.8 percent retracement, which would bring the 10-year yield all the way up to the 10.3 percent level.

In other words, from its current level of 2.73 percent, rates would jump a whopping 277 percent.

That kind of increase, though it may sound extreme, is actually conservative.

Based on my larger economic models — and the fact that we are in a new 32-year upswing in the big rate cycle, meaning we should expect new rate highs to come in the next turning point in the year 2044 (2012 low in the cycle plus 32 years up) …

… Means the 10-year yield will most likely exceed the 15.8 percent level by then.

Now, I’m not sure that I’ll be around in 2044. I’d be 89 years old. Maybe I’ll still be here, maybe I won’t.

But my children will be around then and so will their children. So one of the things I constantly do is try to figure out what the U.S.A. will look like in 2044 when interest rates are 15.8 percent-plus.

It certainly won’t be pretty. Odds are that the U.S. will no longer be the world’s superpower. It certainly won’t be the world’s largest economy. China will have taken that title a few short years from now.

Could it be that the U.S. will break apart by then? After all, secession movements are now already under way in most states — from New Hampshire to Hawaii.

I know the dollar won’t be the world’s reserve currency. That will probably come to an end on the next half-cycle of the major currency markets, which comes no later than 2018.

I do know that the war cycles, which I’ve previously shown you, ramp up all the way into the year 2020, but then they start subsiding. I can only guess what that means. Will the U.S. be on the losing side of the war cycles as they ramp higher and higher into 2020, and then, we slide into despair for many, many years after?

I don’t know or have all the answers. But I do know this:

A. Interest rates are nothing more than the cost of money and credit. When interest rates rise, it reflects diminished confidence in the public sector, government, and its ability to manage a nation and its economy.

B. In major interest rate cycles such as that we are now entering, there is no set level at which interest rates will help defend the underlying currency. If all confidence is lost, no level of interest rates can restore it and secure the nation’s currency.

C. While we’re still the world’s leader, perhaps we should start taking action now to transform the world’s monetary system from a debt-based system to an equity-based system. Before it’s too late.

One such method, at the national level, may be to convert debt to equity. Give citizens an equity stake in the federal and local governments and set up private exchanges to trade that equity, among domestic citizens only. No foreign ownership.

And then, in the private sector, learn from Muslim law — yes, Muslim Sharia law — where debt and interest is forbidden, and lenders take equity stakes in real estate and business enterprises, becoming partners rather than predatory lenders.

It’s time to think out of the box, before it’s too late.

In the meantime, take heed of Mike Larson’s work in interest rates. He knows how to turn lemons into lemonade.

Best wishes,

Larry