Sunday, December 7, 2014

Parabolic Trend Failure of the Day: Real Net Interest Income

The following chart shows the 10-year moving average of real net interest income (interest received minus interest paid).

Click to enlarge.

Check out that blue parabolic trend failure. With an r-squared of 0.99956, it's yet another parabolic sight to behold. It never ceases to amaze me how many unsustainable but nearly perfect parabolas this economy can generate. Okay, now on to the good stuff.

What does it mean if the red trend continues?

Although it is a parabola, it is one with a very long period (and the lower r-squared value implies more volatility). As more and more bonds are issued and more and more money floods into the banking system, the combination just isn't generating any additional real net interest though, at least not yet. Big shocker. If you believe that our empire is in a period of slow decline, as I do, this really shouldn't surprise you much. A slowly declining empire cannot support rising real yields. Ours can't even support steady real yields. They've been falling for decades.

Here's the good news though, if you can call it that.

1. Rome was not built in a day.
2. Rome did not fall in a day.

That's especially true in a world where the actual Rome isn't doing all that well. The rest of the world is setting the bar pretty low for us.

What have I chosen to do about this parabolic trend in red?

At every opportunity, I have locked in real yields on long-term TIPS and I-Bonds. It does not pay to procrastinate as real yields fall over the long-term. In my opinion, sitting in cash is the ultimate form of procrastination.

Much to the dismay of "bond bubble" prognosticators, so far the plan has worked out well. I suspect that it will continue to work out well. I could be wrong though. The economic dam has cracks in it. There's really no telling how long it can last. I'm 50. From a purely self-serving standpoint, I'd strongly prefer that the dam holds until at least 2050.

Bulls and bears alike should really be rooting for my plan to work, for if I am financially ruined holding a "safer asset" then I will not be going alone. I'll be taking a great many "risk asset" holders with me. (As I've stated before, the same does not work in reverse though. I do not depend on "risk asset" holders nearly as much as they depend on me.)

In any event, I continue to be extremely grateful that I was born when and where I was. I enjoy modern conveniences. I have no desire to move to China. I won't be bribing the border guard to get into Mexico. There are probably worse places to be on this earth if and when the you know what really does meet up with the fan. I definitely expect the fan to get plenty of use. I retired in 1999. There have certainly been plenty of things flung at it so far. Seriously.

This is not investment advice.

Source Data:
St. Louis Fed: Custom Chart

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