Posted by jdavis on November 7, 2014
We have been following the market of US Treasuries, avidly, for the last couple of years.
One of our favourite charts is the very long term chart of US Govt borrowing rates. It just tells the story, pictorially, of a World of falling inflation and, of course, falling interest rates. What the uninitiated will not see is that Central Banks, such as The Federal Reserve, do not lead the markets to raise or cut rates. They follow. Throughout modern history.
For the last year, at least, Central Bankers have been rabbiting on about how they're going to be so macho and raise interest rates. First it was going to be late 2013. Then it was H1 2014, then H2. Then... it was Q1 2015 and so on. Currently, it's around Q3 2015.
Firstly, we have been saying consistently we could not see how a World, which is so vastly indebted, could possibly sustain higher rates. However, we have conceded it's possible to raise as a sop to public opinion but then bring straight back down again, say after a few months, maybe a year.
Secondly, irrespective of our musings on the subject, the multi TRILLION $ market has consistently 'informed us' that the idea of raising rates remains hypothetical. What is real is that rates continue to fall. Look at the chart:
US Government Borrowing rates (30 year terms)
In the mid 90s, the US paid c 7% pa to borrow over 30 years. Now, after downs and ups in a downtrend, the rate is c 3%. The brown line is the moving average AKA the trend. Note the rate has risen above the trend 8 times over the last 10 years. But on no occasion has the month ended above the trend line. Until it does, we have to take it the trend is still down.
It will, one day. When? We haven't the foggiest. We lost our working crystal ball...
So, why are rates still falling in the light of economic growth? Well, if there were any serious economic growth rates probably wouldn't be falling. It is nonsense to read that the global economy is growing. Nonsense.
Mildly, sure. Sustainably? Unlikely. If it were, be assured the multi TRILLION $ Government Bond market would not be pushing interest rates down. They would be saying, we're going to have inflation, so we need to be compensated for it by higher and higher rates on our loans to Barak Obama's / David Cameron's / Angela Merkel's etc etc Governments. Whereas in fact they are accepting lower and lower interest rates on their loans. Thus, they are telling us they see falling economic strength and falling inflation.
In the following chart blue = inflation and yellow = deflation.
And rightly not even the global bond markets are forecasting. They are going with the economic reality.
Nearly a third of advanced countries (or those which seek to be advanced) are right now in deflation.
And practically all of them are less than 2% official inflation. This is the opposite to the modern world's experience since the 1970s.
Our view of all this is it is an inevitable fallout from a multidecade explosion in debt. Rising debt can continue for a long time but eventually it stops rising and this takes away the crutches that economies were trained to need in order to grow.
Look at the UK, for example.
In the 2000s it has been proved, without reasonable doubt (unless the doubter is a biased Socialist and especially the multimillionaire biased Socialists...) that the primary reason for growth (until the banking crash) was rising debt.
During the credit crunch of 2010 to c 2012 the UK had practically no growth (well 0.5-1.0% pa). Then the Chancellor announced Help to Buy (a means by which the next generation guarantee mortgages today...). In other words, credit conditions eased and Hey Presto! there was growth in 2013 and in 2014 (though slower than last year).
NB. As regards the growth in the UK and the feted rise in employment. The UK is in a similar place to the US on employment. The following shows the number of folk working part time, for economic reasons (ie not personal/family but because they can't find full time work):
Still at very elevated levels (7 millions), compared to the last 60 years. And those who wonder why this is are always looking in the wrong places.
So, of course, lending brings economic activity and growth but it is not sustainable activity and the debt remains at the end. Also, what is clear is that there is now a diminishing marginal return from every extra £ of debt as we have reached 'peak debt'. The simply vast debt taken out by Govts in 2009 produced what? 18 months or so of growth!
Getting back to the point - the world is slowing down. Not turning down but the rate of growth is slowing down distinctly. This is dis/deflationary and positive for Govt bonds.