January 28, 2015
Long-Term Interest Rates Have Been This Low Only Twice In The Last 214 Years
Only one other time — for about two decades following the Great Depression and through the post-World War II era — has the rate on long-term debt been so low.
Hey fellow retirees! Welcome to about two decades of post great construction bust long-term interest rates! That's if we get lucky and Japan opts to bomb Pearl Harbor, Germany invades France, and we can win World War III decisively without resorting to nuclear weapons. Somebody needs to destroy some serious industrial capacity at some point or we may never get out of this funk!
Gallows humor... it's what's for dinner (once the cat food runs out).
In all seriousness, I have built up quite the safety buffer on my prediction for 2015. In early December I claimed, with 80% confidence, that the 30-year treasury yield would stay under 3% every single day this year, in sharp defiance to the rising interest rate theories constantly told to us on CNBC. So far, so good. Knock on wood.
2.29% on the 30 year right now? The bond market's believing the infectious Japan story right now, and as a holder of bonds, I am too. Sigh.
ReplyDeleteOur annualized real GDP growth since 2000 has been pathetic! Worse than during the GD on many measures.
ReplyDeleteEven since the end of the great recession our real GDP growth has been abysmal.
Trillions in unproductive Gov't deficit spending is little different that trillions in dubious private debt creation.
The current eCONomic narrative is complete bs.
Despite our dismal economic performance, asset prices are at or near historic highs! Booyah! Who says there ain't no free lunch? And who says wealth comes from work?
Free market capitalism my @ss.
mab,
ReplyDeleteOur annualized real GDP growth since 2000 has been pathetic!
From 2000:Q3 to 2014:Q3 we're looking at 14 years of 1.8% nothingburger. Has it stabilized or can we expect even worse from here?
And some wonder why the bond market is predicting at least 30 more years of extended nothingburger. I certainly am. Sigh.
The future's so blight I gotta swear, "Hades!"
On a lighter note, the Numbers spreadsheet program on my new phone has a retirement planner sheet. Love the 9.5% default rate on expected investment returns on savings, lol. Sigh.
This is much more favorable than today's 2.29% expected annual return on 2.29% 30 year treasury bonds. Of course, most seem happy earning nothing as they patiently await rising interest rates. Any decade now! Plan on it!
Wait until the Euro zone falls to pieces then you'll see some real negative rates!
ReplyDeletethe Numbers spreadsheet program on my new phone has a retirement planner sheet. Love the 9.5% default rate
ReplyDeleteI'm short the iPhoney retirement planner. BOOYAH!!
http://research.stlouisfed.org/fred2/graph/?g=YKY
ReplyDeleteis an important graph to understand.
As for interest rates,
http://research.stlouisfed.org/fred2/graph/?g=YKZ
is real per-worker total debt
https://www.youtube.com/watch?v=zFmkM6YXOqo
Reason I showed LUV and TLT together--highly unusual that govt. bonds and stawks are bubbles at the same time.
ReplyDeleteAll in a ZIRP time deposit environment.
Seems highly dangerous too, since what's a mother to do if there is a pop to both. Hmm--trying to think when this happened before? 1931 comes to mind. But it is guaran-dang-teed that interest rates can only move slowly from here--correct?
CNBC keeps touting higher rates in part because the Fed keeps touting higher rates, and also to pump stocks.
ReplyDeleteEverything went tits up when Bernanke raised rates in 2005. The damage was already done, much like now. Good luck, Janet.
Everything went tits up when Bernanke raised rates in 2005.
ReplyDeletethat wasn't it. The housing bubble didn't pop because of higher rates, the unaffordability was reached and breached for other reasons.
There was a $100B per month money injection flowing into the middle class 2004-2007. It's what got us out of the "jobless recovery" of 2002-2003 and was a stealth stimulus that even today nobody is aware of.
http://research.stlouisfed.org/fred2/graph/?g=YO6
Blue is YOY wage gain, red is YOY consumer credit take-on
Higher interest rates didn't cause the crash, the years of suicide lending -- loans that would go into default if housing prices didn't continue to rise -- resulted in a $4T debt overhang in housing once the housing bubble popped.
The same 'madness of crowds' craziness happened in Japan. But:
http://research.stlouisfed.org/fred2/graph/?g=YOc
shows our boom/bubble was greater. Their bubble powered their stock market into a parallel bubble; our bubble was different because there was trillions of cash-out shenanigans going on, and this money funded not only home improvement jobs but EVERY sector of the economy.
While it lasted.
destroy some serious industrial capacity
ReplyDeletethis is an under-appreciated point.
too many goods chasing too few consumers is not inflationary.
Apple sold more iPhones each week in CYQ4 than all the Apple IIs it ever made, 1978-92.
If it can be made in China, and fits in a 40' high-cube container, there's probably no inflation impetus for this product.
And not just PCs . . .
http://research.stlouisfed.org/fred2/graph/?g=YOm
real CPI clothing
midwesterngirl,
ReplyDeleteWait until the Euro zone falls to pieces then you'll see some real negative rates!
The euro is greater then the sum of its parts! That's right. It's even more of a cluster#%^* than would normally be expected!
So, yeah. I can't wait, lol. Sigh.
Fritz_O,
ReplyDeleteHahaha! :)
John,
ReplyDeleteBut it is guaran-dang-teed that interest rates can only move slowly from here--correct?
The big question is which direction they'll move! Most expect higher interest rates. Unfortunately, the markets csn't please all the people all the time. The rising interest rate camp is/was a very crowded trade.
Mr Slippery,
ReplyDeleteEverything went tits up when Bernanke raised rates in 2005. The damage was already done, much like now. Good luck, Janet.
If history is a guide, then I expect her to someday be Time magazine's person of the year. Like Bernanke, she must first destroy a thing in order to save a thing. Everyone loves a hero!
That's why arsonist firefighters are so popular, lol. Sigh.
There is one sector that is inflationary still, and that's housing.
ReplyDeleteWhich is odd though, since housing qua housing doesn't have a significant labor component -- so all the trillions it is pulling from the paycheck economy is not being recycled back into paychecks all that much.
(Unlike health care which comes with 15M jobs)
(The main consumable of rental housing isn't the sticks and bricks -- those are durable goods with low depreciation rates -- but rather what it is being purchased is the tenancy itself -- what it takes to outbid the next tenant who wants to live there . . . for a $2T sector of our economy everyone is certainly paying a lot for an invisible bundle of rights)
http://research.stlouisfed.org/fred2/graph/?g=XNO
and with Gen Y age 15-33 now, I expect housing to continue its inflationary trend.
Can't make housing in China (yet!), and even if we could manufacture new land we'd have no place to put it.
Troy,
ReplyDeleteHigher interest rates didn't cause the crash, the years of suicide lending -- loans that would go into default if housing prices didn't continue to rise -- resulted in a $4T debt overhang in housing once the housing bubble popped.
Rising interest rates were the last bale of straw on the camel's back. So, I think you are both right. Mortgage rates were quite high heading into the crisis, and nothing good came of that.
The camel eould have collapsed anyway of course, fior the reasons you suggest. It was an exercise in camel insanity. Sigh.
Mortgage rates were quite high heading into the crisis, and nothing good came of that.
ReplyDeleteno, last entrants moved to teaser rates and negative amortization to avoid the higher interest rates.
by 2006 the RE sector / smart money knew it was on borrowed time and all that was left was to grab as much before it all blew up.
Troy,
ReplyDeleteI am not as convinced as you that housing will be inflationary. I'm concerned about people like my mom. She once owned a house and no longer does. It did not go to her children either. We've all already got homes. The demographics of the older generation vs. the demographics of the newer generation should be interesting as it plays out. The newer generation has a mountain of student loan debt and potentiallly poor paying jobs in the future. As expected, I am not optimistic. Let's hope I'm wrong.
In other news, I love my new iPhone.
ReplyDeleteI do have one tiny complaint about the phone number I was given.
I have received MANY phone calls and many voice mails from one number in particular, to the point I had to block it. 5 calls in one day with no reply from me? Good frickin' grief!!
Despair.com: Persistence
And as a sign of the times, I also got a notification alert from my bank stating that my account had less than $50 in it. It was intended for the previous owner of the phone, but it freaked me out just the same!
I'm going to go way out on the limb here and suggest that the previous owner of the phone number is not going to be driving new home sales higher anytime soon. Sigh.
The newer generation has a mountain of student loan debt and potentiallly poor paying jobs in the future.
ReplyDeletethat's the beauty (horror actually) of housing; since it is critical in providing life needs:
http://commons.wikimedia.org/wiki/File:Maslow's_hierarchy_of_needs.svg
and its supply is difficult to expand, everyone is forced to bid housing up, up, up.
Cut taxes, housing goes up. Gas goes down, housing goes up.
Housing takes all.
Well, at least not in Japan any more, since their population is declining, reversing the supply imbalance.
Student loans are an issue, but I read recently that the newish (post-2011) federalized loans come with more liberal payment regimes -- repayments are capped to 10% of income over 150% FPL, and the balance (ie. accrued interest) is forgiven after 20 years.
This is actually pretty sane; it lets people pay for their own education if it benefitted them, and lets them slide if it didn't.
As for the jobs picture of Gen Y, old people age 65+ are going to double by 2050. This is demand for labor that only Gen Y can provide.
Troy,
ReplyDeleteWell, in hyperinflation housing tends to lose all as money is funneled into life sustaining food. At least that's what I've read. People can adapt by doubling up on housing as more live together. That seriously hurts property prices relative to all else.
So, if we were to experience the opposite of hyperinflation (as seen in 30 year bond yields) then perhaps housing can take all.
i think it will all depend on quality and quantity of jobs. We may need a lot of people to assist our aging popularion, but many if those jobs (caregivers) don't pay well at all.
The market did not like the FOMC statement and post statements. Someone said they want to raise rates in order to normalize them but that is theoretical if not ideological.
ReplyDeleteMe: I think it is too late.
https://www.youtube.com/watch?v=dYdr-MslXkw&x-yt-ts=1422503916&feature=player_detailpage&x-yt-cl=85027636#t=6
hyperinflation housing tends to lose all as money is funneled into life sustaining food
ReplyDeletehyperinflation is over circulation of money chasing a paucity of goods.
it requires both conditions -- too much money in consumers' hands and not enough goods on the shelves.
Certainly the mild 1970s inflation actually dampered CPI in housing increases (I have the FRED graph for that but I'll spare you).
The US is going to have 80M more mouths to feed by 2050 -- and India (+300M), Nigeria (+200M), and another 8 developing-world countries adding 400M+ aren't going to help the food situation.
Plus if we have to actually start parting with our produce to pay for our trade with 1.3B Chinese that will reduce our domestic food supply (Uncle Warren bought the railroad to facilitate this trade).
But more people in a house also means more incomes, which means higher potential rents.
US is going to be 25% more crowded in 2050.
So yeah, the Soylent Green future is still out there waiting this century, especially if we get more climate disruption and water shortages.
But it's difficult seeing 10 years out, let alone 30.
Back in '85 I was a futurist, and I guess things have gone as I expected. We've got rooftop solar finally, usable EVs, the internet, battery-powered NeXT cubes with their own color LCDs that we can carry around and even make phone calls on, 500 channels on the cable box.
The big unforeseen discontinuity has been the closer integration of India and China into our economy. Microsoft is almost an Indian shop, as is much of mid-tier SV. China has for some reason given us $3T of free stuff since 2002. Ah, that's another discontinuity, the new credit environment:
http://research.stlouisfed.org/fred2/graph/?g=WUP
debt / GDP
productivity has allegedly doubled since the 1980s:
http://research.stlouisfed.org/fred2/graph/?g=YRj
real per-capita (age 15-64) GDP
but rising health and housing costs have eaten away most of that gain
I've got to think the concentration of wealth is extremely
ReplyDeletedeflationary and creates its own feedback loop. Nothing
short of major tax reform can break the cycle.
Not just the "concentration", that implies a static situation.
ReplyDeleteThe reality is the economy is structured to rip trillions out of the paycheck economy each year and not put it back.
$500B trade deficits. $2T (each) housing and health care expenses. $2T in corporate profits.
http://research.stlouisfed.org/fred2/series/CP/
All this money flowing out of the paycheck economy [my codeword for "working class" so I don't sound so much like a raving Marxist] is getting restocked somehow but is still a moderator (in the atomic reactor sense) of consumer long-run spending power.
My thesis is it was the $6T rise in consumer debt 2002-2007, then the $8T rise in gov't debt 2008-now
http://research.stlouisfed.org/fred2/graph/?g=YSU
keeping the economy turning over.
But that is one helluva graph. I've made hundreds of FRED graphs, but haven't seen that particular one yet.
One wonders what the third wave will be, and if we need one.
Ah, I know what's primed for the third wave . . .
ReplyDeletehttp://research.stlouisfed.org/fred2/graph/?g=YSW
MMT is the Golden Hammer that solves all problems.
http://en.wikipedia.org/wiki/Law_of_the_instrument
ReplyDeleteJoseph Constable,
ReplyDeleteSomeone said they want to raise rates in order to normalize them but that is theoretical if not ideological.
One wonders what some would consider normal in a world where interest rates have falllen for more than 3 decades. Maybe we're already there. Sigh.
Troy,
ReplyDeleteUS is going to be 25% more crowded in 2050.
I not at all convinced it will, especially if we do continue the secular stagnation of the past 25 years. For what it is worth, I have no children and the economy is partly the reason. I had no faith that I could earn enough income safely without a job, and hindsight shows that concern was definitely justified. I am not alone. Birth rates have fallen since the Great Recession. If the next recession hits during ZIRP, all bets are off.
If a robot is invented that could completely replace 99% of human labor, I think there would be a great deal of raving Marxists.
ReplyDeleteOur new economy does an excellent job hiding its crackd though. It's hard for me to picture just how many tens of millions are on the food stamp program. I think general confidence and optimism would be much lower if they all had to stand in a soup line. They don't though. They blend in by design. Sigh.
" It's hard for me to picture just how many tens of millions are on the food stamp program."
ReplyDeleteThere's a FRED chart for that:
http://research.stlouisfed.org/fred2/graph/?g=YTT
Real per-capita SNAP benefits
But if I may add my "thesis" to that chart:
http://research.stlouisfed.org/fred2/graph/?g=YTV
red is Real per-capita housing costs.
The issue becomes clearer, I would think.
As for population growth, baby boom echo is just edging into birthing years now, they're age 15-33.
And they're bigger than the baby boom!
http://research.stlouisfed.org/fred2/series/LFWA24TTUSQ647N
Thanks to Medicaid, SNAP, and Section 8, we've kinda isolated the financial risk of having kids still, for the lower quintiles at least ("quintile" is also a great codeword for "class" . . . )
Troy,
ReplyDeleteNCHS Data Brief
The U.S. general fertility rate (GFR) declined 1% in 2013, to another record low: 62.5 per 1,000 women aged 15–44 (2). Since 2007, the fertility rate has declined 10%.
Those at the bottom of the economy are not making out like bandits, nor are they isolated from it. I would take future long-term population estimates with a huge grain of salt, especially if the real main street economy continues to stagnate over complete business cycles.
And once again, I will not believe that the business cyvle is dead until I see the unemployment rate flatline. Since it has been falling like a rock, it's about as far away from doing that now as it has ever been.
Hahaha! :)
ReplyDeleteMaybe I should have said...
I'm short retirement!
That would put me in pretty good company, about 80% of Americawn's are in the same predicament. (I didn't misspell American's.)
BTW, this is an awesome thread. Troy is the man, to use a '90's popular culture catch phrase.
Fritz_O,
ReplyDeleteThis "awesome thread" is the ZZ Top, 'cause every girl crazy 'bout a sharp dressed man. ;)