Chart of The Week: Unsustainable and Unreasonable

It is funny listening to people justify why they’d hold short term US Treasury Debt at these yields (i.e. negative real yields). Funny because any student of economic history will recall that this storytelling rhymes with what American stock and bond market investors thought heading into the waning days of 1938 (the stock market closed up +25% that year; as of today, the SP500 is up almost +22%).

In the Chart of The Week, Matt Hedrick and I show the context of free moneys. If you go all the way back to 1938, you’ll find a very representative period where an American President figured out the power of both currency devaluation and reflation, and abused it.

Yields on short term Treasuries have not been this low since the 2nd leg of the 1930’s economic Depression. Many economic historians blame the bear market in stocks from 1 on the Federal Reserve “raising rates.” I disagree. I blame it on the US Government pandering to the political wind of keeping rates unsustainably low for an unreasonable length of time.

*Note to Fed Heads who currently think Japanese on the perpetual policy front of issuing ZERO rates of return for both their creditors and citizenry alike: “exceptional and extended” is UNSUSTAINABLE and UNREASONABLE – for we, the citizenry of savers and risk takers, that is.

Yes, the math of pending equity returns works is in reverse relative to the duration that governments keep Piggy Bankers at the trough (borrowing short and lending long).

Again, in capitalism speak:

  1. Exceptional = ZERO rate of return
  2. Extended = widened duration

The longer you stay “exceptionally low for an extended period of time” (1938 or 2009), the more unreasonable it is to assume that the next move in rates (UP) is going to create a sustainable economic recovery.

If you disagree with everything I am writing, that’s fine. Most “economists” who didn’t call the 2008 stock market crash didn’t agree with me that plummeting US Dollars and Treasury yields were a leading indicator of negative equity returns to come either.

Look at this chart below again, then pull it back to 1938, and look at it again.


Unless we sign off on making the USA a glossier version of Japan, the next big move in short term rates is up. This is as low as we can go. There is a bubble in short term US Treasuries that’s getting ready to pop.


Keith R. McCullough
Chief Executive Officer

Chart of The Week: Unsustainable and Unreasonable  - 2Y