Cash is Trash?

Interest rates will remain low forever and we have the tools to make it happen,” or so goes myth from the world’s most important central bankers:-

In continuing its asset purchases (QE of US Treasuries and mortgage junk) the FOMC committee seeks to maintain downward pressure on interest rates.”…… Fed Chief, Ben Bernanke, December 2012.

Britain’s interest rates are likely to remain at a record low for at least three more years,” ….Governor of the Bank of England, Mark Carney, August 2013.

“ I’ll do whatever it takes ( to preserve the Euro, keep interest rates low and keep credit flowing,”……ECB head-boy, Mario Monti, July 2012.

The only trouble is, “it isn’t working,” as we have been at pains to state over the past year or so and as you can see by the chart below.

weekly_blog_130814_01

 

In the real world, the cost of borrowing is tied pretty much to the 10-year sovereign debt rate and the rate is soaring. In fact it looks more like a chart or the PIIGS cost of borrowing, as their economies were on there way to either bankruptcy, or near bankruptcy.

But this isn’t the PIIGS, it’s the big-boys now. History will make its choice on whether these central bankers were just “confidence boosters” OR “confidence tricksters,” but either way Mr Market has decided that it wants higher rates, as the amounts on loan are just far, far to large and a higher level of compensation is being demanded for the increased risk be taken.

But how high a rate of compensation?

Well, let’s start with a look at the longer term and study just the US and UK 10-year sovereign yield, the former shown in black and the UK in blue. (The Euro-Zone history only commenced in 1990 but had it been earlier, it would have followed the US lead.)

weekly_blog_130814_02

 

Unfortunately the Bloomberg data for the UK only goes back to 1989, hence the near 16% pa peak co-incided with the £Sterling’s exit from the ERM, the Euro’s failed first attempt. We do know, however, that UK 10 year yields were at very similar market highs as the US in 1981.

The 31-year bull market for bonds ended in July 2012 and the yields have been revving higher ever since. A quick guide from Fibonacci re-tracement guidance suggests a rise towards the 38.2% to 61.8% targets of 7% to 10% pa interest costs.

It will not be in a straight line, as can be seen within the yield hike above (1960 to 1981) and/or the yield collapse (1981-2012), but it will be in a quicker time frame than the 31-year bull market for bonds. Bear markets are always quicker to unfold than the prior bull phase. 

Either way, as the market gurus’, economists and financial journalists echo the central bankers’ myth, encouraging the herd to pile into stocks and/or buy-to-let, study the charts. What will a move to even 5% on the 10-year do to corporate profits and real estate prices?

Cash is not trash, it could just be king.

 

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One response to this post.

  1. […] outlined in the 14th August 2013 blog, “Cash is Trash,” the Fed and/or other Central Bank stimulatory policy wasn’t working, in respect of holding […]

    Reply

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