Sunday, June 23, 2013

Has a secular bull market in interest rates commenced? Are they set to rise for the next 30yrs?

Rising Interest Rates – Bullish for the Market

Interest rates have been falling, as a trend, for about 30 years. They talked about negative interest rates, but Armstrong explains here, that artificially low interest rates result in a shortage of cash, which ultimately is what drives lenders to raise rates, to attract capital back into the banking system. Indeed, the EM Money Market chart from JPM on a Zero Hedge posted in the comments, shows rates bottoming out right about when gold reached its blow off top in 2011, with the recent rates breakout out just when gold prices began to collapse. So we could see a 20 year bear market in gold & bull market for cash & bond interest rates? If gold is a non-interest bearing currency, demand for it should be inverse to that of interest bearing currencie

Posted by libertas @ 01:49 PM (4672 views)
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35 thoughts on “Has a secular bull market in interest rates commenced? Are they set to rise for the next 30yrs?

  • If rates are on their way up, we could see a tug of war action on house prices. On the one hand, higher rates will make mortgages less affordable, but on the other hand, people will find it easier to save deposits, resolving leverage issues, and with more money on deposit, more lending will be made available to those who have deposits.

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  • Presumably, this would result in a shift from speculative buy to let towards more homes falling into the hands of families. Not a moment too soon. This could be compounded by the increase in the cost of education in University towns, where buy to let investors letting to students will see the double whammy of increasing rates alongside lower demand from students, both in quantity and purchasing power. Leaving them with decrepit properties to sell that require complete overhaul that are subject to capital gains taxes. Some of these will go derelict as owners choose to mothball rather than pay capital gains tax, except in distressed sales. Government must eliminate capital gains tax or allow Council’s to compulsorily purchase to avoid a downwards spiral.

    It is also possible, that higher rates will see speculators shift from commodities to currency, causing the price of things like oil and electricity to fall, despite all the crazy “climate change” tax rip offs. Indeed, there has been a shift to oil exploration with shale gas as an example of investment moving back into productive uses.

    Now, this is not all guaranteed. It is possible that rates turn down again, heading into negative territory as a final blow off. This is possible. If that happens, I expect gold to bottom out at $1000, and then shoot up towards between $3000 and $10,000 if rates plunge down and to below zero. If that happens, then rates will probably then finally begin a sustained upwards march and gold would probably begin its secular bear market proper, settling at around $1800 for this cycle.

    It is all about whether the secular fall in interest rates is over or not, and Armstrong suggests that this is out of the hands of the central banks. That they follow rather than lead the business cycle. He believes their interventions simply prolong the business cycle and inject volatility.

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  • happy mondays says:

    We shall see, i shall keep my fingers crossed & my money reluctantly in the bank for now!

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  • mark wadsworth says:

    I’m with Happy Mondays, fingers crossed and all that.

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  • I was however looking at properties in parts of Devon, and found great town houses for just over £110,000. At that price, I would be tempted to buy even though they may fall. If we are looking at a 30 year rise in interest rates it would be a slow grind rather than a quick process. Indeed, the unwinding of government debt has to take a long time so, if you put off purchasing because of this, you could miss your boat, and if you are 30 years old now, you need to own your house outright within the next 30 years to have a decent retirement.

    One of the things I’ve learned is that it is one thing understanding long term financial trends, i.e. that the dollar is eventually going to be worth nothing, and that gold can go to infinity, but it is another thing altogether understanding that these secular cycles sometimes do not coincide with the human lifetime!

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  • Voice Of Reason says:

    All these comments assume the conjecture of the poster, that interest rates are going to start to go up and that will mean greater availability of cash, is true. It isn’t. It would be true in an environment where interest rates are market driven but in the real world interest rates and the availability of money are both decided by central banks and as a result frankly any sort of economic reasoning is futile.

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  • It is the perfect inverse of the blow off top for gold in 2011. We did not see that coming!

    Nice try, but not sure about your statement. Gold was around $1,750 mid 2012 – but according to your statement/chart gold should have been right down for your correlation to work.
    All that’s happened is that BB has talked about withdrawing QE, but I don’t see it happening – the US debt interest increases that would happen completely kill of that argument.

    If rates are on their way up, we could see a tug of war action on house prices.

    I think that is wishful thinking. Rates are not on the way up anytime soon; it would literally cripple the economy. The new head of BoE will definitely see to that, that’s his job – higher inflation and low interest rates. Expect something more akin to Japan.

    As a saver, I would love to see interest rates at 9% / 10% or more…but I see 0% long before then.

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  • HP Watcher, you may be right, but if governments do not control the business cycle, then it matters not that rising rates will cripple the economy. But remember, if interest rates go up, it cripples one part of the economy, boosts another. Savers do well, small businesses with low debt will trump international corporations. The great thing about cycles is that things flip from one thing to another at change points. Given that international corporations are simply outsourcing all our jobs, maybe we have nothing to lose from such a shift in confidence?

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  • Actually, looking at the gold chart again, the blow off top begins just as emerging market rates bottomed out, with the top when the rates spike to 4%. The recent collapse in gold has corresponded with a 30+% rise in rates on 10yr US bonds, corresponding with Obama making it clear that Bernanke will not be re-appointed.

    As said. If rates go negative from here, gold returns to a bull run. If however rates continue their march upwards, gold could be in a 20yr bear market, after which, when rates begin to fall, gold heads towards $10,000, but you may be a couple decades older by then.

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  • The fall in gold could be devastating for liberty, as all those who are anti-government got told that gold could only go up. Well, they are right, if you look at the 100yr chart, it is and will continue upwards but, humans live in shorter cycles and should invest accordingly. Do you want to wait 30 years for your money to pay back? That is what I have finally come to understand, that if we are at the beginning of a 30 year bull in interest rates globally, the gold is not a good investment if you need to spend your cash in the next 20yrs or so.

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  • This was the case in 1980 as it possibly will be today. However, a good case for negative interest rates is the fact that gold has not yet reached a nominal high vs 1980. We will just have to wait and see.

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  • And don’t forget it is not just about the UK and US, it is also about China, Russia and India etc. Can’t see them wanting gold worthless anytime soon.

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  • We live in the UK (well, most of us). Let’s see what happens when Carney prints big time.

    Not withstanding that, our European cousins are having a rough time of it all. They can’t even agree what happens to failed banks, I guess they will have to act soon. Their economies are sliding…

    China has a debt bomb. They seem to be able to release figures just weeks after the ends of the period it relates to. Either they are super efficient or they make them up (ps: their inter bank lending seems to have become a little frozen of late)!

    It’s becoming more obvious by the day that the US is spying on everyone and manipulating the markets. A number of websites are now devoted to it. Half a million snoopers paid from Utah are spying on me as I write.

    Ordinary people are taking to the streets from Turkey to Brazil. It’s becoming as infectious as bird flu.

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  • “It is the perfect inverse of the blow off top for gold in 2011. We did not see that coming!” – Nearly everyone is always wrong, and most of the people are mostly wrong at the very extreme of the market moves (up or down). This is why long term traders look at the COT and Market sentiment for clues.

    When EVERYONE says its a one way bet thats when you need be wary. But they can say that for a while before the market tops / bottoms.

    “We” might not have seen the top coming but there are levels on the way up and on the way down where people should be looking to liquidate or add to their holdings. In hindsight everyone says ….. aww yes of course!

    Its better to have a plan before you do anything. e.g. if it gets to x then i will get out of all or some since the probabilities are high it will/ wont then get to y. Obviously at the time you may very well be wrong but being wrong that way should be embraced.

    There is no point waiting for the last penny of a move. You can lose a fortune waiting for that last penny. A penny isnt worth a fortune!

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  • “In truth, Bernanke is leaving because he knows the truth. The Fed boasts a lot but it knows it is not in control and that rates are starting to tick up. He did not direct that change, but it is unfolding as capital moves.”

    The Central banks are the equivalent of King Canute. Once the market decides rates are too low or too high for that matter, it is the market that will force the CBs into action. Its an illusion that they control rates.

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  • A rise in interest rates will threaten a fresh financial crisis – see today’s telegraph – but moreover, make it an even bigger task for the US to pay it’s way.

    The FED will talk tough – like Gordon Brown – but do absolutely nothing. I think their hands are completely tied.

    What these guys do is far more important that what they say. We shall see…..

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  • A rise in interest rates will threaten a fresh financial crisis – see today’s telegraph – but moreover, make it an even bigger task for the US to pay it’s way.

    The FED will talk tough – like Gordon Brown – but do absolutely nothing. I think their hands are completely tied.

    What these guys do is far more important that what they say. We shall see…..

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  • (Apologies for the double post – don’t know how that happened!)

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  • “Its an illusion that they control rates”. Thanks, Techieman,

    The CBs have a huge propaganda apparatus. They are professionals – unlike the plod who tried to smear the Lawrence family.

    Just about all the (key) rates seems to be influenced, if not fixed. Failing that the US has troops in 140 countries.

    Short term, the dollar is being pumped up – then what? It must be harder now for honest IFAs to recommend investments to clients….

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  • HP Watcher. Armstrong’s argument is that the reaction going forward is bail ins, more taxes and wealth confiscation. He says that this will be deflationary for the core currencies. Smaller currencies in peripheral nations could still go hyperinflationary but he says that the core countries with global reserve status will not.

    That said, I do think Sterling will be devalued against the dollar by Carney, so am looking to shift cash into the dollar in the coming weeks.

    TECHIE, for me, looking forward, the sign of the blow off top in gold was its parabolic move upwards, out of its bull market trend. It then falling back and re-testing the bottom of the channel should have been the sign to get out !! And move into dollars.

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  • Looking at Sterling, it collapsed in 2009 against the dollar and has since then consolidated. However, around February, it collapsed out of that trading range and has since been attempting to retest the bottom of that channel, failing twice already.
    http://uk.finance.yahoo.com/q/bc?s=GBPusd=X&t=5y&l=on&z=l&q=l&c=

    Armstrong is calling for a collapse of 40% in Sterling vs the dollar. It could be a short, sharp process, and it would set the seeds for export manufacturing to return, so in the long run, it could be beneficial. It could also cause the immigration influx to reverse, but at the end, we will get massive inwards investment from international corporations as British land prices will be on fire sale for a brief period vs other currencies.

    Expect calls for us to join the Euro, and no doubt we could see wars and false flag events to distract the public. Syria could be the situation, and note, Al CIA Da has been given heat seeking missiles, so we could see passenger jets shot down to justify a huge war there in the middle east. Huge, because it will be a proxy war against Russia, who is arming Syria and Iran. It could expand into Georgia and beyond.

    Armstrong reckons the bottom could be 0.75 against the dollar.

    http://armstrongeconomics.com/2013/05/18/the-british-pound/

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  • Oops, he said 60 to 64 cents to the dollar.

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  • Looking for 1250 to 1275 support in the yellow stuff. Dollar weakness @134 euro ; 157 gbp looked good to buy the greenback.

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  • http://www.telegraph.co.uk/finance/mark-carney/10137808/The-challenges-Mark-Carney-faces-as-Bank-of-England-Governor.html

    Interesting article there about Carney. They claim he is not fearful about raising rates. Indeed, if the pound slumps anywhere near as much as Armstrong suggests, inflation would pick up big time and the BOE would be forced to raise rates aggressively, thereby being the solution to the problem. The pound would stabalise, and I’d imagine house prices would begin to fall. The BOE would be powerless to stop that, because at a certain point, the integrity of Sterling becomes more important than house prices. King Canute indeed.

    My suggestion therefore is, dollar for a year, then into British real estate when it becomes clear that Sterling has bottomed. This could be as soon as rhetoric from BOE moves towards “measures to protect Sterling” and achieve a “strong pound”.

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  • if the pound slumps anywhere near as much as Armstrong suggests, inflation would pick up big time and the BOE would be forced to raise rates aggressively

    I think you may be getting a bit ahead of things here. A slumping pound would generally be seen as a good thing, as it will help UK exports, also focus consumers on UK sourced items. Mark Carney has already said that the UK can stand more inflation, so his efforts will be in that direction, so I don’t see deflation anytime soon.
    TBH, I see inflation going to around 5% or 6% CPI – possibly more – before they do anything about it.

    Not sure about the dollar, as it’s pretty much in decline – what’s happening in China indicates that.

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  • hpwatcher, a weaker pound will be tolerated for a while, until it gets so low that inflation becomes a political thorn. Even though some may want the currency at zero, at some point, the weakness becomes a problem, which is why the true price is a balance between the bulls and the bears that is always shifting.

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  • The dollar will strengthen due to interest rates going up. With rates up over 30% on 10yr treasuries, people will be piling in to buy treasuries, which is why QE will likely end, plus, Moody’s just upgraded US notes.

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  • mark wadsworth says:

    Llibby 28, it’s better than that, at the moment people are still piling OUT of US treasuries, they are down another one-and-a-half per cent since Friday (woo hoo!) – and as long as people are piling OUT then implied interest rates keep going UP and people will not start piling back IN until interest rates are much higher and/or the panic is over.

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  • until it gets so low that inflation becomes a political thorn.

    I don’t think it will be anything like the extreme, like what you are suggesting.

    The dollar will strengthen due to interest rates going up.

    That’s a massive expectation – but we shall see about that.

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  • Help to Sell is looking a little compromised now.

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  • Mark, folk are piling out of bonds because their value has fallen with increasing rates but, for every seller there is a buyer, who will be purchasing to get a carry trade on higher interest rates, i.e. borrowing Yen to purchase dollars to get arbitrage yield. The issue is not the absolute interest rate, it is the relative interest rate and, the interest rate vs yields on other assets such as stocks and bonds. With the stock market at all time highs, price to earning ratios are not what they were after the crash of 2008.

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  • Indeed, Dill, Help to Sell will be a drop in the ocean if BOE is forced to aggressively raise rates to defend the pound. Remember, we just had Bildeberg, and that usually happens in a country just before a collapse. That happened with Spain, with Greece. I think part of the meeting is discussing who will take the spoils and co-ordinating the government’s response. In this situation it is cutting the pensioners loose.

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