PARADISE LOST: THE DEPARTURE OF LOW INTEREST RATES © Leo Haviland February 9, 2022
Kenneth Burke remarks in “A Grammar of Motives”: “And so one can seek more and more money, as a symbolic way of attaining immortality.”
CONCLUSION AND OVERVIEW
In both stock and debt marketplace domains (and especially in stock arenas), securities owners (particularly “investors”) and their central banking, political, and media allies adore bullish price trends and employ artful rhetoric to promote them. Bullish enthusiasm for low yields in debt marketplaces of course has its limits. Central bankers (and stock investors and Wall Street and Main Street) do not want recessions or deflation and consequently “too low” interest rates, which are “bad” for (reflect or portend feebleness in) “the economy” and equities. But sometimes even negative nominal yields for government debt of leading advanced nations (such as Germany) allegedly are reasonable and praiseworthy. Moreover, for stock marketplaces, bull moves almost always are joyful and good!
All else equal, for equity realms such as America’s S+P 500, low (but not overly depressed) arithmetic interest rates and widespread faith that this rate pattern probably will persist for the foreseeable future tend to give birth to and sustain bullish stock trends. Over the past several years (and despite the horrifying stock price crash in first quarter 2020), ongoing and successful yield repression (enhanced by money printing and fortified by accommodative sermons) by the revered Federal Reserve Board and its trusty friends, and often aided by massive government deficit/”stimulus” spending, encouraged major bull climbs in the United States stock marketplace. In addition, low interest rates (often negative in real terms) in advanced countries such as the United States inspired financial pilgrims avidly searching for adequate “yield” (return) to purchase corporate debt securities and other “asset classes” such as commodities.
Previous essays discussed key stock, interest rate, currency, and commodity marketplaces and their relationships, as well as the political scene. See essays “Emerging Marketplaces, Unveiling Danger” (12/2/21); “Hunting for Yield: Stocks, Interest Rates, Commodities, and Bitcoin” (11/7/21); “Rising Global Interest Rates and the Stock Marketplace Battlefield” (10/5/21); “America Divided and Dollar Depreciation” (9/7/21); “Great Expectations: Convergence and Divergence in Stock Playgrounds” (8/14/21); “Financial Fireworks: Accelerating American Inflation” (7/3/21); “Marketplace Rolling and Tumbling: US Dollar Depreciation” (6/1/21); “American Inflation and Interest Rates: Painting Pictures” (5/4/21); “Financial Marketplaces: Convergence and Divergence Stories” (4/6/21); “Truth and Consequences: Rising American Interest Rates” (3/9/21).
Several months ago, that analysis concluded that the signpost United States Treasury 10 year note yield had established a major bottom. Essays emphasized, in contrast to the opinion of the majority of central bankers, the likelihood that substantial global inflation likely would persist. Higher inflation alongside massive and increasing international debt burdens probably would encourage higher interest rates around the world.
Also, long run United States interest rate history (use the UST 10 year note as a benchmark) reveals that noteworthy yield increases lead to peaks for and subsequent declines in American stock benchmarks such as the S+P 500 and Dow Jones Industrial Average.
Investigation pointed to rising rates for high-quality government debt outside of the United States, as in Germany. A pattern of higher yields in the United States corporate sector as well as in lower quality emerging marketplace sovereign debt appeared. Thus a rising rate environment has become a global phenomenon. Given not only the upward march of yields in the UST 10 year note, but also the international trend of rising rates, the probability of a peak in the S+P 500 and related leading nations increased.
America’s S+P 500 and stocks in other advanced nations soared to new highs after February 2021 while emerging marketplace equities have marched downhill (price divergence). However, the chronicle of those two broad marketplace realms at least since the Goldilocks Era of the mid-2000s reveals that their price and time trends tend to coincide. Over the long run, these landscapes are bullish (or bearish) “together”. In the current constellation of rising American and international yields, in both government and corporate areas, that warned of eventual price convergence between the S+P 500 and emerging marketplace stocks. The S+P 500’s record high in early January 2022 occurred near in time to interim highs in developing nation equities.
“Emerging Marketplaces, Unveiling Dangers” (12/2/21) concluded: “These intertwined patterns warn that the S+P 500 probably has established a notable top or soon will do so”.
The longer run viewpoints of “Emerging Marketplaces, Unveiling Dangers” and related recent essays remain intact. The paradise of low interest rates in the United States and around the globe will continue to disappear. This ominous upward yield shift in the UST 10 year note and elsewhere endangers the heavenly bull move in the S+P 500 and related stock marketplaces. The S+P 500’s stellar high, 1/4/22’s 4819, probably was a major peak; if its future price surpasses that celestial height, it probably will not do so by much.
The UST 10 year note yield probably will ascend to at least the 2.50 to 3.00 percent range, with a substantial likelihood of achieving a considerably higher elevation. The Federal Reserve and other high priests of central banking probably will not engage in substantial actions to rescue the S+P 500 unless it tumbles around twenty percent or more from a prior pinnacle.
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Paradise Lost- the Departure of Low Interest Rates (2-9-22)