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Affluent Investor | April 28, 2017

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Ma, There’s a Storm a Comin’

I laughed at the talking heads’ reaction to the sell off in the bond market over the last few weeks; there was much wailing and gnashing of teeth over a fifty basis point rise in the ten year.  Yes, it was a large percentage point move but we are coming off historic lows.  Interest rates only go from twenty percent to zero once in a lifetime.

So where do we go from here?  Baby, you ain’t seen nothin’ yet!  The long term average of the ten year is approximately 6.6%.  I’ve been talking about this for two years but what kills me is how utterly surprised the Street seems to be that rates are rising.  To me it’s simple, what other direction can they possibly go?  It’s so obvious.

We are teed up for a perfect storm of an interest rate shock.  The United States is approaching $20 trillion in sovereign debt.  The Fed has been intervening in our bond market for years now, buying over half the debt we issue to keep interest rates at an artificially low level.  We are borrowing all of this money for essentially nothing.  And by the way, in order to keep these rates low, the Fed has grown its balance sheet to $4 trillion dollars.  Our credit rating has been cut and there is real fear in the world that we are not going to be able to pay our creditors in the long run.  The USD is losing its status as the preferred reserve currency due to these policies.  Hence, there will be less demand for dollars in the future.  Therefore, there will be less demand for U.S. treasuries. This will put further pressure on rates to move higher as we try and attract capital from our lenders.  And who knows if we’ll even be able or willing to service our debt at higher interest rate levels?

So all we need now is an excuse, an excuse for an interest rate shock that is.  Who knows where it will come from?  China, The Middle East, Bernanke starting to taper QE?  Oh I forgot, that has already happened.

So my advice?  Sell bonds and buy gold.

As the farmhand Zeke yelled excitedly in The Wizard of Oz, “It’s a twister, a twister!”

Born in Georgia and raised in Savannah, Todd spent his early summers in Carp Lake, Michigan listening to the vivid stories of his grandparents recalling their youth in the northern wilderness. Ever since his earliest days, he loved story telling.

Todd left Savannah in 1982 to attend the U.S. Air Force Academy in Colorado Springs, CO where he studied aeronautical engineering. Upon graduation in 1986, he immediately left the Academy for flight school. His initial assignment was flying Combat Search and Rescue helicopters at Elmendorf Air Force Base in Anchorage, Alaska. In the UHAE (Unique Harsh Arctic Environment-pronounced “Yoo Hay” by Alaskans) he flew local rescue missions and was also deployed throughout Asia. During this time he was credited with saving many lives and even more assists. In addition to flying exciting missions, Todd also managed to graduate from the University of Alaska Anchorage with an M.S. in Engineering Management. In 1990 he volunteered for Special Operations and went back to flight school. In 1991 he was assigned to the 20th Special Operations Squadron at Hurlburt Field, FL, flying MH-53J Pave Low helicopters. Immediately he was deployed to Kuwait. Over the next three years he was active in classified missions in support of counterterrorism under the control of the National Command Authority and deployed throughout the world. His customers included SEAL Team Six and Delta Force. He left the Air Force as a Captain in 1994. During this hectic period in his life he found time to write his first novel, The Ultimate Solution which was never published. He did publish an article in the Armed Force’s Journal in 1994 on Special Operations Aviation.

1994 found Todd joining an investment bank and earning a chance to expand his knowledge of his other passion, Finance. During this second career he became highly knowledgeable in Emerging Markets Fixed Income and traveled a great deal internationally with a focus on the Caribbean. He has conducted business in over forty different countries. He became acutely aware of the consequences of economic decisions and their effect on national and economic security.

However, Todd.’s love of storytelling was uncontrollable. He left the financial business in 2011 to write. Currency was published in December of that year. Once he began typing, he never stopped.

Todd lives on a three-hundred year old farm in Connecticut deeded by King George of England with his children.

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  • Bob_Oscar

    Yep, its me..(from twitter)

    Reading your bio, I would say you are “the one” to take over for Vince Flynn, (God rest his soul)…a “Mitch Rapp” character is needed so that some of us who long to be assured that there are people like him out there, “taking care of business” no matter what administration “officials” say.

    BTW….where does the Fed get the money to “buy” our debt?

    When you refer to “bonds” do you include tax free muni’s?

    • Pavegecko

      Bob – thanks for the comment! Good to see my Twitter peeps follow me around! LOL Anyway – yes I’m scared of Munis! And as they say in Bolivia, the Fed prints the money!

      • Bob_Oscar

        With all due respect, sir, “prints the money” is not good enough.

        Who gives them the authority to “print” money?

        Why not just continue printing money & keeping interest rates near zero?

        Apparently people like this since the market was up, up up while this was going on….& “they” say “inflation” is less than 1%…

        If the Fed gets all the US bonds in exchange for “printed money”, what do they do with the real money when they “sell” them?

        There is something else going on here. If everything was O.K. while QE is going on, why not keep it up? This indicates to me that some group is “losing money” or is about to lose..

        ..Money talks, BS walks…is the guiding principle here?

        • Pavegecko

          Congress gave the Fed the ability to print the money. Printing money forever will devalue the currency more than it already is. Yes the market is on a sugar high. When they sell them, the money goes back to the Fed and out of the money supply. Everything is not OK – printing money is a bad thing. Yes, all of us are going to suffer the consequences.

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