Interest Rates
8 responses | 1 like
Started by joj - Sept. 14, 2019, 6:14 a.m.

A rather dramatic rise these past 2 weeks.

The beginning of a significant move higher?  Or, just a pop from a very over depressed level.

If a bear market in LT bonds is underway, I wonder what the underlying factor is.  Historically, brisk economic activity might be cited.  But I wonder if a day is coming in which lack of confidence in ability for governments to repay their debts causes a bear market.


Also, watching the relative performance of gold - to - interest rates.  The charts correlate nicely.  Gold is understandably under pressure here with the bond market breaking sharply.  But looking at the bar from Aug 7th on both charts you can see that gold is holding in there on a relative basis.

By Richard - Sept. 14, 2019, 7:46 a.m.
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the way that M2 has been growing over the past 2 months, one can assume that this sell off in bonds is real and based on other factors, I am leaning to believe that the Final Top is in. Could get real interesting real soon.

By pj - Sept. 14, 2019, 12:12 p.m.
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"gold is holding in there on a relative basis."

But silver has sure gotten walloped.

By wglassfo - Sept. 14, 2019, 3:30 p.m.
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The Fed has every incentive to lower the fed rate

Looming recession as the world sinks into recession

Lower job growth [if this continues] may be the 1st indicator of recession in the USA, due to lack of new investment

Corp buy backs show no indication of new investment, thus new jobs

Fed is determined to reach 2 % inflation rate, thus the Fed hopes to lower int and encourage investment, [which has failed in most every country that has tried this], but the Fed will try any way

Given the above and more I would lean toward bond holders wanting to sell bonds now, as the fundamental reality causes a lack of confidence in current bond value 

I would not want to own bonds as I am almost positive the Fed will be forced to offer more bonds on the market to support increased gov't spending

At some point there are not enough bond buyers and a liquidity crisis hits the bond market

Anybody left holding bonds, as many try to sell will be the victim of a burst bubble , with no buyers at par value and a liquidity crisis.

The investment world may be questioning the ability of the USA gov't to pay it's debt and also future debt which makes bond default a possibility or more likely bonds valued/trading at much below par.

New bonds issued by the gov't have much less market value which eventually leads to rapid inflation

The Fed will not be able to control such an event, if enough people lose confidence in the value of USA bonds, and a huge liquidation of USA bonds happens.

Sadly the middle class with yrs of fund portfolio investment will lose a lot of value, just when inflation hits with a vengence

As of now most bonds are treated as a hot potato, with  increases in value, but the real possibility the value could be mostly lost in a rapid iquidity crisis.

By TimNew - Sept. 14, 2019, 5:01 p.m.
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Just so I'm clear on this.  Are you saying that interest rate cuts by the Fed historically fail as a stimulus.  Business investment, etc.  I just want to be sure I read you correctly. 

By wglassfo - Sept. 14, 2019, 6:16 p.m.
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Yes that is correct. Hard to believe but true

With int at virtually zero or negative, a new lower int rate has a very small part, or no part in decisions to invest in new plant equipment. Current ultra low int rates are not an expense one would consider if new plant equipment was to be purchased. The principal re-payment or ROI is a much bigger consideration. Int cost is almost Zip in the decision

Corp would much rather borrow at low int rates and buy back shares than invest in plant equipment. The share number is limited, the market for more production is a risk, most do not want.

However, there is always the outlier that will decide lower int rate plays a role in increased business activity, so there is that to consider,

Many central banks, in the world, are at negative int rates and yet the world is slipping into recession, so lower int rates did not increase business activity.

Only our gov't with trillions of debt has to worry about int rates

Just an example

Int on 1 million at 3 1/2% retail, is not a very large cost, if sales are 20 million, Profit margin is 10-20 %. Just to put things in perspective. But the market may not buy another 20 million of production.  No sense increasing production, no matter if int is low when a recession may happen. In this instance low int will not increase production This same decision is happening all over the world, as seen by negative int rates, low retail int cost, and recession worries.

By TimNew - Sept. 14, 2019, 9:24 p.m.
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My initial response is "wow. Just wow"     1st, interest rates are not near 0 or zero.  And interest rates are a HUGE factor in the purchasing decisions that companies make in capital investment.  I could go on and on.  But do a search on the historical effects of rate cuts/increases.  There are really good reasons why equities respond like they do to fed decisions

By wglassfo - Sept. 14, 2019, 11:58 p.m.
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I missed your word "historical"

However int rates "are" near/at historical lows

I would call a Fed rate of 2%?? [might be off a small bit] and retail at 3 1/2-4 %, historical low int rates. When have we ever had zero or negative int rates, in our life time??? I would think that is ultra low int rates

The USA is one of the few countries with a bond selling with some int coupons attached. Much of the rest of the world has trillions of negative int rates. This is one reason for a strong USD as investors seek yield.

 This current low int rate environment is not resulting in new or increased plant investment. Instead it is encouraging borrowing cheap money for stk buy backs.  The world is slowly entering a recession. Central bankers have tried low or even negative int rates but the recession keeps on coming. Central banks, especially in the EU have already tried lower/negative int rates to encourage investment, but that has failed. The EU may consider a return to QE but time will tell.

If you want to go back to the days of Fed 18 % and retail at 22 % and accounts past due at 1 1/2%/month then as int rates fell down lower,  that did boost the economy

NUHN an Ag producer of farm equipment did not say int rates were the deciding factor when they laid off part of their 600  employees. Instead they said tariffs caused higher material costs and made them uncompetitive and sales decreased. Lower int rates would not have any effect on a decision to keep all 600 employees.

By TimNew - Sept. 15, 2019, 6:24 p.m.
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My use of "historical" was not referencing rates. It was to the "historic" effects of rate cuts on the economy. Business investment, etc. I may be mistaken,  but I would swear I've heard you claim you use short term debt running your farm every year.  Was I wrong?  If not,  do the borrowing rates affect your decision?  I'd be very surprised, or perhaps not,  if you denied that. (Honestly) 

Our "historically" low rates were 0 for nearly a decade and then we had 7 rate hikes in under 2 year. "Historically",  that is unprecedented. Currently it's 2.5,  which is not "historically' high,  but it took aggressive effort to get it to that point that fast.

The market has pretty much , IMO, priced in a .25 cut,  some anticipate a .5. Either. If you firmly believe what you are saying,  would recommend you strongly short the equities Tuesday eve before the feds announcement on Wednesday. If you're right, you'll make a fortune!!

As an aside, for at least two years  you've been predicting a recession. Eventually,you'll probably be right, and I am sure you'll take a "pigeon on the chessboard told ya so" position.  But you'll continue to be wrong for the forseeable months, maybe years.   If you are investing based on this nonsensical  prognostication,  you have my sympathies.