Interest Rates Will Not Rise Until 2027

 

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Interest Rates Will Not Rise Until 2027

 

I constantly remind myself that the stock market could go much higher than anyone could imagine.  In contrast, Gold, Silver and Precious Metal mining stock could go much lower than anyone could imagine.

I remind myself that I am limited and flawed as a human with regard to growing money.  We are half-way through 2013, and it feels like Groundhog Day, waking up, stock market is up 1%, and Gold and Silver are down 1%.  And then the next day is exactly the same. I know it’s a bit of an exaggeration, but not by much.

You don’t need to pick stocks, study macroeconomics or do any research.  The market is going to go up regardless.  In fact, things feel so assured that people have reverted back to the belief of ‘buy and hold’. Just like at the end of the 1990’s before the market crashed 50%, and again at the end of 2007 before the market crashed 58%.

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The thought for this week: “Cheap debt can hide lots of lies and lots of sins.”  I’d like to show that earnings per share are not what they seem.  And I’d like to show you how there are also no more life rafts for when things go bad.

Incredibly, government’s blatant interventions are not even being hid anymore from the public; it is happening out in plain sight.  And lastly, I want to show you why rates cannot go up.  They will stay range-bound probably longer than anyone anticipated.

Let’s start with the chart below that shows earnings per share for S&P 500 stocks.  From the third quarter of 2011 until the first quarter of 2013, earnings went up $3.70. 

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Two-thirds of those earnings were shares buy-back.  Much of that was from companies who don’t know how to grow a company, and were buying back their shares instead.

In addition, some of the buy-backs are from companies that have taken on very cheap debt to buy back their shares. Unfortunately, these are not ways to grow a company over longer periods of time.

You grow a company’s wealth by inventing or creating value through services and products.  Ironically, 2/3 of the earnings per share growth over the past 18 months have been from either cheap debt, or from companies that don’t know how to grow their companies.  This is simply because the economy is not as strong as Washington D.C. would like us to believe, and the companies do not know what to do with their money.

Take a look at the next chart below.

When the U.S. has its next business recession, or balance sheet recession, the Fed can’t lower the rates any further.  The teal, purple and blue lines are the three-month yield, the discount rate, and the Federal funds rate.  These almost always get dropped, or lowered, when we go into a recession.

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The red line is the stock market.  The recession in early 2001 was answered by lowering rates.  It worked.

So, what happened from October of 2007 through March 2009?  The government lowered the rates again.  This time, they lowered them to zero.  That also worked.

However, what is going to happen next time – and there will be a next time – when the market corrects because of a recession?  The Fed can’t use their main tool of lowering rates anymore.

It will be interesting to see what they are going to do.  They are already buying $1 trillion of bonds and mortgage-backed securities.  Sure, they could buy more, but at what point will the bond market say, “No more”?  Eventually the market will say that; however, as mentioned before, things can continue much longer than we could imagine.

The Fed does their primary market open operations on Tuesdays.  This is when they go into the market and buy their bonds and mortgage-backed securities.  The mossy green line on the chart below is what the S&P has done on just Tuesdays for the past six months.  The red line is all of the market days, minus Tuesdays.

Notice anything?

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Next look at the chart below.

Mortgage rates have gone up significantly over the past 3-4 weeks.  This chart shows the rate of a 30-year, fully amortized mortgage in the U.S rising.  It went from below 3.5% at the beginning of May to over 4% now. 

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This leads me to my last chart below.

The U.S. 10-year treasury will stay range-bound for longer than anyone can imagine.  This chart shows the yield on a 10-year bond.  In May alone it went from below 1.6% to above 2%. 

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I would be shocked if it breaks 2.4% and stays above it.

But, if it does, that is going to wake up Bernanke and his printing press. I do not think the U.S. could handle a 10-year rate above 2.4% right now.

For 18 years, from 1935 to 1952, the 10-year treasury stayed range bound between 1.5% and 3%.  Will that happen again?  Time will tell; but, so far the answer is yes.

What does this mean for your investing?

It means high and higher yielding investments will get crushed when the 10-year moves to the upper range. When it falls, they will slingshot higher. You will be able to leverage and take advantage of the trading range.

Together, we are growing and protecting your wealth,

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A Note from RC: My team and I have spent the last decade, and nearly $1 million, designing an overall system to take the human error out of investing…and help you beat the market over the long-term.  It’s simply called The Fearless Wealth System.  Large hedge funds spend millions of dollars for these kinds of results.  Click here to learn more about how regular investors are using it to profit right now.

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