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Below are two of the most important macro charts in my notebook – cost of long term capital on both a 30 and 1 year basis. Why are these “most important”? Because what occurs next on the margin here will have a meaningful impact across asset classes, how they trade, and how they are valued.

The 30 year chart puts a lot of what has occurred in the cheap money leverage cycle in context. The numbers don’t lie here, people do. This long term chart made geniuses of many in America. As cost of capital declined, some levered up on it and spent their brains out – some even called it a repeatable investment process. Pardon?

THE QUESTION from here is what do you do if the Queen Mary turns up into the right on 10 year yields?

You know that access to capital is never going to be what it was. You know that anyone in need of long term capital (MGM Mirage, Barclays, etc…) is paying double digit rates. You know that the US Federal Reserve eventually has to raise rates (they can’t cut from zero).

Do you know what this means for your portfolio? This is going to be “The New Reality”…

I have the critical breakout/breakdown line (or “shark” line) for US 10 Year Treasury Yields at 3.83% (see chart).

Manage risk at the tail. Jimmy Carter’s economic legacy remembers cost of capital well…

Keith R. McCullough
Chief Investment officer
Research Edge LLC