WEBVTT NOTE Higher Rates are Coming 1 00:00:00.000 --> 00:00:10.000 Welcome back to Butler on Business, and I'm sure you'll join me in welcoming Dr. Mark Thornton with the Mises Institute in Auburn, Alabama. 2 00:00:10.000 --> 00:00:18.000 He is actually, like Todd, traveling along the interstates right now on his way back to Auburn. Mark, thanks for calling in, buddy. 3 00:00:18.000 --> 00:00:21.000 Alan, it's great to be back on the show. 4 00:00:21.000 --> 00:00:37.000 Well, I always enjoy having you. You know, as I mentioned to you during the break, I have a godson that lives in Auburn, but he is currently on his way to Denmark. He works for a pharmaceutical company, so their headquarters is in Denmark, so he's on his way. 5 00:00:37.000 --> 00:00:50.000 But what I wanted to talk to you about, despite the central bank, the Federal Reserve's manipulation of the bond market, the bond market appears to be breaking out and trying to force its will. 6 00:00:50.000 --> 00:01:20.000 The Federal Reserve, fiat money, fractional reserve banking, Human Action, 7 00:01:20.000 --> 00:01:50.000 yields on bonds of all sorts, high yield, municipals, treasuries, corporates, for those rates to start to rise, they've been falling forever under pressure from the Federal Reserve, adding more and more credit, adding more and more liquidity into these markets, and basically what the Fed has been doing is trying to keep the stock market on life support, where they're lowering interest rates, 8 00:01:50.000 --> 00:02:20.000 in the short run. And then, of course, earlier this year, they started putting pressure on the long-term bonds by buying up basically most of the treasuries that were issued, buying up most of the mortgage-backed securities that were being issued, in a sense absorbing all the supply that was coming online and keeping prices of those bonds high and the yields incredibly low. And that can only go on for so long. 9 00:02:20.000 --> 00:02:24.840 The realities of markets eventually have to take place, and I think that's what we're 10 00:02:24.840 --> 00:02:27.760 seeing right now. 11 00:02:27.760 --> 00:02:32.540 How do you think then this plays out now that we're beginning to see the market break out 12 00:02:32.540 --> 00:02:35.280 of the central bank's manipulation of it? 13 00:02:35.280 --> 00:02:38.320 Well, I think that's absolutely correct. 14 00:02:38.320 --> 00:02:45.160 On a technical basis, the yields have broken up to the upside, prices have broken down 15 00:02:45.160 --> 00:02:48.600 to the downside in terms of bonds. 16 00:02:48.600 --> 00:02:55.480 And that's a long-term breaking trend that we've seen in many of the bond market areas. 17 00:02:55.480 --> 00:03:02.960 And so with long-term rates rising, and I think we can expect that to be a continuing 18 00:03:02.960 --> 00:03:09.920 process because basically what bond buyers are seeing is that the value, the underlying 19 00:03:09.920 --> 00:03:16.840 value of the asset, which is dollars essentially, bond buyers get paid back in dollars. 20 00:03:16.840 --> 00:03:23.280 And if the value of those dollars is falling, and other currencies as well, then they're 21 00:03:23.280 --> 00:03:28.600 going to ask for a higher return in order to make up for those losses on the underlying 22 00:03:28.600 --> 00:03:29.600 assets. 23 00:03:29.600 --> 00:03:37.000 And so this is a long-term change in trend, I believe, that we've seen right now. 24 00:03:37.000 --> 00:03:42.640 And that basically with higher rates on bonds, that's also going to have adverse effects 25 00:03:42.640 --> 00:03:44.560 on stock prices. 26 00:03:44.560 --> 00:03:52.120 So as bond yields rise and interest rates more generally rise, then we should expect 27 00:03:52.120 --> 00:03:58.160 the value of stocks also to come under pressure. 28 00:03:58.160 --> 00:04:05.280 And this could be, you know, it's very difficult to anticipate the timing and magnitude of 29 00:04:05.280 --> 00:04:06.280 these things. 30 00:04:06.280 --> 00:04:12.880 But basically what we've seen in bond markets is that prices of bonds have been rising for 31 00:04:12.880 --> 00:04:18.880 Several Decades. And interest rates have been declining. You know, when I graduated from 32 00:04:18.880 --> 00:04:24.880 college, interest rates were almost 20 percent. And more recently, they've been lower than 33 00:04:25.680 --> 00:04:33.120 2 percent on long-term government bonds. And so if this is a change in the long-term trend, 34 00:04:34.240 --> 00:04:41.280 then the higher rates trend could continue for a very long period of time. And as I said, 35 00:04:41.280 --> 00:04:46.240 And as I said, that's going to put pressure on all sorts of markets, including stock markets, 36 00:04:46.240 --> 00:04:53.120 which compete with bonds, and also with mortgage rates, which would put pressure on the housing 37 00:04:53.120 --> 00:04:54.120 sector as well. 38 00:04:54.120 --> 00:05:01.000 So in terms of the holders of all those assets, they could be experiencing negative returns 39 00:05:01.000 --> 00:05:02.560 for quite some time now. 40 00:05:02.560 --> 00:05:09.840 The positive sign is that there are people who want to buy houses, who need houses, and 41 00:05:09.840 --> 00:05:29.680 Why should the average person who may not be invested in bonds care about the bond market? 42 00:05:29.680 --> 00:05:37.920 Well, in a sense, we're all invested in bond markets because bonds are the capital stock 43 00:05:37.920 --> 00:05:43.240 of society and the bond market is ten times larger than the stock market. 44 00:05:43.240 --> 00:05:50.360 People don't often realize that, but pensions and life insurance companies, they're all 45 00:05:50.360 --> 00:05:55.720 invested in bonds and so bonds are the lifeblood of the economy. 46 00:05:55.720 --> 00:06:01.760 When we look around and we see all the houses and hotels and warehouses and train tracks 47 00:06:01.760 --> 00:06:09.240 and all the assets society, they're all owned and directed in large part by bondholders 48 00:06:09.240 --> 00:06:11.000 and stockholders. 49 00:06:11.000 --> 00:06:16.760 And so the bond market is a very important component of the U.S. economy, whether or 50 00:06:16.760 --> 00:06:24.600 not you actually have bonds or bond funds in your retirement accounts, it really does 51 00:06:24.600 --> 00:06:31.320 has impacted everybody in all institutions throughout society, and so, you know, they've 52 00:06:31.320 --> 00:06:39.560 been basically keeping that bond market on life support through the Federal Reserve for 53 00:06:39.560 --> 00:06:49.000 a very long time, and that's very, it's an artificial support to those markets, and as 54 00:06:49.000 --> 00:06:54.080 a result, people haven't really been engaged in those markets to the extent that we should 55 00:06:54.080 --> 00:07:01.080 and there is a lot of short-term money in those bonds that could flee those bonds. 56 00:07:01.080 --> 00:07:10.100 So you can see some dramatic changes in bond prices and bond markets. 57 00:07:10.100 --> 00:07:17.960 Mark, back in 2011 when they had the budget control act of 2011 and the stock market here 58 00:07:17.960 --> 00:07:22.200 in the U.S. as well as the U.S. dollar went into a free fall. 59 00:07:22.200 --> 00:07:30.700 The Central Banks around the world colluded, colluded, I would say, to simultaneously devalue 60 00:07:30.700 --> 00:07:36.960 all of the currencies, all the fiat currencies, so no one could really see the weakness in 61 00:07:36.960 --> 00:07:40.460 the dollar vis-a-vis the other fiat currencies. 62 00:07:40.460 --> 00:07:47.080 But it looks to me as we continue to generate monetary inflation that the rest of the world 63 00:07:47.080 --> 00:07:53.160 is beginning to push back despite the ignoring of this story by our media. 64 00:07:53.160 --> 00:07:54.160 Do you see it that way? 65 00:07:54.160 --> 00:07:57.640 I think I do, Alan. 66 00:07:57.640 --> 00:08:06.600 It's clear that central banks, when they saw the problem in 2011, 2009, here in the US 67 00:08:06.600 --> 00:08:12.360 and really around the world, it would include certainly the European Union, it would include 68 00:08:12.360 --> 00:08:16.240 China and it would certainly include Japan. 69 00:08:16.240 --> 00:08:19.980 They only have one tool, and that is to print money. 70 00:08:19.980 --> 00:08:24.580 And despite the fact that you can very often hear government officials and central bank 71 00:08:24.580 --> 00:08:30.500 officials saying they want a strong dollar, they want to keep inflation low, they're 72 00:08:30.500 --> 00:08:37.700 really a one-tool machine, which is basically a money printing machine. 73 00:08:37.700 --> 00:08:43.260 And the U.S. benefits from the fact that it's a world reserve currency, or at least was 74 00:08:43.260 --> 00:08:44.780 a world reserve currency. 75 00:08:44.780 --> 00:08:53.020 And so people were generally willing to hold U.S. dollars and dollar-denominated assets. 76 00:08:53.020 --> 00:08:59.060 But basically what central banks have been telling markets is that we're going to print 77 00:08:59.060 --> 00:09:05.020 our way out of this problem, and of course nobody has really ever successfully turned 78 00:09:05.020 --> 00:09:11.780 money printing into productive assets and goods and services at a general level throughout 79 00:09:11.780 --> 00:09:12.780 the economy. 80 00:09:12.780 --> 00:09:21.420 So, basically, I think that this upward move in interest rates is an indication that the 81 00:09:21.420 --> 00:09:27.700 market has seen that they're not really going to ever relent in this money printing process 82 00:09:27.700 --> 00:09:29.100 and they're pushing back. 83 00:09:29.100 --> 00:09:35.900 And so investors around the world are pushing back against the dollar and other currencies. 84 00:09:35.900 --> 00:09:39.260 And as a result, that's what we're seeing today in markets. 85 00:09:39.260 --> 00:09:45.460 They finally, I think, have topped off in terms of stocks and bonds, and that things 86 00:09:45.460 --> 00:09:49.940 are generally looking like they're going to move lower. 87 00:09:49.940 --> 00:09:55.620 As I indicated earlier, this process of money printing, people will put up with it for only 88 00:09:55.620 --> 00:09:56.620 so long. 89 00:09:56.620 --> 00:10:02.660 And when the demand for U.S. dollar and other currencies starts to decline, there's an 90 00:10:02.660 --> 00:10:08.380 inevitable pushback in markets, and the result is that we're going to see lower dollars, 91 00:10:08.380 --> 00:10:35.740 The Interest Rate on Bonds here in the United States is that barometer. 92 00:10:35.740 --> 00:10:39.420 Mark, listen, I appreciate you calling on such short notice, and I'll tell you what, 93 00:10:39.420 --> 00:10:43.260 later this week when you're back in the saddle at your home office, we'll do this again, 94 00:10:43.260 --> 00:10:44.260 okay buddy? 95 00:10:44.260 --> 00:10:48.700 Yeah, and I think we're going to be doing a lot of shows here because I think we've 96 00:10:48.700 --> 00:10:53.740 entered into a period of very interesting times and very dynamic marketplaces, but the 97 00:10:53.740 --> 00:10:59.220 period of apathy and lethargy that we've been experiencing here for several months, I think 98 00:10:59.220 --> 00:11:02.740 is going to change, and we're going to have to do a lot of talking about that. 99 00:11:02.740 --> 00:11:06.580 Mr. Mark Thornton of the Mises Institute, Mark, I appreciate it, buddy.