Saturday, February 28, 2009

Bond Rates

"Amid the daily news about economic woes, it is useful to ponder the long view. And the long view shows that we now stand at the tail end of the greatest secular swing in interest rates in US history. Interest rates are a barometer of economic conditions. So where have they been, and what can they tell us? .... The upward move began in 1946, when long bonds were yielding about 2.5%, and ended October 1981, when they peaked at 15%. ... The magnitude of this long up-and-down yield movement dwarfs by a very wide margin all four previous secular swings in American financial history. The cumulative change in the postwar trough-to-peak-to trough swing was 25.3 percentage points. ... The private sector is overloaded with debt. The federal government continues to issue an unprecedented volume of new obligations. Our financial institutions are overleveraged and dependent upon government largess for their survival. Whereas the nation stood on the brink of an unprecedented economic boom in 1946, today wealth is contracting massively and the economy is grinding through a severe recession. ... The current interest-rate trough reflects several weaknesses in today's financial markets that are also undermining the broader economy from the failure of monetary policy makers to recognise the impact of financial and structural changes in market behavior, to serious lapses by credit rating agencies, to the inability of the senior management of financial institutions to stay within reasonable risk parameters. Which raises the question: Why are we so poor at managing our key economic institutions while at the same time so accomplished in medicine, engineering and telecommunciations? ... The answer lies in methodology. In science and technology, we rely on the scientific method: experimental design with dependent and independent variables and with reproducible results. Economists and financial experts like to fancy themselves as exact scientists as well", Henry Kaufman (HK) at the WSJ, 14 February 2009.

I agree with HK, interest rates are going up. HK misses something: the Fed changes things rendering "experiments" impossible. I have long said that economics is infected with scientism, see my 15 January 2009 post:


Anonymous said...

Julian Robertson and other hedgies have put on steepener trades betting that interest rates will go up.

Anonymous said...

I think the Fed liquidity is a growing blob...

>> Worldwide production and consumption is declining

>> Need to keep paying all those coupons.

>> Need more liquidity to pay off all those coupons.

>> The Fed is the "big bang" ever expanding

>> The economy is a black hole

>> Which force wins?