Simply put, the bond market got clobbered this week.
After yields on the Benchmark 10-year treasury sat below the 3% level for almost a month, they finally broke through and by quite a margin.
The yield was as high as 3.11% on Thursday before declining slightly towards the end of the week. But in either case, it was a significant move. With significant ramifications.
At this point the stock, bond, and real estate markets have been propped up and inflated primarily by low interest rates and quantitative easing. And as former Federal Reserve chairman Ben Bernanke even acknowledged in 2010, the purpose of low interest rates and QE was to create the appearance of better financial conditions.
Yet what he never mentioned was that when rates go up, you can expect the exact opposite to occur. Similar to what happened after Alan Greenspan lowered rates almost 15 years ago before eventually raising them and popping the real estate bubble he had inflated during his tenure.
Perhaps the most surprising part is how few on Wall Street seemed to have seen the impact of the higher rates coming. Yet nonetheless it has. And with the Federal Reserve still on course to continue hiking rates and reducing the size of its balance sheet, while at the same time a growing list of foreign creditors continue to make trade agreements outside of the dollar, the impact of the last decade of Fed policy is just beginning to be felt.
It’s not an accident that the stock and real estate markets have stopped rising at the same time rates have started going up. And should rates continue to rise, the effects will just be further exacerbated. Because if interest rates are allowed to rise towards any sort of fair market value, the system will crash in the same way it did 10 years ago.
Of course the wild card is that many (including myself) still expect that once the storm arrives, the Fed will start running the presses again at a faster rate than ever. Which is why gold, silver and unprintable assets like well selected cryptocurrencies remain a great way of stepping out of the way when the freight train runs through.
It’s stunning that the insane has continued as long as it has. Perhaps outdone only by how stunning it is that even with the warning signs going off at full blast, the majority on Wall Street and in Washington don’t see the canaries dropping all around the coal mine.
Yet I truly believe that we are living in what will be looked back on as incredibly historic times. Perhaps this is what it felt like to the citizens of Rome as they watched their empire fall. Because even while in some ways it can be apparent, it’s still stunning when the moment finally arrives.
Whether we see this occur on a larger stage this year as many have forecast, or whether it’s still a little longer away, in either case it’s never been more important to take heed of the developments that are taking place on a daily basis now.
May 11, 2018