You get soaring stock prices just before major FEROMRKERHǻRERGMEP problems. And that’s what we’re seeing today, too. lower. Stocks get more valuable (relatively), so they go higher... and higher... and higher. But then, the economic weakness that has led to lower and lower interest rates suddenly causes companies to default on their debts, starting a panic in the stock market. That’s why you get soaring stock prices just before major banking and financial problems. And that’s what we’re seeing today, too. The 10-year U.S. Treasury bond is the global paper-currency financial system’s “barometer.” The yield on this bond sets the price on all other risk assets. And when the barometer, or 10-year “real” yield, is steady or rising, you’ll see “clear skies” ahead. But when the barometer turns sharply lower, and especially coupon like a bond, it does offer protection against credit defaults. Ironically, as interest rates fall at the beginning of these periods, investors tend to bid up stock prices when falling bond payments make stocks look progressively more attractive. That happens up until corporations start to default on their debts. Then, stock prices collapse. That’s why a Melt Up happens just before a meltdown. Interest rates go lower... and lower... and
As the largest and most powerful country in the world, with the world’s leading reserve currency, you’d expect interest rates to be pretty low. The U.S. government is considered the world’s best credit risk... And these bonds are widely considered to be a “risk free” asset. That means there’s zero chance of default. Even so, in a working financial system, investors have many choices. These government bonds compete for investors who can also buy other bonds with higher yields. So even “risk free” bonds should pay investors a real return after taking inflation into account. After adjusting for inflation, the “real” rate of interest on these bonds has been between 2% and 4% , depending on the economy’s strength... When the economy is strong, investors can choose from a lot of other faster-growing (and higher-paying) options. So the government has to pay more, too. But what about when the economy isn’t working? What about when investors aren’t able to trust banks or large corporations... or even foreign governments? What happens when there’s no other safe place for capital? It’s during these times that you see the inflation-adjusted yield on U.S. Treasury bonds fall precipitously – during the so-called “flight to safety.” It’s during these periods that investors earn almost nothing by holding Treasury bonds. And it’s also during these periods that investors are more and more likely to buy gold... which, although it doesn’t pay a
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September 2019
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