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Benjamin Franklin once called death and taxes the only certainties in this world. These days, I’d add rising interest rates!
I believe they’re coming … that the Federal Reserve is powerless to stop the inevitable … and that investors need to take protective action immediately.
Why am I so certain? Take your pick of reasons …
1. The Budget Deficit Is Out of Control! Uncle Sam racked up a $1.4 trillion deficit in fiscal 2009. That was equal to 9.9 percent of gross domestic product, the worst ever in the post-WWII period. President Obama’s budget assumes a 2010 deficit of $1.6 trillion — a whopping 10.6 percent of GDP!
These aren’t cyclical deficits, either. They’re STRUCTURAL. That means they won’t go away when the economy recovers. In fact, long-term predictions assume the deficit will never fall back below the 3 percent-of-GDP level considered fiscally prudent.
2. Treasury Supply Is Exploding! We used to sell $18 billion per month in 2-year Treasury Notes. Now we’re selling $44 billion. We used to sell $13 billion in five-years. Now we’re selling $42 billion. The government was in such good fiscal shape a few years ago that it canned 30-year bond sales. Now we’re back to selling $16 billion a month! Total net issuance is on track to hit $2.5 trillion this year.
3. Sovereign Debt Risk Is Surging! The benchmark 10-year yield in Greece almost tripled recently to 8.7 percent from 3.2 percent. Yields on long-term Portuguese debt increased by almost half. All the so-called “PIIGS” countries are under assault due to surging debts and deficits. I believe a similar crisis will happen here as investors increasingly realize we face many similar financial challenges.
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| Bernanke is determined to keep interest rates low. |
4. Fed Policymakers Are Running Amok! The U.S. Federal Reserve continues to keep short-term interest rates pegged to the floor. And I see no indication that the “zero percent to 0.25 percent” range will change anytime soon.
A key reason: Chairman Ben Bernanke will do absolutely everything in his power to avoid the 1937-1938 scenario. In his view, tighter Fed policy at that time caused a vicious double dip in the economy.
Looser monetary policy now all-but-ensures higher future inflation later — a fact bond traders will price in well in advance. It should also put pressure on the dollar because foreign central bankers aren’t showing the same stubbornness as Bernanke.
Central banks in smaller economies like Norway, Israel, and India have all raised rates, while Australia has done so multiple times — and Canada just put the world on notice last week that it will soon follow suit!
5. Inflation Is Simmering Again! The Fed and most mainstream commentators believe inflation is dead and buried. This despite the fact oil prices have almost tripled to $82 from $32 … copper prices have surged 177 percent … and lumber prices just tagged their highest level in four years.
But the Producer Price Index for March tells a different story. It jumped 0.7 percent from a month earlier, more than the 0.5 percent gain economists were expecting. Wholesale inflation is now running at a whopping 6 percent year-over-year, almost double the average over the past six decades and the most since late 2008.
How High Might Rates Go?
The worst bond bear market in U.S. history struck in the late 1970s-early 1980s. Benchmark 10-year Treasury yields exploded from 6.8 percent in late 1976 to a whopping 15.7 percent five years later. Surging inflation and soaring deficits were largely to blame.
I don’t expect an exact replay, of course. But I believe the risk of rising rates is very real, and I see three possible scenarios playing out …
- A simple case of “normalized” rates could lead to a 30-year bond yield of almost 6 percent, compared with around 4.7 percent today.
- If a key technical pattern I’m monitoring completes, it would measure to an even higher target — 7.3 percent.
- And if inflation really gets out of control, we could get back to the double digits. That’s the least likely scenario, but not completely out of the realm of possibilities.
Bottom line: We’re going to have to pay the piper for our profligacy as a nation, and I believe the bill will come due sooner rather than later.
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| The risk for rising interest rates is very real. |
How You Can Protect Yourself —
And Profit!
Folks, I haven’t been this concerned about a major market shift in a long time. I believe we’re on the cusp of a secular trend change, similar to what we saw in housing when the bubble popped in 2005.
So I’ve invested extra time and effort to keep you informed about how to protect yourself from this impending debacle.
I have repeatedly urged you do things like dump your long-term Treasury bonds … lock in long-term borrowing rates while they’re still relatively low … and focus on investing in countries that do NOT have the same massive debt and deficit problems we do.
If you haven’t already taken these steps, don’t wait any longer. Do so now … before it’s too late!
Until next time,
Mike
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