Interest Rate Folly

Regular reader retiredinprescott left the following comment.

Bill Fleckenstein writes today in his Contrarian Chronicles that he believes the Fed is done raising rates for this cycle. Bill is a pretty bright guy although his track record is spotty (whose isn't?). I guess my point is that predicting interest rate trends is one of the most difficult, if not impossible tasks an investor faces.

The reader goes on to say he is trying to figure out whether to lengthen his maturity or not.

In part I agree about predicting rates but I also disagree. Over the life of this blog I have chimed in a little bit about where rates have been headed. I was wrong about Fed Funds, I thought they would have stopped sooner but have generally been correct about the middle of the curve and I don't think I have ever made any comment about long dated paper (30 year).

Any comments made in the past and anything I might say along these line in the future has more to do with knowing how numbers usually work as opposed to anything else.

For example it is a good bet that the slope of the curve, which has flattened/inverted as it often does toward the end of an economic cycle, will normalize to a steeper slope as a new cycle starts. Flat steep flat steep flat steep is just how it works, I think Leonard the money wrote a white paper on this last fall.

A steeper curve either means short rates go down, long rates go up or some combo of the two. Fed funds at 1% is unlikely, so is 2%. I'm not sure how low it will go when they start to cut rates but they will cut at some point. A steeper curve makes lending more profitable and can spur an economy.

If you buy into the ideas I put out this morning about some fundamental drivers for higher rates combined with long-term cycles continuing to work in some magnitude then this type of thesis does not seem that complex. Timing it correctly for people that feel that need to try to game it certainly adds a lot of complexity to the topic.

I believe the trends will play out the way they always have so I would not want to lengthen maturity while curve is still flat/inverted.