The Bank of England raised its key interest rate for the 14th time in a row.
The Wall Street Journal
That overnight rate was near zero at the start of 2022. This is the highest level since 2008.
Here is the big picture. Interest rates peaked in this country in 1981 with mortgages around 14% and T Bills higher than that. And yes with lower returns in ‘safe accounts,’ people turned to the stock market. In 1982 the DJIA was around 1,000, now it has topped 35,000.
Rates then declined for 39 years bottoming in March 2020.
But reset your thinking. The interest rate markets are just at the start of another cycle of higher rates. This will eventually draw money from the stock market. One recent headline has ‘investors feasting on higher rates.’
The view here is that various stock market indexes peaked between November 2021 and April 2022. Stock prices declined into October 2022. Since then prices have rallied in strong fashion convincing many a ‘new bull market in stocks is back.’ Don’t believe it.
Three-month Treasury Bills are now yielding 5.25%, so we are duplicating our friends across the pond. Here is the problem.
Business and governments partied on low rates like that would be a forever fixture. Now that debt has to be rolled over, it will do so at a much higher rate of interest. The big news this week was the Fitch downgrade of U.S. debt from AAA to AA+. Janet Yellen of course blamed the Trump tax cuts which is as silly a thing as she has ever said.
This week Rich Dad Poor Dad author Robert Kiyosaki pronounced the endless increases in U.S. federal debt as simply unsustainable. Treasury debt alone now tops $30 trillion. And that will take a larger share of the federal budget as rates increase. Sooner rather than later it will consume the budget. Federal debt to U.S. Gross Domestic Product is the highest since WWII and we are not in a war. Then add social security and other entitlements and, well, this won’t end well.
Crude oil pulled back to $79 but has already bounced back above $81. I suspect $100 is not out of the question. Gasoline futures this year are up from $2.25 to $2.90.
The spectacle of an incumbent president using the DOJ to put his likely opponent and former president in jail also comes amid rising rates and a topping stock market. This sets a terrible precedent ala the Banana Republic idea of simply jailing your political opposition.
Apple revenue down for the third quarter, Yellow Freight takes bankruptcy, Chinese real estate bond due 2024-25 trade at 20-40 cents on the dollar. Trouble is on the horizon.
