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Friday, February 15, 2013

Interest rates

I am constantly bombarded in the media with people telling me that rates are going to go up.  Inflation is right around the corner.  All that liquidity sloshing around just has to create inflation.  Bonds are going to be the short of the century. 

Here is a very long view of longer term interest rates in the U.S.

Long term rates are down to depression era levels.  Notice the circled area from 1940-50 where rates stayed low for a decade.  In A tale of two recoveries I showed how long term rates in Japan have been below 2% for more then a decade.  They call shorting bonds in Japan the widow maker trade.  Long term rates just don't get this low unless the economy is in deep trouble.  When they do get this low, they can stay there for very long periods of time.

Here is an interesting chart with the velocity of money (MZMV) and 10 year rates.

Well look at that.  They seem to trend together very well don't they.  The MZMV just made a new low and has been dropping for quite a while.  It is true that all trends eventually end, but will this one end with a sideways move or a sharp rebound.  A look at history suggests sideways.  That same look at history also suggests we could be in a depression just like Japan is.  Depressions are caused by too much debt despite what Keynesian economists think.  The only way out is to deal with that debt.  Something Japan has failed to do and so their economy continues to suck.  More debt by the government in an attempt to start a self sustaining recovery just plain won't work.  There is nothing complicated about it.  Just about anybody that is not an economist would understand if they spent a little time studying the situation, LOL.  Here is a pretty good article on the problem. http://iaconoresearch.com/2013/01/24/debt-to-gdp-and-misdiagnosing-a-bubble-economys-ills/

It is one thing to make short term shorts in bonds, but it is simply crazy to think that just because rates are historically low that they must make a sustained turn up.  I think we need to be able to see a true trend change in MZMV.  Otherwise, upward moves in interest rates are likely to be short lived.  The interest rates are signaling the economy is in deep trouble.  The message could not be any clearer.  Those expecting a self sustaining recovery any day now are destined to be severely disappointed.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.