Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Adaptive Fibonacci Price Modeling System Suggests Stock Market Peak May Be Near - 15th Aug 20
With Gold Above $2,000, Bulls Triumph! What’s Next? - 15th Aug 20
Stock Market, Asset Price Crash Dead Ahead - 15th Aug 20
NASDAQ vs. DJIA: Does the Recent Divergence Matter? - 15th Aug 20
AMD Ryzen 4900x / 5900x and 4950x / 5950x Zen3 4th Gen IPC and Clock Speed and Core Specs - 14th Aug 20
Stock Market Gap Fills Suggests Market Momentum May Stall - 14th Aug 20
Silver May Be Overextended – But It’s STILL Cheap - 14th Aug 20
A Short Guide To Making Your First Stock Market Investment - 14th Aug 20
Is Tech Reality Affects our Dating Possibilities? - 14th Aug 20
Will You Make Money in the New Silver Bull Market ? - 13th Aug 20
Hyper-Deflation Capital Destruction And Gold & Silver - 13th Aug 20
Stock Market Correction Approaching - 13th Aug 20
Silver Took the Stairs to $21 in 2008, Took Escalator to $29 2010. Is Silver on Elevator to 120th floor today? - 13th Aug 20
President Trump Signs Additional COVID Relief – What To Expect from the Markets - 13th Aug 20
Has Gold's Upward Drive Come to an End? - 13th Aug 20
YouTuber Ads Revenue & How to Start a Career on YouTube - 13th Aug 20
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Higher Interest Rates Reflect Default Risk as Credit Boom comes to an End

Interest-Rates / Liquidity Bubble Jun 14, 2007 - 02:54 PM GMT

By: Paul_Lamont

Interest-Rates

From our last report on the Panic of 1837, titled ‘ May 10th Credit Collapse ':

“In late 1836, the Bank of England concerned with inflation raised interest rates. As rates rose in England, credit tightened, and U.S. asset prices began to fall. On May 10 th , investors panicked and scrambled for cash.”

The markets are now tightening credit with higher interest rates. The 10 year Treasury Bond has recently confirmed its break out of the 1982-2006 trend channel.


Higher Interest Rates Reflect Default Risk as Credit Boom comes to an End

This movement caused Bill Gross, manager of the world's largest bond fund to remark that he's “now a bear market manager.” He also asked investors to consider:

“These increases in rates over the past few days have placed the 30-year mortgage market at close to 7% in conventional terms…This will decimate the housing market if it wasn't already decimated before, and certainly put the Fed on hold, and maybe allow the Fed to reduce rates…six to nine months from now.”

To financial historians, the increase in bond rates comes as no surprise. At the end of every credit boom, there has always been a realization point that the debts (yes, even mortgages) accumulated during the boom have become unsustainable. Interest rates (the cost of debt), then rise to reflect the increase in default risk.

The Last Time This Happened

The historical chart below comes from data from Ian Gordon: www.thelongwaveanalyst.ca. During a period of falling interest rates from 1920-1928, a credit boom contributed to speculation in subdivisions, Florida beachfront properties, skyscrapers, and most famously stocks. In 1928, the U.S. Treasury Bond similarly broke out of the channel and rose to a higher yield. This coincided with the end of ‘easy' money which forced the deleveraging of the economy and concluded with the financial crisis of 1929-1932.

To see a striking comparison of the two periods, see the Bond Buyer 20-bond Index below, which is a composite of long-term municipal bonds rated A or better. This chart, provided by Elliotwave.com, is in price, so a fall reflects an increase in yield.

With debt becoming more expensive, leveraged assets are less profitable or unprofitable to hold. So assets are sold and price falls. With the drop in price, more leveraged positions have to be liquidated. The vicious cycle feeds on itself until the debt is destroyed. This is what happened in the forced selling of positions to cover margin calls in the 1929 stock market crash. It is now manifesting itself in the foreclosures on U.S. real estate. As we reported in May 10th Credit Collapse , $1 Trillion dollars of ARM's will be resetting to higher rates over the next 5 years. The margin calls are coming due.

Couldn't The Fed Prevent This Today?

Common perception is that the Federal Reserve could somehow stave off the credit bust. Let's take a look at their track record. Murray Rothbard, in the A History of Money and Banking in the United States describes the action of the Fed in 1931:

“The Fed promptly went into an enormous binge of buying government securities, unprecedented at the time. The Fed purchased $1.1 Billion of government securities from the end of February to the end of July, raising its holdings to $1.8 Billion. The Fed, under Meyer, did its mightiest to inflate the money supply-yet despite its efforts, total bank reserves only rose by $212 million while the total money supply fell by $3 Billion.”

Why wasn't this successful? He continues: “The more that Hoover and the Fed tried to inflate, the more worried the market and the public became about the dollar, the more gold flowed out of banks, and the more deposits were redeemed for cash.” So the Federal Reserve can print money, but it cannot create credit or confidence. ‘Money' is therefore hoarded, by either the public or the banks themselves (if they are concerned about an increase in redemptions).

***As we go to press: A Bear Stearns' Hedge Fund: High-Grade Structured Credit Strategies Enhanced Leverage Fund is “scrambling to sell $4 Billion in mortgage-backed securities to prepare for investor redemptions and margin calls.” According to BusinessWeek, the highly leveraged fund is down 23% this year (April losses at 18.97%) due to bad bets on subprime. Because of its lack of cash, it has currently suspended redemptions. One investor, who had been trying to get out since February, commented: “At the end of the day, I'd like someone to be honest with me about what's going on.” In a June 8 th conference call, Bear Stearns responded with: “We are not taking any questions.”

Our Position

We have been advising over the last 7 months to sell assets as this credit boom comes to an end. It is always better to get out with cash profits than to have your funds frozen or stuck in bankruptcy. Therefore we continue to recommend to investors to sell assets and hold interest-bearing cash at a secure financial institution. For more about our investment management services, visit our website . Starting in July, our monthly Investment Analysis Report will require a subscription fee of $40 a month. Current subscribers should have received their PayPal invoice for half price ($20 a month). To sign up for our Investment Analysis Reports subscribe at FeedBlitz.com .

By Paul Lamont
www.LTAdvisors.net

Copyright ©2007 Lamont Trading Advisors, Inc. Paul J. Lamont is President of Lamont Trading Advisors, Inc., a registered investment advisor in the State of Alabama . Persons in states outside of Alabama should be aware that we are relying on de minimis contact rules within their respective home state. For more information about our firm, or to receive a copy of our disclosure form ADV, please email us at advrequest@ltadvisors.net, or call (256) 850-4161.

Paul Lamont Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules