CAMS Weekly View from the Corner - Week ending 9/22/23
September 25, 2023
A couple of months ago we opened up the topic of mega trends and how being aware of their existence is crucial in market(s) participation and even more so having an open mind that at some point they end. Yes, even the mega trends find an end point.
In the case of these type of trends it is harder to accept their demise than say a typical, relatively short lived trend because as mega trends they become immersed within society, even generationally, that it seems a foregone conclusion they will be around forever. History, deep history has shown again and again that even mega trends end.
History has also shown that when this occurs it is often not accepted or even recognized for a long while which can amount to years before it becomes collectively understood that the previous multi-decade trend is no more. Initially, along the path of its demise it is viewed as an aberration, a short lived temporary change that will course correct soon.
This lack of change back to the way it was ultimately gets accepted as this is now the way it is and will continue to be.
Under review for today’s edition is that of higher interest rates suggesting the mega trend of ever lower rates has ended. We can see how a mega trend of ever lower interest rates is far easier to accept as well as easier to participate within markets when such is the backdrop as compared to that of higher interest rates.
When a multi-decade experience that interest rates only find a way to move lower comes to an end it brings with it a much more difficult backdrop as a market participant. In addition, for society, it is also harder to accept that which they have seemingly only ever known (ever lower interest rates) as that socioeconomic backdrop comes to an end.
The Mid-1940’s
Back in the mid-1940’s a new interest rate mega trend had begun whereby interest rates found a way to move higher as the years ahead turned into decades. With such a mega trend there always exists an ebb and flow of the trend.
In the case of the mid-1940’s launch point of higher interest rates there were times along the path where interest rates turned notably lower which at the time could have easily been construed as the end of the higher interest rate trend. Through the process though the mega trend line itself was never broken (offering the trend remained intact) with interest rates ultimately finding a way to move to an even higher level.
As offered, all mega trends find their end point which in the case of the above came to an end nearly 40 years later circa 1982.
Once we entered 1982 few could comprehend that interest rates had begun a new multi-decade process of finding a way to move ever lower. This seemed an outlandish suggestion by anyone offering such a view.
All society had known for decades was a process where interest rates found a way to move higher and then evidence was presenting itself that said interest rates were going to change direction not only on a trend path but also on a multi-decade timeline! Crazy talk - surely many decried. Regardless, this is precisely what unfolded.
Our Current Era Trend Shift
With the above here we are in the 2020’s now witnessing a mega trend ending. The trend that had been solidly in-play for multiple decades reflected a significant behavioral shift in 2022. This is a shift that we had never seen even attempted by collective market participants for decades previous.
The above chart takes us back to 1980 for a long multi-decade view of the 10 Year U.S. Treasury bond which is a benchmark interest rate vehicle that impacts other interest rates within society as they are often benchmarked to this or other U.S. Treasury notes and bonds.
The above 10 Year instrument is market participant driven meaning it trades in the open market and collective market participants establish its price changes daily and through this its yield or think interest rate. As market participants move bond prices lower their yield (interest rate) moves higher. Price lower/interest rate higher.
Our red trend line clearly depicts how solid the mega trend of ever lower interest rates was as the decades unfolded. Then, in 2022, it all changed and changed dramatically.
That is, collective bond market participants shot the yield tremendously higher as they pushed bond prices notably lower. Through the process the long established downtrend line had been easily taken out with the tremendous upside trend shift.
The significance of that shift is for 40 years such a market shift had never even been attempted let alone actually taken out to the upside and did so with ease we have to note.
Adding validity that we have a new trend established in interest rates and through this the previous mega downtrend in interest rates is over is in the previous few days we have seen, yet again, this trend in interest rates move to a higher level than we have seen thus far on this trend path.
The above does not suggest we will see nothing but higher and higher rates for decades to come. Rather, what it offers is the 40 year mega trend of ever lower interest rates ended in 2022. Continued evidence points to this as we have seen yet another higher high established over the previous few days.
As history has shown again and again there will be times where we will see the above interest rate uptrend move lower as no trend ever goes up or down in a straight line but collective bond market participants offered in 2022 the experience of ever lower interest rates have come to an end. That is very important market based information to keep in mind.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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