Say Goodbye to Yields

The Prime Directive, the Magna Carta, the Must Be Manifesto of the New Global Economic Reality is:

Interest Rates Must Remain Low. Say Goodbye to Yields

With the markets noting the continuing rise of treasury bonds, the direction of interest rates is called into question, but I maintain that there is no question as to the direction of interest rates; low interest rates are the single core essential requirement to a global economic structure which is sustainable. A recent article by Kurt Brouwer pointed up a bond bubble argument that “…interest rates have fallen so far and so fast that they have to go up at some point and this will hurt bond investors.”

It seems to me the most obvious of observations that if interest rates go up, hurting bond investors will be the least of our troubles. In the new mega-debt reality of today, interest rates simply can’t be allowed to go up. They must stay down and all other parameters follow. Remember the “prime directive” in the Star Trek movies? This is the prime directive of today’s global economic reality.

Many of my readers and clients are aware that I often argue against the likelihood of doomsday scenarios; that excesses will be absorbed and wound down over time rather than a D-day.

However, rising interest rates is the fire that will light the fuse to global economic hell with the heady heights of sovereign debt which has hit multi-trillion multiples of GDP across the global economies. Everything else follows this core top priority. In the absence of rising interest rates, the elitists and governments have many other chains they can yank on and indeed, they will do so. Think for a moment of the skyrocketing expense if interest on a few trillion goes from 2 to 5%; unequivocally devastating.

Stated another way, maintaining low interest rates allows even just the possibility of a “sustainable” nightmare, while many here even disagree with that. While a rising interest rate environment is unequivocally unsustainable.

Historical chart shows us steadily declining treasury yields and there is no reason to expect that will not continue in a world where the mere preservation of capital is becoming more and more a priority regardless of lousy yield while praying that the value of the currency isn’t decimated too quickly.

Chart source: FundMastery

If printing billions in currency out of thin air is the response chosen, as has been the case, then the cost factor to release that fresh liquidity into the economy must remain low. Its a matter of scale right? For example, just like the big grocery stores who average a tiny 1% mark-up, a tiny mark-up compared to the mark-up closer to 15% needed by smaller stores to generate a profit.
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Of course we can argue the other side; the damage being done to the economy by flooding the market with these out-of-thin-air billions, not to mention that the banks receiving it are hoarding it. I read recently that banks are holding onto three trillion cash; not to mention corporations are also hanging on their cash and so they’re going to bankrupt the system. There are dozens of such legitimate observations but all secondary to the root issue.

Mario Cavolo
Shanghai

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