Central Bankers Will Stop All Bull Markets Says Interest Rate Guru

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How much does it cost to listen to an ‘expert’?

Well, it depends.

Say you wanted a hedge fund manager to speak to your investment team. They might charge you a few thousand to impart some insights.

Or what if you wanted a former central banker to give a key note speech at an event?

If they’re well known, they might come with a heftier price tag.

The extreme is Bill Clinton.

While other US presidents cost an average of US$60,000 for speaking gigs, Clinton costs millions.

In 2015, he and his wife brought in more than US$6 million simply for talking.

But rather than listen to the self-proclaimed experts of the world, why not listen to the expert all ‘experts’ want to listen to?

In the world of interest rates that man is Jim Grant.

And right now, he’s sounding the alarm bells.

Let me explain what it will mean for individual investors like you…

One of the biggest names in interest rates

Many know Jim Grant as the interest rate guy. A former writer for Barron’s, Grant’s manned the ship of Grant’s Interest Rate Observer for 35 years.

Grant has an in-depth knowledge of interest rates and how they affect the economy.

That’s why, when he gave a talk in Sydney last week, Australia’s top fund managers were eager to listen. He hosted a lunch for 58 of his readers and their friends.

Not only does Grant have decades of experience, he’s critical of central bankers, which his readers also like.

He believes central bankers, collectively, have destroyed the value of markets — the best price finders.

Whatever the reason, the world seems to be over-supplied with things and under-supplied with what central banks regard as a minimum rate of inflation – they want more,’ Grant said.

The Federal Reserve, the European Central Bank and the Bank of Japan create this credit and buy these securities and destroy prices, and do so with implicit confidence that in so doing they will not create conventional high-speed inflation.

Of course even the guru of interest rates will get things wrong from time to time.

For example, Grant’s predictions on the fall of Australia were admittedly premature.

For a long-time, Grant has been critical of China. Debt is his primary concern. And if China slows significantly, it will be detrimental to us Aussies.

China is our number one trading partner. They spend billions on Aussie commodities, produce and other items.

If this spending was to stop or slow, our economy would take a real hit.

That’s the reasoning anyway.

Since then, Grant has admitted ‘he’s been wrong to date about his bearish thesis on Australia,’ the Australian Financial Review (AFR) writes.

But recently, Grant has sounded the alarm bells. The 35-year bond bull market is about to end. This isn’t anything new from what others have been saying.

However, Grant’s latest predictions could send shock waves not just through bonds, but stocks as well. 

He was wrong about Australia but not this

US bond yields increased dramatically in 2018.

In a little over two months, the yield on a 10-year US bond is up almost 20% to 2.87%.

US bond yields increased dramatically in 2018. In a little over two months, the yield on a 10-year US bond is up almost 20% to 2.87%. 06-03-2018

Source: CNBC
[Click to enlarge]

The yield of a bond is its coupon (what the bond pays semi-annually) divided by the price at which you can buy.

Because coupons are paid on the face value of every bond (price at which the bond is issued) investors generally look to buy bonds at a lower price to increase their yield.

That means when the yields rise, prices are falling.

What’s causing US bond prices to fall?

At the moment, its investors themselves.

They’re selling out now, before the US Federal Reserve starts to sell billions of bonds in the coming years.

This is why Grant and others have been saying the 35-year long bond bull market is at an end. The biggest participant in the market (the Fed) is no longer propping up bond prices.

Soon they could be selling them by the billions.

Grant believes US 10-year treasury bond yields could reach 4.5%.

Think of this as a ‘risk free’ return.

Because the government is the borrower, it’s extremely unlikely, for now, that they’ll default on their debt.

Thus if you can buy a 10-year bond yielding 4.5%, you’ve locked in that return for 10-years.

But if you can get a 4.5% ‘risk free’ return, why would you stay in stocks which collectively (S&P 500) yield only 3.97% right now?

Such an increase in bond yields would cause millions of investors to flow out of stocks and into bonds.

This isn’t isolated to the US either. Aussie stocks would be impacted as well.

This doesn’t mean you should sell all of your positions now. Trying to ‘time’ the market is a headache in itself. You might end up losing more money than had you rode out the declines.

But it might be the perfect time to shore up some cash for the buying opportunities to come.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: Our in-house financial advisor, Vern Gowdie has been warning investors of market declines for years. And he’s convinced the next ‘Great Crash’ is soon coming. That’s why he’s outlined a step-by-step plan for survival.

You can check out Vern’s plan here.

About Money Morning Editorial

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the…

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