Just How High Will Interest Rates Go? To 4%, Perhaps Even 7%?

Interest rates have bottomed and will rise substantially during the next decade OR interest rates won’t rise because rising rates would crash governments, economies, derivatives, equity markets and more.

The comments above and below are excerpts from an article by Gary Christenson (DeviantInvestor.com) which has been edited ([ ]) and abridged (…) to provide a fast & easy read.

The Bigger Picture:

Interest rates bottomed in 1946, topped in 1981, and bottomed (probably) in 2016. Rates rose for 35 years and fell for 35 years.

Can interest rates go lower? Ask the machines, central banks and algos that control them but, given the rapid rise since August 2016, it seems increasingly likely that rates will continue to rise from what looks like a generational bottom. They might rise for several decades.

What is a reasonable target?

1. Current 10 year rates are about 2.4% and have reached a two decade declining trend line.
2. A break into the 2.5% to 3.0% range would indicate higher rates coming.
3. A significant break above 3.0% would strongly indicate that rates hit a generational bottom in 2016 and will rise much higher.
4. The average drop from high to low since 1999 has been about 2.5%. If we apply that to guess the next short-term peak, then 1.33% plus 2.5% is about 4%.

Could rates rise to 4% on the 10 year note? Consider the following unlikely events for comparison.

• The NY Times gave HRC an 84% chance of winning five days before the election, yet she lost.
• The Brits voted for exit against all odds and polls.
• Silver dropped from nearly $50 in 2011 to under $14 in 2015.
• Amazon stock rose from under $10 in 2001 to over $800 in 2016.

A 4% rate seems likely by comparison. The average rate for 200 years has been over 5%.

CONSIDER:

• that my expectation is that interest rates have bottomed and will rise for years,
• that interest rates could easily rise to 4% or considerably higher (is 7% unlikely when the 200 year average is more than 5%?),
• that higher interest rates will hurt prices for real estate and stocks,
• that higher interest rates will affect auto loans, student loans, credit card interest charges, massive corporate debts, real estate financing, sovereign debt service, and the coming recession/depression,
• that higher interest rates will affect adversely affect derivatives (over $500 trillion of derivatives are tied to interest rates) in a major way. This could be rather difficult.

From John Rubino: The Variable-Rate World Stares Into the Abyss – Again

“… a picture emerges of a system that can’t handle rising interest rates, but is nonetheless getting them. The result? At best a global slowdown and at worst an epic crisis.”

From Daniel R. Amerman, CFA: The Imminent Multi-Trillion Dollar Surge in Social Security and Medicare Costs

“For decades we have known that the time would come when Social Security & Medicare costs would begin a rapid and explosive growth upwards. That time is no longer the distant future – but something that will take place next year, and the year after, and the year after.”

CONCLUSIONS:

• If interest rates have bottomed they are likely to rise for many years. This will place considerable pressure on leveraged assets and the multiple $ trillions in dodgy and leveraged investments and shaky loans that might not survive rising interest rates.
• Expect the Fed (and other central banks) to “do something” to “help” with $1 – $2 trillion deficits and rising rates. Expect “printing” dollars, massive bond monetization, “helicopter money,” more QE and other “unconventional” measures. Hyperinflation is possible in the U.S and elsewhere. Watch Japan and Europe.
• Expect the Fed to rescue, as best they can, the financial and political elite. Tough luck for everyone else…
• Bonds and stocks are vulnerable and could decline from nosebleed levels. Most other “assets” have counter-party risk – I’m not paying you because I didn’t get paid. Gold and silver should come to mind. Gold and silver do not have counter-party risk.
• Gold and silver have several thousand years of history indicating they are a store of value. Can anyone say the same for the euro or the U.S. dollar?

Looking forward to a traumatic 2017 and 2018.

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