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US Interest Rates and the Toughest Man Who Ever Lived

Interest-Rates / US Interest Rates Dec 09, 2016 - 05:19 PM GMT

By: David_Galland


Dear Paraders,

I begin this week sitting at our dining room table here in Cafayate, Argentina. Out the window, the vista is brimming with sunshine, vineyards, lovely houses, and lovelier mountains across the valley.

My wife is off working out at the Athletic Club & Spa. I would be too, were I not laid up by my recent hernia operation.

Later today, I’ll be playing a demonstration game of the ancient Chinese game of Go with a fellow resident and master of the game from California. Then we’ll dine at Bad Brothers Wine Experience with freshly returned owners from South Africa and my friend, former partner, and now closest neighbor Doug Casey.

All in all, another excellent day here in the sunny and uncomplicated climes of the Argentine outback.

However, for the moment I’ll dismiss the thoughts of congenial social gatherings and focus on certain items that have gotten my attention this week, including another place where the sun shines in abundance: the Middle East.

It is there that my candidate for the toughest man who ever lived once resided.

But first, I want to delve into a rather less exciting topic. So unexciting that, under normal circumstances, watching water drip from a faucet would provide better fodder for a conversation.

With that hint, you have probably already guessed the topic in question must be interest rates.

Interesting Opportunity in Interest Rates?

This morning, I had to chuckle at the banner headline on the CBS MarketWatch finance site.

Warning: Wall Street can’t predict where the S&P 500 will go in 2017

You think? I had no idea!

There has been a lot of ink spilled lately on the topic of fake news. While that headline does not rate as fake—it’s accurate—it would certainly fall into the category of “junk.”

Of course, “Wall Street” – at best a nebulous construct, can’t predict how the S&P 500 will do over the next year. If it could, then exactly the opposite outcome would occur as “everyone” would place their bets accordingly.

Other than snarky writers looking to poke fun at the inanity of the verbiage, I can’t imagine who pays even the slightest bit of attention to this sort of drivel.

The simple truth is that no one can predict where the collection of equities that make up the stock market will net out in 2017. The large pile of stock issues could crash, soar—or just muddle along. All three of those outcomes are firmly within the range of possibilities.

There is however, a market of even more importance that is much more binary than stocks. Namely, interest rate instruments.

That’s because rather than reflecting millions of investors acting independently—and in many cases, emotionally—on a minute-to-minute basis, US interest rates are heavily influenced by a small group of academics: the members of the Federal Reserve Board.

While the Fed has no direct control over medium- and long-term rates, there’s little question that being able to move the short-term fed funds rate gives it considerable influence even at the longer end of the curve.

The reason the Fed’s influence can be so powerful is due to its ability to signal a trend change.

For a real-life example of how this works, consider that in 1980, even with inflation running over 15%, gold—the ultimate inflation hedge—did a swan dive. And not of the pretty sort.

The sell-off in gold was triggered by the actions of the Volcker Fed in 1979. Once people realized Volcker was determined to use interest rate policy to crush the raging inflation, it became clear that a seismic trend change was underway.

Noting the clear writing on the wall, holders of gold—or at least those not blinded by all that glittery yellow stuff—rushed en masse to the exits, resulting in the aforementioned swan dive. Despite the still high inflation.

Back to the present, looking at the futures market for the fed funds rate (i.e., real money betting on the binary outcome of whether the Fed will raise rates after its next meeting on December 13 and 14), we can see the traders are now overwhelmingly betting on a 25-basis-point hike from its current range of 25–50 bps.

And by overwhelmingly, I mean 97.2% of traders are now betting on a 0.25% hike.

Of course, there is the possibility that the Fed gives in to the hawks—or tries to wrong-foot Trump—by raising rates more aggressively. Say by 50 bps. Or it could simply leave them where they are.

However, those two scenarios must be viewed as outliers.

The point I am trying to make is that the market has already fully priced in a 25-basis-point Fed hike in December. But, importantly, betting on a hike of such a diminutive size is a short-term trade, not a bet on a long-term trend change.

That suggests the following market action could result:

  1. The Fed announces a 25 bps hike. The phenomenon of “Buy on rumor, sell on news” kicks in and Treasury yields, which have spiked over 3% on the 30-year bond, a 50-basis-point jump over the last month, begin to retrace the increase.

    To speculate on this scenario, you could buy a long-Treasury ETF such as TLT, which gives you a solid shot at profiting as the traders take profits. Few will expect the Fed to continue to raise rates aggressively in 2017, or at least to the degree that would represent a major trend change.

    Per other recent articles in this service, historic levels of government, corporate, and personal debt serve as a physical cap on interest rates. Simply, rates can’t rise very much because the beginning of a secular rise in interest rates would mean the end of well, everything.

  1. The Fed announces a 50 bps hike. In this case, the stock market will crash. And historically, when stocks crash, money pours back into bonds, meaning yields will come down. Maybe they’ll go up a bit first, but in the end TLT will still likely turn out to be a profitable trade as there is little question it has run up too far, too fast in recent weeks. Again, the odds of this happening—at least according to traders—are effectively zero.
  2. The Fed announces it will leave rates where they are. In that case, a mad scramble for the exits by the traders with bets on higher rates will ensue. Treasury yields will quickly retrace and probably overshoot on the downside… again making TLT a great trade.

For the record, I am pasting in a snapshot of the price action in TLT over the course of 2016. You can see just how far and fast yields have risen in the second half of the year (which translates into the fall in prices shown in the chart). At the bottom of the chart, you can also see that the negative momentum is starting to wane, suggesting a bottom may be close. I wouldn’t wait overly long before getting positioned.

That said, there is no such thing as a sure thing when it comes to this sort of speculation.

However, in the absence of a serious trend change in the direction of interest rates, and given the baked-in-the-cake expectation that the Fed will raise rates by 25 basis points next week, I think placing at least a small wager that Treasury bill rates will fall after the announcement seems like a reasonable speculation.

(If you want a sure thing, focus your attention on buying great companies when they fall to a level of deep undervaluation. How to do just that is explained in some detail in our free report, Dimes for Dollars—The 3 Most Powerful Strategies to Buy Low and Sell High).

The Toughest Man Who Ever Lived

Were you asked to name the toughest man who ever lived, I am sure, dear reader, any number of names might pop to mind.

My personal pantheon of toughness would have to include Genghis Khan, Sir Ernest Shackleton, and Frederick Ward.

In case Ward’s name is unknown to you, he was a New England ship captain and soldier of fortune who ended up at the head of Imperial China’s Ever Victorious Army during the Taiping Revolution.

Before that, he fought in the Crimea, then worked as a mercenary for Juarez in Mexico.

So tough was Ward that despite receiving a horrible gunshot wound in the face, within several days he was back at the front. In another battle, he was wounded five times and yet continued to fight on.

By the time his fate finally caught up to him, he had been wounded 16 times and, with the exception of the last, always managed to quickly recover and fight on. Some people are easy to kill, but Ward wasn’t one of those people. (For more on Ward, pick up The Devil Soldier by Caleb Carr).

Subutai, one of the Genghis Khan’s most successful and far-ranging generals, would belong on my list, as would the 150 men of the Royal Engineers who held off more than 4,000 of Shaka Zulu’s best troops in the Battle of Rorke’s Drift.

There are many, many other candidates—and feel free to weigh in with your opinion with our commenting tool below, or an email directly to me at

However, standing tallest among my candidates for the toughest man who ever lived was not some brute, mercenary, or hard-charging warlord, but quite the opposite. His name was Baldwin IV, and he was the King of Jerusalem from 1174 to his death in 1185 at just 24 years old.

Oh, and he was a leper.

The Leper King

Baldwin IV was born of Crusader royalty, his father being Amalric I, King of Jerusalem. As such, he enjoyed all the usual advantages one might expect as the son of a feudal lord, including fine foods, luxurious accommodations by the standards of the day, and access to the best education possible.

In the case of young Baldwin, his tutor was William of Tyre, considered one of the smartest and best-read historians and chroniclers of the epoch.

It was William of Tyre who discovered Baldwin’s affliction. He did so after noting that the young prince—just nine years old at the time—didn’t flinch in the slightest during a game with friends where they pinched each other as hard as they could to see who would be first to cry out.

In William’s own words:

“When this happened several times and I was told about it… I began to ask questions and came to realize that half of his right arm and hand was dead, so that he could not feel pinching or even biting.”

Though the family knew there was something seriously wrong and brought in the best doctors available, the official diagnosis of leprosy would not be made until a few years later when Baldwin hit puberty and the worst aspects of the disease began to manifest.

In the interim, with the disease still largely dormant, the young prince’s education was expanded to include the knightly arts of sword fighting and fighting from the back of a horse, steering his mount with only his knees, freeing up his hands entirely for combat. Training that would come in very handy.

Compounding Baldwin’s problems, at the time leprosy was considered a curse from God. And the Crusader states were embroiled in a series of bitter secession struggles that required constant attention.

Worst of all was the rise of the mighty Saladin, the legendary Kurd who over time managed to consolidate the disparate Islamic factions across the Middle East. Among his key themes was the need for Islamic forces to come together to recapture Jerusalem from the Crusaders. In other words, from Baldwin IV.

Against this background, as his disease spread, Baldwin was regularly beset with accelerating bouts of incapacitating pain and illness.

Even so, at just 13 years old, with his leprosy now known by all, Baldwin was entrusted by his father with the leadership of a small army. He led a counterstrike at Damascus to draw Saladin away from his siege of Aleppo, a task in which he succeeded, leading from the front as was his nature.

Shortly thereafter, Baldwin’s father died, and despite his disease, he was made king, albeit with regents helping him to rule.

In 1176, upon reaching the age of majority, 15-year-old Baldwin took power even though his disease was now fully manifest and pretty much the entire court was against his ascension to the throne.

The extent of his toughness was fully revealed in 1177 when, at the age of just 16 and increasingly incapacitated by his disease, Baldwin led a force of 500 knights against a 20,000-plus invading army commanded by the mighty Saladin.

Biding his time, Baldwin waited until just the right moment when Saladin’s army—not expecting trouble—was stretched out with its long baggage train mired in mud. Baldwin, whose hands were now bandaged due to the terrible damage done by leprosy, led his massively outnumbered knights against Saladin’s army, triggering a rout so complete that Saladin barely escaped with his personal bodyguard.

By the time the hacking and cleaving in the Battle of Montgisard ended, close to 90% of Saladin’s troops had been killed.

Despite his worsening condition—he was blind and unable to walk by 1182—Baldwin continued to run the kingdom and, as needed, sallied forth at the head of his knights to fend off the constant attacks by Saladin and his far larger forces.

In his last major martial effort, in 1183, Baldwin led the relief of Saladin’s siege of the Crusader stronghold of Al-Karak, though he was so ill he had travel to the fight on a stretcher.

In the end, in 1185, at just 24 years old, his disease finally got the better of him.

Of course, throughout history, other young people have shown remarkable poise and fortitude in the face of adversity.

For example, Alexander the Great, who between the age of about 16 and his death at 32 pretty much conquered the world. Yet, for the most part, he did it at the head of a large army—as many as 90,000 men—and, oh yeah, he didn’t have leprosy.

So, at the end of the day, Baldwin IV gets my vote.

When reading about Baldwin, it’s hard not to contrast his remarkable toughness to the Millennials who demand safe spaces to hide in because someone “triggered” them by saying something they deem offensive.

However, with a bit of reflection, I’m not overly worried about the Millennials. For a couple of key reasons:

  • No more (conventional) war. Absent some truly boneheaded move by the politicians, I have a hard time seeing a scenario where the US government is forced to draft Millennials into a grand army to invade a foreign land. What wars are fought will increasingly be fought in cyberspace and/or by using drones. Both of those forms of warfare are perfectly in sync with the Millennials’ techno-skills.
  • A generation raised under warning flags. The Millennials have known war their entire lives. That’s because the older part of the cohort came of age under the shadow of the 9/11 attacks, and the younger has never seen anything else. Since that infamous day, the US has been engaged in a constant state of war—the longest war in US history. As such, Millennials have been raised in an environment of regular warnings of pending attacks and intermittent terrorist attacks.

    Per a recent Heritage Foundation study, the perma-war has given Millennials a higher level of trust in the military than any generation since WWII. This doesn’t mean they are pro-war, but they have been indoctrinated to accept the need for a powerful army as a lynchpin of daily life. As such, Millennials view news of strikes against radical Islamists as a normal part of life.

In other words, while the post-Vietnam Boomer generation was decidedly anti-war, provided the Millennials aren’t asked to boot up and march off to some foreign adventure, they can be counted on to step up—albeit at the controls of a computer console—to ward off any threats to their homeland.

So, there’s that.

Before moving on, I want to again mention the book The Crusades by Thomas Asbridge. Simply because I got so much out of it.

It is a truly comprehensive history of the Crusades. It starts out a bit on the academic side, as the author sets the sociopolitical stage. However, when he turns to the succession of Crusades, the story just keeps getting better and better.

I guarantee that by the end of the book, you’ll have a far deeper understanding of the Middle East than 99.9% of the people you know. But mostly, you are going to find yourself riveted by the amazing characters, truly epic battles, bravery, folly, and more.

The research the author did is amazing.

Then, when you're finished, watch Ridley Scott's Kingdom of Heaven, as it revolves around the conflict between Baldwin IV, the Leper King, and Saladin as well as the Knights Templar.

It's a long book, but once you get into the meat of it, you’ll wish it were longer.

There is much to learn from the book, not the least of which is that the idea of constant conflict between the West and the Islamic East over the millennia is simply not true. In fact, for 500 years after the Crusader kingdoms were finally dislodged from the Middle East, foreigners continued to happily visit, trade, and even live in the Middle East.

In fact, even during the worst of the fighting between the Muslims and the Crusaders, Christian and Jewish traders continued to trade freely throughout the region.

In any event, given that the turmoil in the Middle East is likely going to persist in the headlines, probably for the rest of our lives, taking the time to educate yourself on the history of the place is time well spent.

Here Come the Clowns

White Guilt Relief Is Here! What can a hipster suffering from the miserable condition of being born white do to alleviate the crushing guilt over their unearned privileges?

It’s not like one can hide one’s whiteness, at least not without risking to be exposed and ridiculed for cultural appropriation.

Yet, walking around in public with your shiny pinkness on display is just downright offensive.

Fortunately, there’s now a solution.

For a monthly subscription fee of $25–$100, you can receive a “Safety Pin Box,” which, one assumes, includes an actual safety pin so you can display your self-loathing for all to see. In addition, your box includes a list of tasks to undertake to prove your worthiness to the cause.

Per the sponsors, your tasks “…vary in scope from individual to group assignments, and task categories include data collection, personal development, influencing your networks, and showing radical compassion.”

Furthermore, to make sure that everyone knows just how big of a tool you are (you know, in the fight against inequality), the organizers offer an array of T-shirts for purchase, though I’m guessing the purple shirt is not suitable for white folks.

Not sure who is on the receiving end of the cash, but hats off to whoever came up with this creative way of soaking the saps. I hope they’re laughing all the way to the bank.

And with that, I will sign off for the week by thanking you for reading and for subscribing to The Passing Parade!

With a special thanks for those of you who pass these missives along to friends who you think might find them worthwhile.

If you haven’t yet signed up for our free Dimes for Dollars Report, do so now. There are no strings attached—just some very important information to be gained.

Until next week!

David Galland
Managing Editor, The Passing Parade

Garret/Galland Research provides private investors and financial service professionals with original research on compelling investments uncovered by our team. Sign up for one or both of our free weekly e-letters. The Passing Parade offers fast-paced, entertaining, and always interesting observations on the global economy, markets, and more. Sign up now… it’s free!

© 2016 David Galland - 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.

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