Billionaire's Portfolio

January 10, 4:00 pm EST

We talked yesterday about the move underway in market interest rates. Today the yield on the 10-year touched 2.60%. That’s the highest levels since March of last year.

For perspective, let’s take a look at the chart …

Suddenly, rates are all the media can talk about. They specialize in trying to find a story to fit the price.

With that, many have been attributing rising U.S. rates to a vague report out of China. This is from Bloomberg: “Senior government officials in Beijing reviewing the nation’s foreign-exchange holdings have recommended slowing or halting purchases of U.S. Treasurys, according to people familiar with the matter.”

There’s nothing new about this notion that China could find our bonds less attractive. It has been ongoing chatter for the past decade.

What’s driving interest rates is simple. It’s the increasing probability that this year we will have the hottest U.S. and global growth in the post-crisis era. And with that, commodities prices are rising.

And contributing to all of this (not in a small way), is fiscal stimulus, within which, a corporate tax cut should finally get wages moving higher. This is all inflationary. And this is all bullish for interest rates (bearish for bonds).

So, as I said last week, despite the quadrupling of the stock market, money may just be in the early stages of moving OUT of bonds and cash, and BACK into stocks.

With that, let’s take a look at a longer term picture of rates…

The chart above is a look at the nearly 40-year downtrend in interest rates. You could argue this downtrend broke in 2013, when the Fed said it would begin dialing down it’s QE program (the taper tantrum). But rates went on to make new lows, as the economy continued to flounder under the inability of central banking firepower to get the economy out of stall speed growth. Alternatively, you could argue this multi-decade downtrend in rates broke on election night (2016), when the idea of big, bold (do whatever it takes to get the economy moving) fiscal stimulus was introduced in the U.S.

The question is, if we do indeed get hotter growth, and we get a pick up in inflation, at what point will that formula stop feeding into hotter markets and hotter growth, and start choking off recovery through higher rates. I suspect it could be a couple of years away, given the ground the economy needs to make up for lost time.

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