Thursday, March 18, 2021

The End Of Cheap Money

The end of an era, any era, is signaled by a loud "bang", some sort of obvious event that makes clear to one and all that times have changed - assuming they are listening.  In financial markets they say "no one rings a bell" to signal the end of a bull (or bear} market - but that's absolutely wrong.  If you pay attention and do not get distracted by the surrounding cacophony, you always hear the "bell". 

 US Treasury bonds have enjoyed a stellar ride for a full 40 years.  After reaching a stratospheric 15% in early 1981, yields for the 10-year bond have been on a steady and constant downward slope - until 2020 (Chart 1).  That's when the bell "rang": a combination of panic and central bank interventions caused yields to fall off a cliff to 0.5% - and then rebound sharply.  The chart is in log scale, making it easier to see the massive departure from "normal".

 Chart 1

The interesting thing about "bells" is that they are always denied, disputed and very often ridiculed by "experts".  The reason is simple: too many people have been lulled into complacency and too many vested interests have accumulated over too many preceding years, when "the trend was your friend".  (As an example from history, the seemingly sudden collapse of the USSR was signaled years earlier by its ruinous campaign, defeat and ignominious withdrawal from Afghanistan.)

The good thing about markets, when allowed to perform freely, is that they distill every bit of available information and turn it into action, plain for all to see. So, what is the above chart telling us?

  • A reversal to the existing downtrend should bring yields back to at least 3%, almost double today's 1.66%.
  • The departure from trend was so sudden and extreme and the rebound so equally abrupt, that it is highly unlikely that we will experience lower rates any time soon.
  • The V-shape in rates is now accompanied by the largest ever increase in money supply and government debt, plus a sharp spike in commodity prices.
  • The Fed and Treasury are in rare concurrence, both trying to convince the market that monetary and fiscal profligacy are inconsequential - but, it's not working. Talk is cheap - worthless, actually.
  • Bond yields are still well below current and projected inflation, i.e. negative real interest rates.  It makes zero sense for any real money investor (eg pension fund) to assume the market risk of owning long bonds.

 IMHO, therefore, the confluence of events is a clear and loud "bell" that interest rates have bottomed out and are very probably going to be going up for a protracted period.  The Era Of Cheap Money is over.


  1. thanks for sharing your data so generously with us ... just to reciprocate, since I know you like random bits of data...

    there is a small precious metal dealer in my town... usually, I can transact instantly. Today, I had to wait half an hour...

    I won't make too much of it... might be I just had bad timing... just a random factoid.

    1. From such small ripples waves are made... thanks for the factoid 😆

  2. Hey Hell,

    I just had the maddest of mad notions...

    I propose the following hypothesis: America's fiscal policy (and many of its movements) are under China control. I know, I know, its sounds insane but lets look at the evidence.

    1) We know that the Chinese have bought a lot of US politicians. Now those politicians cannot do something too obviously in favor of China but China still needs to make a profit. How do they do it?

    2) Look at how the corona relief bill is structured. Nothing for infrastructure, tech, … etc. These things create long term strength for the US and would also be more effective stimulus. No, everything is free money for Chinese toys. What is this, China factory stimulation budget?

    3) Chinese factory need the stimulus desperately. That is a house of cards if ever there was one. The only reason it has not blown earlier is because of American monetary policy…. Coincidence?

    4) Look at all the mad movements out there. Clearly their leadership is not interested in their members…. Easy answer: Someone is paying them.

    5) Look at the arrogance of the Chinese officials. It is the scorn they have for someone that is obviously beneath them. They believe they can strut around and no one will touch them. Why? Because they have bought the US political system.

    6) If I was intending to, that is how I would structure an attack on the US…. It is a traditional Chinese move. This is chicken approved!

    Best Regards,

  3. I don't know if it's a China Stimulus Bill, but it is (was) certainly a FAANG stimulus. Unless Americans save the money and/or pay down debt, instead. Now that would be interesting...