“Let no man deceive you by any means…” advises the Good Book (2 Thessalonians 2:3).
The Apostle Paul, the likely author, aimed to address some falsehoods circulating in Thessalonica during the first century. Someone, possibly a government official, was suggesting that Christ had already returned.
Paul dismissed this notion, stating that the Anti-Christ would appear first to declare himself God.
Is it possible that Paul was onto something? Has the Anti-Christ manifested itself yet?
Recently, Dr. Anthony Fauci referred to himself as “the science”. While he might not have claimed divinity, he certainly embodies something troubling.
Similar to Joe Rogan’s attempts to debunk Fauci’s misinformation, Paul faced numerous adversaries. This resistance, however, is expected for those pursuing truth. Just ask the spirit of John T. Flynn; speaking the truth often leads to enemies in powerful places.
Mundus vult decipi, ergo decipiatur – The world desires to be deceived, so let it be deceived.
Why not indulge this preference?
Many find it comforting to believe U.S. Treasuries are the most secure investments globally rather than certificates of guaranteed confiscation. It flatters a cabinet member’s ego to view American exceptionalism as something more than a military-backed banana republic.
Today, individuals like John Locke, who “love truth for truth’s sake,” are increasingly rare. Nonetheless, just because truth isn’t popular doesn’t mean it should be dismissed.
Remember, what’s politically correct is seldom truthful. Furthermore, the truth often speaks in ways many choose to ignore.
For example, in the past 19 months, the yield on the 10-Year Treasury note has surged from 0.5 percent to over 2.03 percent – marking an increase of 153 basis points and reaching a 31-month high.
What truths are the credit markets relaying to those willing to listen?
Anticipating Financial Blowups
When you buy a Treasury note, you are effectively loaning money to Washington for a agreed period at a fixed interest rate. The risk of default on Treasuries has typically been viewed as nonexistent.
With the U.S. government and the Federal Reserve capable of printing money to fulfill its debts, one would think this is safe. However, this approach carries risks. Printing more dollars to settle debts dilutes the existing dollar value, resulting in potentially negative inflation-adjusted returns.
On Thursday, the Labor Department reported that consumer prices, measured by the consumer price index (CPI), are rising at an annual rate of 7.5 percent. Using methods from the 1980s, the actual rate is over 15 percent.
This means that with a 10-Year Treasury note yielding 2.03 percent, its holders are losing approximately 5.47 to 12.97 percent annually. In essence, the U.S. Treasury is defaulting on its bond obligations.
As inflation expectations rise, yields climb. However, this poses a challenge for long-term Treasury investors: as yields increase, Treasury prices decrease. So, should they decide to liquidate their holdings early, they’ll incur losses.
No matter how you view it, Treasury investors face severe potential losses. Did your broker bring this to your attention?
Additionally, as interest rates escalate and borrowing costs rise, several consequences follow.
Tech companies – shiny objects like Meta – begin to lose appeal. Higher borrowing costs also hinder the ability of over-leveraged corporations, state governments, municipalities, and Washington to refinance their debts.
When interest rates increase, dramatic events can occur, leading to financial blowups like Long Term Capital Management in 1998, Lehman Brothers in 2008, and Orange County in 1994. Sometimes, the stock market crashes, as seen on Black Monday in 1987.
If yields continue to climb, everything will change.
Prepare for an Epic Mega-Catastrophe
Anticipate numerous blowups ahead. The truths of the credit market are being underscored by rising interest rates.
To truly grasp what messages the credit market is conveying, one must take a step back 80 years and examine a chart of 10-Year Treasury yields from the 1940s to today. Notably, around 1981, there was a sharp peak.
Interest rates peaked in September 1981 before generally declining for the next 39 years to a record low of 0.5 percent in July 2020.
During this time, the foundations for a mega-catastrophe were laid.
The relationship between interest rates and asset prices is generally straightforward: tighter credit leads to lower asset prices, while looser credit results in higher asset prices.
When credit is cheap and abundant, individuals and businesses borrow more to afford purchases. For instance, massive loans enable buyers to push home prices up. Companies can use plentiful cheap credit to repurchase stock, inflating its market value and executive stock options.
Conversely, when credit tightens, borrowing is reserved for high-return opportunities surpassing the elevated interest rates, leading to a drop in financial asset prices.
In 1981, borrowing was costly, while assets like stocks, bonds, and real estate were inexpensive. For example, the interest rate on a 30-year fixed mortgage peaked at 18.63 percent, with the median sales price of a U.S. house at approximately $70,000.
Now, the interest rate on a similar mortgage is about 3.98 percent, while the median house price has skyrocketed to around $408,000, significantly more on both coasts.
In 1981, the Dow Jones Industrial Average (DJIA) was near 900 points; today, it hovers about 35,000 points—a staggering increase of over 3,788 percent. In contrast, nominal gross domestic product (GDP) has only risen approximately 600 percent during this timeframe.
Clearly, nearly four decades of increasingly cheaper credit played a pivotal role in inflating stock and real estate prices. Financial asset prices and costs of living essentials, like college tuition and health care, have been severely distorted due to this long period of easy credit.
The disparity between exorbitant asset prices and low borrowing costs has poised the world for an epic mega-catastrophe.
Impending Financial Crises
The Federal Reserve wields considerable influence over credit markets, but it does not control it completely. Historically, today’s 10-Year Treasury note yield of 2.03 percent remains exceptionally low. Yet, juxtaposed with the last two years, it appears extraordinarily high.
Since bottoming at 0.5 percent in July 2020, the yield has surged dramatically, increasing over 306 percent in under two years.
As stated, the last significant interest rate low occurred in the early 1940s, hovering around 2 percent. Following that point, rates generally rose for the next 40 years.
Few recognize that the Federal Reserve’s modifications to the federal funds rate lead to vastly different outcomes during rising versus falling interest rate cycles. From 1981 to 2021, whenever the economy softened, the Fed responded by lowering interest rates to stimulate demand.
This disinflationary environment mitigated the negative impacts of the Fed’s actions. Although asset prices increased and incomes stagnated, consumer prices didn’t spike dramatically, thanks in part to cheap labor from China.
The Fed misinterpreted these outcomes as a sign they had mastered the business cycle. This couldn’t be more misleading.
During periods of rising interest rates—as witnessed in the 1970s after the U.S. defaulted on the Bretton Woods Agreement—Federal Reserve interest rate strategies become highly detrimental.
Politically, Fed policymakers struggle to adapt effectively to rising interest rates. Their attempts to keep the federal funds rate artificially low to invigorate the economy become increasingly ineffective.
As we transition into this rising interest rate environment—which began in July 2020—monetary inflation yields consumer price inflation, ultimately leading to the Fed’s policies veering into catastrophe.
It seems that we have finally reached the end of nearly four decades of declining credit rates, as yields resume their upward trajectory. They could continue to climb for the next 30 years.
The Federal Open Market Committee (FOMC)—comprised of appointed bureaucrats—are likely the last to realize this shift. All they had to do was heed the messages from the credit market.
Consequently, the cost of credit will become increasingly expensive by mid-21st century, signaling the end of the era of ever-declining interest rates that we have known since the early Reagan administration.
This transition back to rising interest rates promises to be tumultuous. The Fed is preparing to make this shift particularly challenging, as the likelihood of a 50 basis point hike in the federal funds rate at the upcoming March FOMC meeting has reached 100 percent.
As of this writing (Thursday night), there are rumblings of an emergency Fed rate hike scheduled for Friday. By the time you read this, perhaps an official announcement will have been made.
This will undoubtedly strain financial markets. Prepare for chaos. It is likely to provoke a recession—or worse, an epic mega-catastrophe—later this year. However, it may not accomplish what the Fed desires…
That is, it won’t curb inflation.
That ship sailed over a year ago while Washington was busy distributing free money as if it were candy.
Saint Paul cautioned against such complacency nearly 2,000 years ago. Merely because the world seems to be ending doesn’t grant a license to lounge around and collect payments financed by printing press money.
Brethren were advised to continue “earning their own living” (2 Thessalonians 3:12) and to “not eat anyone’s bread without paying for it” (3:8).
Wise counsel indeed.
[Editor’s note: President Biden and the laggards in Washington attempt to obstruct the initial stages of a 40-year trend. They have little chance of success. Likewise, investors who ignore the lessons of stock and bond market behaviors over the past 40 years are also unlikely to succeed. Rising interest rates will reshape everything. However, those who grasp the underlying changes and strategically position their assets will find themselves on an exhilarating journey. Consider exploring the Geometric Wealth Building Program for valuable insights. Discover more here, and you’ll be grateful for it in the coming decades.]
Sincerely,
MN Gordon
for Economic Prism
Return from Blowups and an Epic Mega-Catastrophe are Coming to Economic Prism
