CAMS View from the Corner
January 13, 2025
The cost of capital, i.e. the price of money is the most important price of all within an economic system.
Where that price is currently (think interest rates) or in recent time offers relatively little information and impact compared to a broader view of such price. The big trend – or what we have labeled, “The Megatrend” in distant historical editions embeds key and important information.
If interest rates are generally double digits in an economic system but the structural backdrop along with the trend itself offers those will be withering lower given time, said high cost of money will not be as burdensome for the system at large in light of the trending lower storyline.
Conversely, if an economic system has been immersed in low interest rates for a long while and the masses fully expect the cheap money to continue the economic system at large will have a slow but steady adjustment process to work through.
As the increase in the price of money works through collective psychology it is not broadly recognized and appreciated that it is actually happening.
What the newfound and unexpected uptrend in interest rates (price of money) represents is a complete change from the existing entrenched view that interest rates can only be low and in time, only move lower as though it is law.
This then moves toward collective awareness that indeed it is occurring but collective disbelief holds firm that it will not have staying power and hence will change “soon.” Collective denial runs deep at this stage.
This then evolves into the masses psychologically adjusting to not only an acceptance of such but an expectation that this is the way it is and will continue to be for as long as the eye can see. A new entrenched view emerges given time.
These three stages of trend, on a collective psychological basis, do not unfold quickly. Importantly, the process of collective recognition on through to expectation is a grind.
This is Really Happening
Let’s move from the theoretical of megatrends and the inherent collective psychological adaptation process of such and onto the reality we have been living that the most important price of all – interest rates, i.e. the price of money – has ended their multi-decade megatrend of lower and lower levels.
We have all evolved to the expectation that interest rates can only and will only stay low being this has been the case, on a trend basis, for four-plus decades. This entrenched collective belief system seemingly remains while reality itself is continually presenting it is a mistaken psychologically held view.
We have shared the above chart in a couple of editions over recent years and for my part personally have been monitoring this chart for the previous 15 if not 20 years.
The motive for me doing so always fell under the view that when this megatrend changed it would change all that we had become accustomed to socioeconomically through the collective expectation of ever cheaper money, i.e. lower interest rates.
The above chart is the benchmark 10 Year Treasury note on an interest rate basis dating back to 1980.
The red down trend line clearly identifies the multi-decade trend of ever lower rates. As visually depicted this down trend ended as rates easily moved up through the down trend line and remains at elevated levels.
Our short blue horizontal line was inserted when offering and following this storyline in an edition from nearly 2 years ago. The point of that blue line was to act as a marker that these rates, if they were to show any sign of containment, would hold below said blue line.
As depicted, they moved even higher and rather than it acting as a ceiling it has become a floor which has held as a low point, not a high point as these rates have elevated further from that time nearly 2 years previous.
As a side note, it will be easy to interpret this as an opinion shared from us and how we see the interest rate world if you will. This is not the case.
We invite you to trust your eyes – we are merely sharing a message from collective bond market participants (the smartest market btw) which has been unfolding for well over three years. The above megatrend change is not an accident. The smartest market did not suddenly become stupefied.
But the Fed will fix this
Part of the entrenched view of the multi-decade down trend in interest rates is that the Fed is the ultimate determiners of interest rates. This is false. Bond market participants are the ultimate determiners of interest rates.
The Fed can choose to lower their short term rate known as the Fed Funds rate but there is no law that states bond market participants must follow the path of the Fed’s directional change in their benchmark rate.
Case in point is dating back to September 18th of 2024 which marks the beginning of the Fed’s current rate cutting cycle.
In this cycle to current day they have cut their Fed Funds rate by a full 1%.
Conversely, collective bond market participants have consistently sold off bonds to include the above charted benchmark 10 Year Treasury Notes. As these prices have moved lower via the collective selling the interest rate has increased by just over 1%. When bond prices move lower their interest rate moves higher.
Yes, the Fed reduced their rate by 1% while bond market participants have increased rates by 1%.
Being mortgage rates take their cue so-to-speak from benchmark Treasury securities, to include the above 10 Year Note, the 15 Year Fixed National Average Mortgage Rate has increased by 1% dating back to September 18th – the inception date of the current rate cutting cycle by the Fed.
Per consensus beliefs, dating back 2, 3, 4 years ago the entire topic of this edition could not happen and was nearly unthinkable.
If suggested, said suggestion/observation would be met with a retort of absurdity if not outright scorn of even offering such a topic. On a personal note I can attest to this experience many times over. BTW, that is classic psychological first stage trend change mentalities displayed as shared above at the outset of this edition.
A Structural Higher Interest Rate Environment – A Megatrend
The bottom line of today’s edition is to continue to monitor and share the unfolding change in the multi-decade megatrend of down trending interest rates.
It appears in recent years we have begun a new uptrend in interest rates whereby the structural interest rate backdrop will be rising not declining as we have become accustomed to for over 40 years.
This is not to say we will never see a lower interest rate structure from current levels. All markets, interest rates included, ebb and flow as they move through time.
As an example, note the ebb and flow of the 40 year down trend in rates in the above chart. Rates would move lower then a bit higher only to again move lower. Through it all carving out a series of lower lows – hence a down trend defined.
Similarly, with the information collective bond market participants are sharing, via the megatrend view above, it appears we will see an ebb and flow higher with a move down in interest rates only to be met with a higher high given time. Through it all carving out a series of higher highs – hence and uptrend defined.
We emphasize the movements of megatrends and the awareness of such move slowly over time which is why we started this edition with trend awareness through the lens of three stages of psychological trend adaptation.
If you are convinced rock bottom interest rates will certainly be achieved “any time now” you may want to rethink that via the messaging from collective bond market participants – the ultimate determiners of interest rate levels.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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