As I’ve been warning, bond prices are now tumbling. The yield on the 10-year Treasury note shot up to 2.92 percent last week. That’s the highest since July 2011 — over two years ago.
What’s worse is the velocity of the rise. Since mid-April, the 10-year yield has rocketed from a low of 1.64 percent, a whopping 78 percent rise in three months.
That would be like gold jumping from its low of $1,320 in mid-April to $2,349 today. Or the Dow Industrials exploding higher from its April low of 14,444 to 25,710 today. Astounding moves no matter how you measure them.
But it’s not just the 10-year interest rate that is rising. Rates on everything from 2-year to 30-year terms are soaring. Plus, they’re not just surging higher in the U.S. Interest rates are increasing all over the world.
So why are rates rising? The answers are simple:
First, investors all over the globe are starting to see what I’ve been telling you all along: The U.S. sovereign bond market is the world’s biggest bubble, and it has to burst.
|No matter what the Federal Reserve says or does, it will not be able to control the actions of tens of millions of investors.|
There’s simply no way investors are going to keep putting money in bonds with rates so low and the U.S. government’s balance sheet in such horrible shape.
The selling is hitting the bond market from virtually every angle. Overseas investors in our bond market, our creditors, are getting out as fast as they can. According to the latest data for June, they dumped a net $40.8 billion in Treasuries, $4.99 billion in corporate debt, and $5.2 billion in mortgage-backed debt.
More recent figures are even worse. According to data just released by TrimTabs Investment Research, total bond dumping by domestic and overseas investors shows $30.3 billion in sales of bond mutual funds and ETFs this month through Aug. 19 — $5.2 billion was pulled on Aug. 16 alone.
Second, bond investors no longer believe the Federal Reserve can contain the interest rate rise. They’re right. No matter what the Fed says or does, it will not be able to control the actions of tens of millions of investors. Or the actions of the free market.
When the free market forces take over and decide that U.S. bond markets are no longer a safe place to invest, as they are doing now, it’s lights out for Treasuries.
Third, and part and parcel of the interest rate rise, is the loss of confidence investors are now experiencing in U.S. bonds. That’s the ultimate motivation for dumping bonds.
Investors no longer see U.S. bonds as a safe place to park their money.
They no longer see the Federal Reserve as being able to stop rates from rising. And they don’t believe Washington will ever be able to fix its terminally ill balance sheet.
Worse, with the budget ceiling negotiations about to ramp up again, investors know all too well that Washington will use smoke and mirrors to hoodwink the public into believing something is being done, while at the same time, the national debt explodes to over $17 trillion.
That’s more than $53,000 per U.S. citizen.
I, for one, am overjoyed interest rates are rising.
Not because I might be able to earn more interest on idle cash. But because of the significance of rising interest rates.
I have pounded my fist on the table about this all year. Rising interest rates should be music to your ears because it means inflation will come roaring back. Not hyperinflation, just old-fashioned rising inflation.
Why does it mean inflation will rise? Because as investors yank their money out of bonds, causing rates to rise, the cost of money and credit will go up.
So as the cost of money and credit goes up, so does virtually everything else. And unlike deflation, where investors and consumers squirrel away their money, when the cost of money and credit and virtually everything else starts to rise with increased momentum, the opposite takes hold: Investors and consumers start investing and spending their money, anticipating that prices will only be higher in the future.
That increases the velocity, or turnover, of money and credit, which, in turn, greases the wheels of inflation.
And how important is that? For investors, it’s critical.
It means further increases in the major stock indices. Yes, we are in a correction right now. But over the long-term, as I’ve been warning you, rising interest rates and inflation are the best forces that could happen for the stock market.
The simple truth is this: Over the long-term, the U.S equity market is one of the best inflation hedges there is. At times, even better than gold.
For instance, since its 1929 crash low of 40, the Dow Industrials is up 375 times over. Compare that to the price of gold, which is up roughly 69 times over since its 1929 price of $20 an ounce.
More recently, consider the period from 1980 to today. The Dow Industrials are up more than 16 times over. Yet at today’s price, gold is barely double its 1980 price.
I’m not panning gold. I’m merely proving to you that equity markets do better with rising inflation than they do during the brief periods of disinflation or even outright deflation that occur.
It means a rebirth of the commodity super cycle. It was never dead to begin with. It merely took a two-year pause. But now, with the bond market tanking and the cost of money and credit rising, causing inflation to rise, we should soon see a major bottom in the entire commodity sector, which is great news for tangible asset investors.
Not to mention, it means a rebirth of gold’s great bull market. Mind you, inflation is not the only driver for gold prices. If it were, gold would already be substantially higher.
But rising inflation certainly won’t hurt gold prices. It will add more power to the mix, helping gold to actually catch up with the Dow in the years ahead, and cause gold to soar well past $5,000 an ounce.
Don’t expect gold, or even the Dow Industrials for that matter, to immediately start making a moon-shot higher. There is some backing and filling for both that still needs to happen.
But I implore you to keep the longer-term in perspective: Commodities and stocks are going to explode higher in the months and years ahead, and they are going to do it at the same time.