How High, Interest Rates?

Last week’s commentary asked how high the dollar can climb before it snuffs inflation and the increasingly shrill hysteria that has accompanied it. Inflation is supposed to cheapen the dollar, but that is not what has been happening. Instead, it has been climbing steeply relative to all other currencies. The experts have not been able to explain this, nor why the rally began well before the Fed was even thinking about tightening. It is simple, though, if you understand deflation and its chief symptom, a rise in the real burden of debt. The dollar has been climbing because it “knows” there are more debts than can ever be repaid. This can only result in massive waves of bankruptcies that are going to make us nostalgic for the consumer inflation that is today’s headline news.

Sure, the Fed could print enough money to pay off everyone’s debts, including its own: student loans, our collective liabilities for Social Security, Medicare and private pensions, etcetera – but also car loans, mortgages and credit card balances that have ballooned. The resulting hyperinflation would solve nothing, however, even as it destroyed lenders as a class and all institutional conduits of borrowing. The megabanks would be ruined, leaving no one to lend to you, me or anyone else. It could take a generation or longer for credit to sprout roots again. Do we really want to go down that path?

More Tightening Unneeded

This week’s question is related to the one about the dollar: How high can interest rates climb before they snuff inflation and the increasingly shrill hysteria that has accompanied it? Economists and pundits seem to think the Fed has only begun to tighten. More likely is that interest rates are already high enough to have tripped the U.S. and global economies into deep recession. It was going to happen anyway because of all those unpayable debts, but the Fed’s hawkishness has unleashed market forces that have already mooted the need to tighten any further.

My long-term forecast has called for a 3.24% top in the U.S. Ten-Year Note. On Friday the rate hit 3.13%, just an inch from the target. The rally has been so ferocious that I double-checked my math to determine whether an overshoot might occur. I’ll stick with the target for now, but even if it’s exceeded, rates for home buyers in particular have reached levels that froze the economy and crushed real estate in 2007. If you’ve been a scale buyer of long-term Treasurys in order to implement the Gold-versus-T-Bonds ‘barbell’ hedging strategy I’ve advised for the last couple of years, it’s time to move more aggressively into the bond side of the hedge.

  • RICHARD CHARLES May 12, 2022, 2:35 pm

    Busy week
    We bought some VUG

  • RICHARD CHARLES May 11, 2022, 3:47 pm

    RARE UP Near Close at Lows

    Long Opening CALLS 118 % of calls:

    Don’t see this very often.

    Often comes when market participants are ground beef.

    • RICHARD CHARLES May 11, 2022, 4:02 pm

      CALLS 117 % of puts

  • Rich May 9, 2022, 11:06 am

    $TNX 3.203 % today even closer to Rick’s Hidden Pivot target.
    (PnF currently targets $TNX 4.032 %)

    $TYX 6.15 % target suggests widespread credit carnage somewhere ahead.

    Big4 concur on both Targets, with 121 % Short CBT UST 10Y Note principal price.
    and 140 % Short CBT UST Long Bond principal.

    We are overdue for the big bounce from big bottom hunters:

    BB suggested by Big4 Long Fed Funds 115 %, Long DJIA 113 % and Long selected Forex including Bitchcoin and the Franc, Pound, Rand, Yen.

    1929 did not go straight down, but rallied 49 % in five months from 13 Nov 1929 to 17 Apr 1930, as oligarchs patriotically bought.

    Then DJIA fell – 89 %.
    Round and round it goes.
    Who knows when or where this time ?

    Human nature unchanged in a century or millennia,
    else we would not learn from history.