Late stage tulip mania on Wall Street goes ballistic!
To paraphrase Scott Fitzgerald, the literary king of Jazz Age New York, "the bond market, like life, is lived forward, but only understood backwards". While Sydney Homer, Anna Schwartz, Milton Friedman and Ken Rogoff have chronicled the world's interest rate cycles for the past 500 years, I will limit my take to the postwar era.
In 1946, the yield on the US Treasury 10-year note was 2.25%. Interest rates rose dramatically in the 1960's as LBJ escalated the Vietnam quagmire and spent lavishly on his Great Society programs without raising taxes. This led to huge US trade and budget deficits, the breakdown of the Bretton Woods monetary regime and a speculative bear market in the US dollar. Inflation trotted and then galloped uncontrollably in the 1970's as OPEC hiked the price of oil fourfold after the October 1973 Mideast war and the offshore capital markets, lubricated by the petrodollar, metastasized into history's wildest, biggest financial carnival.
The 10-year US Treasury note yield rose from 2.25% in 1946 to 15% in May 1984, the month when Chicago's Continental Illinois Bank failed after an electronic depositor run in the offshore money markets led to an FDIC bailout, an Uncle Sam's first nationalization of a US money center bank. This banking crisis triggered a 35-year period of falling interest rates until the 10-year T-note yield bottomed at a surreal 0.6% during the pandemic in late 2020 when $18 trillion in global debt securities was priced with negative yields. After a 38-year bond bear market (1946-84) morphed into a 35-year bond bull market (1984-2020).
Interest rate cycles move in very long-term trending patterns. We are now in only the 4th year of another secular bond bear market and the US T-note yield has risen as high as 4.47% even as the Powell Fed slashed the Fed funds rate by 100 basis points and Trump begins the most radical economic experiment in modern capitalism. If history is any guide, we are in the early stages of another spectacular bond bear market and there is no reason why 10-year money is not headed to 7% and beyond as the annual interest cost on America's $35 trillion national debt rises beyond $1 trillion a year. This is the real index of coming wealth destruction in the credit Frankenstein created by peekaboo offshore finance, the real reason why gold flirts with 2900 an ounce and Bitcoin is almost $96,000. Money talks.
Interest rates are the life blood of the financial markets and asset valuations. This interest rate cycle is destined to be merciless as Trump 2.0 has re-written the rules of the world monetary order and triggered geopolitical convulsions as seismic as those that turbo charged history in November 1918, May 1945, November 1989 and September 2001.
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