Category Archives: Interest Rate Monitor

Interest Rate Monitor: August 2024

In our March 2024 posting, we said the following:

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Was the Fed Too Accommodative Before the 1929 Crash?

No.  We say this because the history of the Fed is to follow market rates in implementing their own policy.  Frequently, by the time the Fed has responded to the most recent run up or down the Reserve Bank is acting contrary to the prevailing trend.  While this may appear accommodative when market rates are rising, it is merely a delayed reaction rather than intending to “help” the markets along in an accommodative manner.

1922-1930:

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1923-1924:

While it is the history of the Federal Reserve to follow market rates, they somehow managed to claim to “put the brakes on…” speculation in 1923 and was willing to do the same in 1924.

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1925:

Although no action was cited for raising rates, it was clear that speculation was a worry.  A constant worry was that the banks not lend money for the purposes of speculation as found in the quote “No Federal Reserve Credits for Speculation.”

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This commentary, “Sometimes an effective purpose of an advanced discount rate” means that raising rates is a strategy for avoiding the “poisons of speculative enthusiasm.”  Of course, we know that this is not true as seen in the period from 1895-1920, 1942-1965, 2015-2019, and more recently from 2022-2024.

1926:

We know that the Federal Reserve was on guard about speculation getting out of control when the top commentors in finance said:

“…should the bulls carry their orgy much further, the Federal Reserve rediscount rate at New York would almost certainly be raised from 3½ to 4 per cent.”

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There was some alarm over the fact that the Fed wasn’t doing enough to curb speculation. Legislators were anxious to give the Fed even more power to overrule the market.

“Dr. Miller said he would prepare definite proposals as amendments to the act which would retard Federal reserve money leaking into the speculative market.”

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Of course the rate increased to 4% from 3½% in 1926 as all other rates were on the ascent until the beginning of 1927. Worth noting is the following quote:

“The expectations of the founders that the Federal reserve system would decrease speculation has not been realized…”

This is what happens when there are claims that we need to target speculation or promote stability, buffers are created that ultimately inhibit the market, if only temporarily.

"When a [Federal Reserve] banking system is proclaimed as a cure-all, failure to relieve any adverse condition tends to bring it into disrepute." "The fallacy of attempting to stabilize former by shifting latter." – Barron's. May 17, 1926.

1927:

This is the year of conspiracy theories and Federal Reserve rate policy.  We’ll proceed with the data and the notes. The piece below starts off with:

“Forewarned is forearmed. The business world is being warned not to expect too much during the current year.”

This is almost an invitation to a boom.  In modern parlance, the market climbs a wall of worry.

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It is interesting to see the commentary from S.W. Straus, head of the nationally-known building mortgage firm:

“…warns that the country will be overbuilt unless the brakes are applied forthwith.”

Who is overbuilding? The person who heads a building finance company.  Who should apply the brakes?  Well, it could be the head of a building finance company.  Except, rather than do it himself, he is implicitly asking for the Federal Reserve to do it for him.  Until then, he is going to continue financing deals to stay up with his competitor competition. 

Earlier we highlighted in 1926 that the Fed would “almost certainly” raise rates if speculation were to get out of hand.  Well, brokers’ loan reached a level above the 1926 high at the same time that rates were temporarily cut.

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Again, because the Fed follows and never leads the market, they were responding to the early 1927 peak in the call money rate nearly 9 months later.  Meanwhile, brokers’ loans were exceeding the 1926 high.

By the end of 1927, the only message to be gleaned from the activities of the Federal Reserve are that they don’t know what they are doing and we should probably ignore them.  This is probably where they lost it.

1928:

The year 1928 was one of aggressive rate hikes.  Initially, it started with the regional branches which had the ability to increase rates independently of the New York Fed.

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As noted in the above headline from January 1928, it was thought that a hike in New York wasn’t coming.

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Days later, the New York Fed raised their rates. The reason?

“…its immediate purpose was fully understood to be the controlling or speculative tendencies which might have got out of hand…”

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Again and again, the Fed attack on speculators with the increase of interest rates failed to curb the rise of the stock market.

“Even the marking up of Federal Reserve rediscount rates a second time failed to chill the bullish exuberance in Wall Street – this notwithstanding that the main argument for higher stock quotations used to be the prevalence of abundance of excessively cheap money.”

The year of 1929 was all too clear and predictable.  However, the view that the Fed was accommodative is a misguided view.  Some have claimed that the perception of being accommodative was due to the difference between real rates and the nominal rates.  Historically, Markets react to nominal rates, economists theorize about real rates.

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There is the perception that the Fed has control of markets and therefore is pushing stocks higher or forcing the price of gold down.  These notions are simply that, notions.  They have no merit to anyone without an agenda other that the facts & truth and  willing to accept the long history of data that is now at our fingertips.

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See also:

Interest Rate Monitor: March 2024

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Reader Question & Answer

Q: “Wondering if the key is to watch for divergence w commodities and equities?”

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When the Fed Tried But Couldn’t Crush Stocks

By the logic of many, the stock market is being propped by the Federal Reserve.  How is the Fed propping the stock market? Pushing interest rates down and keeping them down and possibly considering going negative on rates.

As we’ve consistently maintained, the Fed doesn’t matter.  The following is an example of when it appeared as though the Fed was doing everything in their power to undermine the rise in the stock market.

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The standard arguments to the increase of the Dow Jones Industrial Average include the New Deal programs implemented in 1933 and/or WWII which began in 1939.  These claims sound good but don’t quite explain the reversal of the Dow Jones Industrial Average in July 1932.

If the claim is that the Fed is propping the stock market now then it is because an examination of the extensive history of rate increases from 1942 to 1968 hasn’t been reviewed.

Finally, if the claim is that the Fed is bound and determined to use every tool in the playbook to increase the stock market, then by the record of the period from 1934 to 1971, we should see the discount rate increase ten times and a constant fiddling with the margin rate.

It is possible that the low rates and unlimited “stimulus” measure is actually capping the rise of the stock market.

Interest Rate Cycle Comparison

1940-2020: The Full Interest Rate Cycle

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Reasonable assumption on interest rates should be done based on relative or comparable starting points.  With interest rates at secular lows, we should only compare rate activity from the 1940 to 1980 period which was a secular rising trend while avoid comparing rate activity to the 1980 to 2008 period.

Fastest Rate Increase, From the Low

Below we compare the rate increase of the 3-Month Treasury from the secular low in 1940 at 0.01% to the rate increases from the 2011 low at 0.01%.

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From the level of 0.01% to 2.39%, the rate of increase was exaggerated for the period from 2011 to 2019 compared to the period of 1940 to 1956.  The currently level of volatility is not unexpected for the early phase of the secular rising rate trend.

Interest Rate Monitor: September 2020

Secular Trend Review

We have been consistent in our view that the secular trend in interest rates is up rather than down and that increasing interest rates are good for the market.  Our view preceded the Federal Reserve’s policy of rate increases starting December 15, 2015.

  • “A single rate increase by the Federal Reserve in no way makes for a trend.  However, markets often lead the way and what initially seems “bizarre” is only a natural change in regime, a change that we haven’t seen since the early 1940’s (December 16, 2015.).”

  • “We’ve only included the point in the interest rate cycle that corresponds to the phase that we are entering, coming from an all-time low to an eventual all-time high (November 15, 2015.).”

  • “Investors anticipating a general rise in interest rates should feel some comfort in knowing that most manager(s) in the utility sector are ready for what is to come.  Rising interest rates are not an automatic death sentence for utility stock prices or earnings.   In fact, the early stages of rising interest rates may see utility stocks match or exceed the returns of non-interest rate sensitive stocks, on a total return basis.  Only when the outlook is cloudy will it become difficult to offer projections that are in line with prior expectations (September 4, 2014.).”

Cyclical Trend Review

In spite of the secular trend, we have also called the rate decline based on “price action” irrespective of the talk about what the Fed should or shouldn’t do.

  • On January 23, 2019, we provided our first downside targets for interest rates.  At the time, we had the 3-month treasury slated for a potential downside (in the extreme) of 0.83% from the level of 2.45%.

  • On April 23, 2019, with the 3-month Treasury at 2.45%, we said the following: “If the current run of stability in rates is anything like the period of 2015 to 2016, we should see a sharp drop in rates as was seen in the period from September 12, 2016 to September 22, 2016.  At that time, the 3-month treasury dropped from 0.37% to 0.18%, a decline of -51%.”

  • On December 6, 2019, with the 3-month Treasury at 1.53%, we said: “If the November 1, 2019 low, at 1.52%, is broken then we can reasonably expect at least another decline to the 1.30% level and maybe more before another rate cut by the Federal Reserve.”

  • On March 3, 2020, when the 3-month Treasury sat at 0.95%, the Fed decided to do an “emergency cut” in interest rates.

  • On March 16, 2020, when the 3-month Treasury sat at 0.24%, the Fed cut rates to zero.

All of the actions of the Fed were preceded by the change in the overall trend of the 3-month Treasury.  Our take on what is next is below. Continue reading

Rising Secular Trend in Interest Rates

As we have long advocated, the declining trend in interest rates is coming to an end and the secular trend in rates is up.  To provide a decent level of analysis on what might happen going forward, we have a comparison of the Dow Jones Industrial Average to the 3-month Treasury from 1934 to the peak in May 1981.

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Conventional wisdom says that as interest rates rise then stocks should underperform.  However, when contrasted to the interest rate sensitive Dow Jones Utility Average, we see that the index increased +1,321% from the April 1942 low to the March 1965 peak.

We contrast the change in the Dow Jones Utility Average to the 3-month Treasury to highlight what happened to the price of Silver in the same secular trend.

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Historically, it is understood that rising interest rates mean rising commodity prices.  In the last secular trend, the price of silver increased modestly until, in the late stage of the cycle, all commodity prices go wild.  We believe that such a trend is likely to occur again.

Our general conclusion on the secular trend in rising interest rates is that the best alternative in the initial stages is stocks and commodities in late stage of the same trend.

For the past 25 years the commodity market and the stock market have moved almost exactly together. The index number representing many commodities rose from 88 in 1878 to 120 in 1881. It dropped back to 90 in 1885, rose to 95 in 1891, dropped back to 73 in 1896, and recovered to 90 in 1900. Furthermore, index numbers kept in Europe and applied to quite different commodities had almost exactly the same movement in the same time. It is not necessary to say to anyone familiar with the course of the stock market that this has been exactly the course of stocks in the same period ( source: Dow, Charles H. Review and Outlook. Wall Street Journal.February 21, 1901.)”

Interest Rate Monitor: March 2020

For the last 40 years, interest rates have been in decline.  So people can be forgiven when they have the view that the trend is down, it should be down, and if it ever goes up and something goes wrong then the solution must be to cut interest rates.

Unfortunately, during a secular rising trend, cutting interest rates aren’t the solution. Worse still, falling rates ARE THE PROBLEM.  Adding QE and stimulus to rate cuts compounds an already bad situation.

Review

We have been unanimous in our view that the secular trend in interest rates is up rather than down and that increasing interest rates are good for the market.  Our view preceded the Federal Reserve’s policy of rate increases starting December 15, 2015.

  • “A single rate increase by the Federal Reserve in no way makes for a trend.  However, markets often lead the way and what initially seems “bizarre” is only a natural change in regime, a change that we haven’t seen since the early 1940’s (December 16, 2015.).”
  • “We’ve only included the point in the interest rate cycle that corresponds to the phase that we are entering, coming from an all-time low to an eventual all-time high (November 15, 2015.).”
  • “Investors anticipating a general rise in interest rates should feel some comfort in knowing that most manager(s) in the utility sector are ready for what is to come.  Rising interest rates are not an automatic death sentence for utility stock prices or earnings.   In fact, the early stages of rising interest rates may see utility stocks match or exceed the returns of non-interest rate sensitive stocks, on a total return basis.  Only when the outlook is cloudy will it become difficult to offer projections that are in line with prior expectations (September 4, 2014.).”

Current Rate Environment

As we have stated well before rates started to increase, in a secular rising trend in interest rates, going up will be good for stocks and the economy.  What this also means is that in a secular rising trend in interest rates, going down will be bad for stocks and the economy.  We have depicted the change below.

Rates Going Up

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Rates Going Down

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We have used the Daily 3-Month Treasury for one simple reason, when it goes up or down, the Federal Reserve ALWAYS follows.

Conclusion

The door has been closed on the rate cutting tool that the Federal Reserve has wielded like a force field against any perceived threat to the economy.  However, the reality is that we’re in a secular rising trend in interest rates. ANY additional stimulus (fiscal or monetary) should be looked upon as prolonging the problem rather than improving or fixing the problem.

Interest Rate Monitor: March 2020

Review

  • On January 23, 2019, we provided our first downside targets for interest rates.  At the time, we had the 3-month treasury slated for a potential downside (in the extreme) of 0.83% from the level of 2.45%.
  • On April 23, 2019, with the 3-month Treasury at 2.45%, we said the following: “If the current run of stability in rates is anything like the period of 2015 to 2016, we should see a sharp drop in rates as was seen in the period from September 12, 2016 to September 22, 2016.  At that time, the 3-month treasury dropped from 0.37% to 0.18%, a decline of -51%.”
  • On December 6, 2019, with the 3-month Treasury at 1.53%, we said: “If the November 1, 2019 low, at 1.52%, is broken then we can reasonably expect at least another decline to the 1.30% level and maybe more before another rate cut by the Federal Reserve.”
  • On March 3, 2020, when the 3-month Treasury sat at 0.95%, the Fed decided to do an “emergency cut” in interest rates.
  • On March 4, 2020, the 3-month Treasury sits at 0.72%.

Update

Slow and steady is the pace of our analysis.  So far, we’re on track.  The chart below says it all.

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Interest Rate Monitor: December 2019

On October 7, 2019, when the 3-month treasury sat at 1.75%, we said the following:

“Tentatively, we expected the 3-month Treasury will decline into the range of 1.62% to 1.39%.”

By October 30, 2019, the Federal Reserve lowered rates when the daily 3-month Treasury was at 1.62%.  Since that time, a pattern has emerged which is worth a quick take. Continue reading

Interest Rate Monitor: October 2019

On November 21, 2015, we said the following:

“While a Fed rate increase is what everyone is waiting for, history suggests that Fed policy  (government regulated) follows short-term Treasuries (market driven).”

We made the commentary because we saw that the 3-month Treasury rate was advancing higher.

Since that time, we’ve watched as the Federal Reserve Bank continues to followed the short-term market rates both up and down.  After the November 21, 2015 posting, we saw, in December 15, 2015, the Federal Reserve increase the Fed Funds Rate for the first time since June 29, 2006.  Again, the Fed Funds Rate increase followed the action of 3-month Treasury.

As with the rate increases in the 3-month Treasury followed by the Fed Funds Rate shortly thereafter, so too did we see the Fed Funds Rate decline after the 3-month Treasury reversed to the downside.  As we said in our April 23, 2019 posting:

“If the current run of stability in rates is anything like the period of 2015 to 2016, we should see a sharp drop in rates…”

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The chart above highlights the point of our April 23, 2019 claim relative to the actual rate activity that has followed.  Most important is the fact that Fed Funds Rate policy did not take place until four months after the peak in the 3-month Treasury.  Even after the rate decreased in July 2019, it was clear that the Fed would have to catch up for lost ground which is reflected in the September 18, 2019 rate cut.

Below are the targets that we have set for the 3-month Treasury which will be reflected, in direction only, with the Fed Funds Rate. Continue reading

Interest Rate Monitor: June 2019

On April 23, 2019, we said the following of interest rates:

“If the current run of stability in rates is anything like the period of 2015 to 2016, we should see a sharp drop in rates…”

At the time, rates had been in a trading range, as seen below.

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The drop in the 3-month Treasury has been nothing short of phenomenal.  However, the question on everyone’s mind is, how far down?  We attempt to address this in the following commentary. Continue reading

Chart of the Day: Inverted Yields from 1800 to 1965

Below is a chart of inverted yields of American bonds as published in Richard Russell’s Dow Theory Letters on May 25, 1965.  What is most conspicuous about this chart?  The overall trend of lower highs (yields) and lower lows (yields).

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Interest Rate Monitor: April 2019

Below are the downside targets for the 3-month Treasury from the beginning of the Fed’s interest rate increasing campaign. Continue reading