Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
The Price Of Gold And The Art Of War - 18th Dec 14
Euro Succumbs to ECB QE Expectations and FOMC - 18th Dec 14
John Williams: A Downhill Run for the U.S. Dollar in 2015 - 18th Dec 14
Outrage at Taliban Islamic Fundamentalists Massacre of 132 Pakistani School Children in the Name of God - 18th Dec 14
How Inflation Changes Retirement Benefit Choices - 17th Dec 14
The Real Reason It's Tough to Beat the Stock Market - 17th Dec 14
Russian Currency Crisis and Debt Defaults Could Create Contagion in West - 17th Dec 14
How to Profit From Russia's Stock Market Crash - 17th Dec 14
Russia Crisis - If You Put Your Money in the Bank Will You Get it Back? - 17th Dec 14
Crude Oil Price Crash, U.S. Employment and Economic Growth - 17th Dec 14
Opposing Forces At Play In Gold and Silver Precious Metals Complex - 17th Dec 14
Wall Street Will Always Find An Excuse For Not Raising U.S. Interest Rates - 17th Dec 14
Torture, Terror And Elite Schizophrenia In The UK - 16th Dec 14
Eurozone Conflict Will Bring a Major Stocks Buying Opportunity - 16th Dec 14
Viewing Russia From the Inside - 16th Dec 14
Gold and Silver Stocks Bottom - Are We There Yet? - 16th Dec 14
The Financial Industry Pigmen Win Again - 16th Dec 14
Crude Oil Price Epic Blowout - 16th Dec 14
Asian Stocks Markets: Sand In The Gears Of The Bull Market - 16th Dec 14
U.S. Dollar Trend Forecast 2015 - Video - 16th Dec 14
Silver Price Bottom? - 15th Dec 14
Gold Price Base Building Bullish Pattern - 15th Dec 14
Stock Market Probable Pop-n-Crash Today - 15th Dec 14
Stock Market Time for a Bounce - 15th Dec 14
Stock Market Euphoria: The Mother of All Ponzi Schemes - 15th Dec 14
Gold - The Weight of Time as Trend - 15th Dec 14
U.S. Dollar Collapse? USD Index Trend Forecast 2015 - 14th Dec 14
The Rushing Stocks Bear Market and How to Prepare - 14th Dec 14
Gold and Silver Dreaming of a White Christmas - 14th Dec 14
Cyprus-style Bank Bail-ins to Take Deposits and Pensions - The Global Bankers' Coup - 13th Dec 14
How To Renounce Your US Citizenship And Become Stateless - 13th Dec 14
Stock Market Downtrend Underway - 13th Dec 14
Gold And Silver - Wall Street, aka United States, Pulls Off Another Destructive Coup - 13th Dec 14
U.S. Congress Has Guaranteed the Secular Stocks Bear Market is Not Over - 13th Dec 14
Gold and Silver Starting to Show Bullish Signs - 13th Dec 14
Arab Spring II is Coming Fast - The Unintended Consequences of Lower Oil Prices - 13th Dec 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

Why U.S. Interest Rates Are Rising

Interest-Rates / US Interest Rates Feb 20, 2013 - 06:46 PM GMT

By: Michael_Pento

Interest-Rates

The interest rate on the Ten-year Note has risen from 1.58% on December 6th of last year, to as high as 2.03% by mid-February. Most equity market cheerleaders are crediting a rebounding economy for the recent move up in rates. According to my count, this is the 15th time since the Great Recession began that the economy was supposedly on the threshold of a robust recovery.


However, the reading on last quarter's GDP growth was negative, while the January unemployment rate actually increased. Therefore, it would be ridiculous to ascribe the fall in U.S. sovereign bond prices to an economy that is showing signs of an imminent boom.

The truth is that rising bond yields are the direct result of stability in the European currency and bond markets, the inability of the U.S. to address its fiscal imbalance, and a record amount of Federal Reserve debt monetization.

The Euro currency, which was thought to be on the endangered species list not too long ago, has surged from $1.20 in the summer of 2012, to $1.36 by the beginning of February. In addition, bond yields in Spain and Italy have recently fallen back to their levels that were last seen just before the European debt crisis began. Renewed confidence in the Euro and Southern Europe's bond markets are reversing the fear trade into the dollar and U.S. debt.

Washington D.C. was supposed to finally address our addiction debt and deficits in January of this year. Instead of refusing to raise the debt ceiling and allowing the sequestration to go into effect, our politicians seem to be able to agree on just one point; that is to delay austerity. President Obama claims that the nation has already cut deficits by $2.5 trillion over the last few years. Nevertheless, the fact is that deficits have totaled $3.67 trillion in the last three years alone! The absolute paralysis of Congress to agree on a genuine deficit reduction plan has finally given bond vigilantes a wakeup call that was long overdue.

Finally, the Fed increased its level of money printing to $85 billion, from $40 billion on January 1st. This record amount of debt monetization comes with unlimited duration and is accompanied by an inflation target of at least 2.5%. The Fed's actions virtually guarantee that real interest rates will fall even further into negative territory, despite the fact that nominal rates are rising.

So how high will interest rates go in the short term? It seems logical to figure they will increase at least to level they were prior to the European debt crisis. Back in the fall of 2010, just prior to the spike in Southern Europe's bond yields, the interest rate on the U.S. benchmark Ten-year Note was yielding around 3.5%. Therefore, unless there is another sovereign debt crisis in Europe (or perhaps one starting in Japan), I expect interest rates to trade back to the 3.5% level in the next few quarters.

This means U.S. GDP growth will be hurt by the rising cost of money and the tax hikes resulting from the January expiration of some of the Bush-era rates. Rising tax rates, one hundred dollars for a barrel of oil and increasing interest rates significantly elevate the chances of a recession occurring in 2013.

Since rates are increasing due to debt and inflation concerns, it also means the Fed will have to decide between two very poor choices. It would never choose to stop buying new debt and start selling its $3 trillion balance sheet, as that would send bond yields soaring in the short term and the unemployment rate into the stratosphere. So investors can't really count this as a viable option for Mr. Bernanke. He could simply do nothing and watch another recession ravage the economy--not a high probability given the Fed's history. Or, Bernanke most likely will be forced into embarking on yet another round of QE in an attempt to keep long-term rates from rising further.

This would be the most dangerous of all the Fed's options as it will send inflation soaring and cause interest rates to rise even higher down the road. The resulting chaos from violent interest rate instability is the main threat to the stock market and the economy in the very near future.

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2013 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2014 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

Free Report - Financial Markets 2014