State of the World

State of the World

And just when the world was full of experts on the Strait of Hormuz, now we have the Bab-El-Mandeb. That’s the narrow exit at the southern end of the Red Sea, the eastern side of witch (in Yemen) is controlled by the Iranian-backed Houthis. Another oil choke point.

Oil and Iran obviously came up in the Private Briefing Bill and I recorded earlier this week. So did the Fed. And debt. And much more!

P.S. Closing the southern end of the Red Sea, along with the Strait of Hormuz, would leave Middle East oil stranded…unable to get to Europe and Asia. Obviously a huge story to follow over the weekend. And it will have big implications for our Trade of the Decade and the new oil and energy stocks

 So we have plenty of water in the ground.

Well, you’re lucky. It’s been a very dry and mild winter in Wyoming, and that always translates to a dangerous fire season, which brings me to my first question. We’re talking about things are on fire in financial markets. I want to start with a term you’ve been using for a long time, and it’s key to our analysis of what’s going on in the US economy and in the US stock market. And that’s the primary trend in interest rates.

So you’ll recall that in August 2020, as you pointed out many times, the 10-year yield on the US Treasury note hit 0.51%, which was an all-time low. Today, it’s 4.25%, 730% higher. I did a little research and showed that in the 1970s, when there was last an oil crisis and stagflation, so inflation with no growth, it hit 11%. And by the time Paul Volcker was finished raising interest rates, the 10-year yield was almost 16%. So one more piece of information for you. And then my question.

I did a little calculation that showed that of the US debt that has to be refinanced in the next 10 years, if the 10-year yield were 5%, it would increase the interest cost on that debt by half a trillion dollars. If the 10-year yield were 10%, it would increase the annual interest cost by $2 trillion. So we’d spend $2 trillion a year just in interest expense on the national debt. Given that we can’t afford that, is the primary trend in interest rates still up? And if so, how high do you think they’ll go?

 there’s a lot that I don’t know there, but as you say, it started in July 2020. The all-time bottom of yields happened. And all we know for sure is that these interest rate cycles, these yield cycles are very, very long. And the previous one had been in existence since the day I was born. I was born in 1948, and the interest rates had hit an all-time low right around there. I don’t know whether it was before or after I was born. And I don’t know whether my birth had anything to do with it, but it got down to very, very low levels and went up again for a long, long time until 1980 and then started going down.

And so the whole cycle ran through my lifetime. And now we’ve started a new cycle. And if it’s anything like previous cycles, it’ll take a long, long time to get wherever it’s going. And we presume, we don’t know, but in real terms, you’d expect the cycle to go back to about where it was and be about 10%, 15% real interest rate. Now, what that is in nominal terms will be a whole different thing because we’re now looking at inflation at a level, possibly at a level we haven’t seen before. We don’t know.

But there are a lot of things that are happening now that make us think that inflation could be much, much worse. So the idea that this cycle has already run its course and that we’ve already seen the high in yields is not, to me, very believable, not credible because we’ve got a long way to go just to get back to normal interest rates, let alone top of the cycle. So my guess is that we’re looking at a long, long period with lots of ups and downs in which interest rates generally go up, real interest rates generally go up.

And there’s a lot of noise in the system because the inflation rates are not only going up, but they’re hard to figure. We’re already seeing that, just hard to keep track of whether prices are really up, are they really down? For whom are they up? For whom are they down? And so on. So to me, I’d say the best bet is that real rates are going up. The best bet is that they’re going to continue to go up. And I wouldn’t get too self-satisfied about it. I think that they’re going to eventually go down, but that could take another 10 years, could take another 15 years, something like that. So that’s my best guess. And it’s just guesswork...