Friday, September 27, 2013

The Path to Infinite Leverage (Musical Tribute)

The following chart shows the inverse of the 10-year treasury yield. Why the inverse? At 0%, one could borrow an infinite amount of money and still pay the interest payments in full (without even breaking a sweat). When seen this way, 0% isn't a floor. It's infinity!

Click to enlarge.

Note that there has been a trend change. As seen in the difference between the red and blue exponential trend channels, the inverse is growing even faster than it once was. What does this mean? Rising interest rate environment my @$$! That's what. Just an opinion of course. Your opinion can and probably does vary.

But before you disagree, consider this. Our modern financially innovative over-leveraged society *requires* an exponentially increasing amount of leverage, lest it seize up (again). If not, please provide evidence to the contrary. I'm all ears. Further, an economy seizing up tends to be disinflationary (compared to what it was before it began to seize).

If I am right, then we better start learning Japanese economics, because that's where we are headed apparently. Welcome to the era of perma-ZIRP. And when I say perma-ZIRP, I do not mean over the next 10,000 years. It could easily be a LOT longer than most people think though. For savers looking for a relatively safe return, I expect the beatings to continue until morale improves. It's one reason I have not been scared about locking in long-term interest rates whenever the opportunity presented itself.

When you're at the end of the road
And you've lost all sense of control
And your thoughts have taken their toll
When your mind breaks the spirit of your soul

Your faith walks on broken glass
And the hangover doesn't pass
Nothing's ever built to last
You're in ruins

This is not investment advice. It's just the opinion of a perma-bear. That said, who honestly believes that the hangover is passing? We're not just drinking a hair of the dog that bit us. We're attempting to drink the whole frickin' dog again. Good luck on that one long-term!

Source Data:
St. Louis Fed: Custom Chart

No comments: