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!”