Rising Interest Rates: New Era with Tough Outcomes

Wolf Richter with Jim Goddard on “This Week in Money“:

What will the bond market do? The conniptions in the Treasury market are causing pain in existing portfolios but offer opportunities down the road. What’s the impact of these rising interest rates on the housing bubbles in the US and Canada? Where is the pain threshold? How will it differ in the US and Canada? And what will higher interest rates do to new- and used-vehicle sales? We’re at the beginning of a new era with potentially tough outcomes.

The Fed’s monetary policy shift is finally taking hold. It just took a while. The Louis Fed Financial Stress index spiked beautifully and suddenly, from historic lows back in November. Read…  “Financial Stress” Spikes. Markets, Long in Denial, Suddenly Grapple with New Era

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  55 comments for “Rising Interest Rates: New Era with Tough Outcomes

  1. Kiers says:

    Very treacherous period for portfolio managers: one entire asset class is out: treasuries, because of guaranteed rising yields over the rest of 2018! Commodities don’t have that much steam (yet). Balance between equity and cash.

    What is the street doing for this year? Haven’t heard of a cunning “guiding paradigm” for the present QT period, like the way risk-parity served during the heart of QE: leverage the falling treasury yields and buy the dips in equity, wasn’t it?! They made out like robber barons using that.

    • kiers says:

      PS: one danger: being forced to balance solely between equity and cash should remind students of history of the 1987 “portfolio insurance” paradigm: buy high higher, sell low lower! gulp.

    • WES says:

      Hi Kiers:

      The “risk-parity” scheme with it’s leverage on Treasury yields likely created a large demand for Treasury bonds either directly or through derivatives.

      With interest rates rising, I am wondering who will want to buy these bonds now when waiting will get better prices and higher yields?

      It will be very interesting to see how Wall Street packages up and sells what basically is the desire to catch a falling knife!

    • Jan says:

      Check the Peter Schiff and /or Davidstockmanscontracornrr.com and you will get the answer. Regards

  2. OutLookingIn says:

    Pumping up the money volume.

    A hand delivered pamphlet show up in my mail box today.

    USE $40,000
    $50,000 OR EVEN
    We can help you turn your home’s value into money you can work, plan and live with.

    Now down to the fine print, on the bottom at the back.
    If you want to borrow $150,000 (net loan) using your home equity, your interest rate will be 6.95% however your loan total will be $162,100 based on a 20 year amortization schedule with a 2 year term, fixed at 6.95% compounded monthly. Monthly payment of $1,252.00
    Annual mortgage interest rate is calculated monthly not in advance.

    This is part of a Canada wide campaign by a large financial institution.
    Another money printing tool, considering fractional reserve banking.

    I wonder how many of these HEL’s will end up sliced and diced, shuffled and stuffed into CLO’s for the derivative market? The global financial system just keeps on getting more fragile.

    • Petunia says:

      I got an offer for a personal loan from a Goldman Sachs affiliate. I remember thinking the interest rate was outrageous, even for a vampire squid.

      • Anon1970 says:

        My guess is that you have not yet frozen access to your credit reports and that the credit reporting agencies have sold your information to assorted businesses who want to lend you money or sell you stuff. Aside from from helping to protect you against identity theft, freezing access to your credit reports will result in a sharp drop in junk mail.

        • OutLookingIn says:

          In this case, freezing a credit report would not have mattered.
          These pamphlets were part of a ‘naked’ (no address info) mailing to ALL household addresses.
          My guess is that they are desperate to generate more loans (HEL’s), so as to generate more derivative (CLO’s) product for the market.

    • Anon1970 says:

      Before the US real estate collapse a decade ago, I used to get regular mailers from a company called Ameriquest Mortgage encouraging me to refinance my home. Ameriquest ended up ruining the lives of many thousands of financially unsophisticated Americans. For his services to the Republican party, the company’s founder, Roland Arnall, was rewarded by being made US Ambassador to the Netherlands. Ameriquest was later fined $300 million for its financial abuses. Arnall was never punished by the US justice system but did develop cancer and died at age 68 before he serve out his full term as Ambassador.

    • Paulo says:


      I was thinking about installing a covered garbage can by our community/street mailbox for fliers and “offerings” as you described. For a long time they were absent, but lately have started to show up again almost weekly. I’ve got a good looking drum, I just need to fab up a lid for it.

      In fact, sometime next week I plan to shift my MasterCard to a different organization for % cash back. We always pay the monthly balance off, but they keep raising my monthly limit which ticks me off. I lowered a $23,000 limit to $10,000 two years ago. (For emergencies). They have started to boost it again without even asking and now it is at $13,000. They must do an automatic $1500/yr boost.

      It was rampant in 2007. :-)

      • OutLookingIn says:

        Financial desperation.
        The system is debt based. Without debt growth, the system dies.
        Watch for even easier credit offers to come.
        Yes, the financially unsophisticated will suffer greatly.

        • kiers says:

          How interesting that NOW (ten years post GFC) when “they” raise rates, they want the sheeple fully cooperating to raise the velocity of money, but when rates needed suppression to build asset bubbles ,lo and behold, they wanted sheeple OUT and ASLEEP! We are all witness to it.

          So this is what they should teach in Econ 101 about QE to future kids: “Rates were lowered via the Fed to create asset inflation to rehabilitate the moneyed, but, vitally, the low rates required deflation and a stand-still freeze among the sheeple to enforce the policy”

          IF textbook authors are to teach the truth, that is what they should write. (IF!) Seeing how things are, that is unlikely. If that ain’t class war….don’t know what is

  3. Jon says:

    In San Diego.. the housing is all time high and going higher and higher

    Let’s see what brings this to halt or down..
    Keeping my fingers crossed

    Btw.. inventory is all time low..

    • Frederick says:

      Reality will do it just fine Just so much people can pay

      • Petunia says:

        I was just in the cable company store downgrading my package to a cheaper one. Half the people there were turning in equipment and downgrading.

        • Jon says:

          What’s that got to do with housing in San Diego?

        • 2banana says:


          Cut the cord and save thousands a year.

          Free HDTV with an $100 antenna.

          Netflix and Amazon Prime for the rest.

          You will never miss cable.

        • Petunia says:


          It has a lot to do with the price of housing everywhere. Even after the tax cuts, people are cutting back in every way they can. Eventually, CA will feel the effects of SALT, and the effects of the rest of us cutting back on entertainment.

        • Drater says:

          Thank you for explaining the direct correlation between your cable package and the San Diego housing market…very interesting

        • viewer says:

          Can an HDTV antenna work when there is no line of sight to a transmitter?
          How do people living behind a hill or blocked somehow get access without cable?

        • Frederick says:

          I cut the cable in 2014 We get free TV here in Turkey and I don’t watch it anyway My wife likes some of the soap operas

        • Jon says:

          That’s not necessarily true. My mom just cut her cable and got YouTube TV after I finally convinced her. She’s not struggling at all. It’s just easy money to save, so why not. Its just a superior product for less cost. Not bc she was forced to do it to save money.

          Also antenna does not work in SD very well due to the endless canyons interfering with signals.

        • Petunia says:


          Glad to hear mom is doing well. However, she may still be affected by SALT in high tax CA, and her switch to a cheaper entertainment medium will definitely affect them. Whether eventually all the changes tip in one direction or another will affect housing prices, up or down. I think it will be down in flyover country.

        • Coaster Noster says:

          I use a $29 antenna that gets all the stations in the SF Bay Area, including PBS and their 9.2, 9.3 broadcast channels, and UHF (Channel 60 has great foreign programs). The antenna is a flat piece of plastic 12 inches x 12 inches, clear, with some aluminum inside. It is from Solid Signal (search solidsignal). I just hang it over the curtain rod. I stopped Directv in 2005, not on cable since. DirecTV sends me “offers”, and I send it back to them, showing the savings I have made ($50+ a month, for x years) and how happy I am not to pay to watch commercials.

        • alex in san jose AKA digital Detroit says:

          Petunia – right on. Many of us are “cheaping out” I’m resisting getting a smart phone because it’ll cost me about $600 a year. Just think to yourself, “At the end of the year, do I, or do I not, want $600 in cash in my hand?” I’m overjoyed that I’ve found I can buy a decent bike tire for about $15 from Performance Bike rather than $40 or so from a more local shop. Getting a couple of tires, some tubes, patch kits, tools, etc makes it worth the $7 on public transportation to go there (it’s in Mountain View).

          Cheaping out is going to be the new cool.

        • Marko says:

          Were the other half of the people in there to upgrade there service? J/k

          I would expect most people in a cable store to be there returning equipment. In my experience they bring the equipment to you when you’re a new customer and make you return the equipment when you quit their service.

    • John says:

      It should stabilize and that’s a good thing. It won’t drop much if at all. Inventory too low. Previous buyers over past 8 years all very qualified. Jobs still strong. 7.5% appreciation in 2017. I’m hoping it slows down to a healthy 3-5% in 2018

      • Jon says:

        Having seen many housing crash in socal in the last 5 decades or so. i think it is a wishful thinking to say that it’ d stabilize and won’t drop much.
        I vividly remember, people saying the same thing in 2005-2006 .. for example, best weather, everyone wants to live in sd, low inventory, everyone is rich, job market is awesome, zoning laws in san diego too strict etc etc. But from 2008-2011, the real estate prices crashed by 50% or more even in the coastal areas supposed to be shielded from downturns.
        It’s gonna be interesting, how people in san diego would deal with new tax laws, rising interest rates, prospects of thousands of high paying jobs being obliterated ( qualcomm.. broadcom )..

        Personally, I think the housing prices are not sustainable here but would be interesting to see what pops the bubble.. it’s gonna be a domino effect I guess.. may be interest rate combined with job loss and recession… unless recession and job loss never happens..

        • John says:

          There’s a few big differences this time Jon. Buyers are qualified and put a large down payment with low fixed rate mortgage rate.
          In 2006 it was a landscaper buying 500k home on 30k income with no down payment with a teaser rate!

          This is why I predict slow down of appreciation or only slight drop in price.

          Also in 2006 prices were rising 20-35% a year. Now it’s 7-12%. Very big difference and more sustainable.

          Plus new home construction and supply is NOT the same as it was in 2006. They are starting to build now finally so yeah in 3-4 years maybe it’ll be an issue, but not now.

        • Jon says:

          In socal the real estate crashes every few years
          the reasons are different each time but the impact is same …

          I am sure that time would come we don’t know when and why…
          But for sure it’s gonna come

        • JZ says:

          Inventory, supply, demand, rate rise, foreign money, money laundering, speculation, rent seeking, mortgage securitization, tax, realtor tactics… I am always amazed how many factors there are that will affect house prices. out of all of these factors, I can NOT make any sense or predictions to figure out what force is driving prices.
          One thing I do know is that price/rent > 30 now, and that number was 10 to 15 in 2010.
          I am NOT a person to catch any trend to buy high and sell higher. To me, the value of house, like all other assets has been driven down to ZERO. Return free risk.

    • Very curious market, properties taken “off” the market may be increasing. At the moment when you are aware that inflation is about to take hold, sellers often pull back and wait to see where prices are going. Part of me says, we aint’ seen nothing yet. A market crash, pressure on the banks, home equity lines vanish and mortgage rates climb, that seems more likely. But..

  4. caradoc says:

    Imagine a boring 60/40 portfolio rebalancing semi/annually as the air comes out. Just transaction costs on the way down in value, little else to show for it.

    • SuzeB says:

      Hmmm….I have some of my IRA in a couple of U.S. bond index funds, one is short term that has lost money already, the other is intermediate term. Wondering if I should move these bond funds into cash this week but I have no idea if that is smart or stupid (and I don’t pay a financial advisor). In 2008 I did nothing to my portfolio which was in cash and stock mutual funds, very few bonds…lost half of the stock funds and it all came back but now I’m a bit older and not sure I want to risk losing as much this time. I’m all ears!

  5. RD Blakeslee says:

    For those of us not burdened by rising interest rates (e.g. cash savers and don’t dabble in stocks and bonds), rising interest rates will help us a little as inflation takes hold. Savings institutions will pay us more on our bank accounts and the principal on fixed-interest loans to us will be paid over time with less valuable dollars.

    For a little while yet, it is a good time to buy a new vehicle (IF you need one!) with a zero interest rate loan for as long a term as you can get, PROVIDED your prospects for a steady income flow or a goodly amount of savings enables you to make the payments.

    • Paulo says:


      I have considered doing the new vehicle thing. But dang, I just used my 32 year old Toyota yesterday. How can I get rid of it? It would be like shoving my Mom out on an ice floe.

      But when it quits, all sentiment is off.

      I have been researching like heck, and will wait for the ‘downturn’ to purchase a nearly new used truck. Chevy Colorado 4X4 basic package; hold the electronics and no mayo, no cameras, no GPS, and no financing please.

      • OutLookingIn says:


        I would hold off on a “new” buy.
        Too difficult and very expensive to repair, without the tech help of a dealership.
        Just finished refurbishing a 68 Ford P/U that I bought for next to nothing from an old farmer. Simple mechanics. NO COMPUTERS. It runs great and don’t mind hauling gravel in it!
        Oh and by the way, the total cost is turning out to be about a quarter of the price of a new truck.
        So hold off if you can. Save your money.

        • Coaster Noster says:

          Three Ford Rangers since “9-11” (I bought a one-year-old the week before). Never any engine/tranny /third member repairs, or A/C, or ….anything but tires. First one got t-boned, second one stolen, third one newer (2003) with special key, so theft is unlikely. Engines are solid, and repair (e.g. broken mirror, h&r driver) DIY documented by many, on YouTube.

        • WES says:

          Hi Out looking in and Paulo:

          OT – The nice thing about the “old” cars and trucks is they don’t have on board computer systems with built-in GPS/listening mics to invade your privacy by tracking your every move! Less chance too of your vehicle being electronically hijacked while your driving it in case someone doesn’t like you!

    • SuzeB says:

      Mostly cash saver here although I do have stock and bond mutual funds in an IRA. (I have fond memories of a CD earning 15% in the 1980’s.)

      A week or so ago I found an online money market account that pays 1.70%. I had the money in a credit union that was paying 1.25%. After a bit of hassle, I moved it into the higher paying online account only to see yesterday the credit union is now paying 1.75%.

  6. mean chicken says:

    Temporary reprieve for pension funds. Then…. BAM!

  7. RangerOne says:

    I’m looking at rellocating from San Diego yo Dallas for work and all I can say is the difference in housing isn’t as magical as I thought.

    It’s true you get a bigger place for your money in a suburb. But given the roughly 2.6% property tax you pay in any nice school district and the yearly reassement with a rather high increase cap. Homes quickly become a similar burden to San Diego.

    At least with income my tax my taxes go up because I make more money. With property tax I get fucked because other people think my home is worth more…

    The only plus I see is that Dallas acctually is building homes in a normal range to meet demand. So you have choices even in a sellers market.

    But their “high-end” market is getting hit by the tax changes too. Even a $400k house over there is over the $10k cap in taxes. So in areas in Dallas where average prices are $600k+ they are loosing some breaks. Which is honestly propbably good.

    Also I was shocked by the insruance rates compared to California where it is pretty cheap regardless of home cost.

    • Ken says:

      Ranger, how did you manage to that “bad” word past the Wolf censors?

    • Phillip says:

      TX likes to brag about not having a state income tax but the money to run the government has to come from somewhere, so they tax real estate at a much higher rate (and reassess every year) than CA. Sales taxes are very similar so the overall effect is much the same. It is correct about property insurance being much higher (tornadoes, floods) and insurance companies usually spread the risk over a large area even though Dallas may not have the flooding the Gulf coast does. I believe it comes down to quality of life and having been a Texan at birth through university years, I am now (25+ years) a happily transplanted Californian. Certainly not perfect but nothing is.

      • alex in san jose AKA digital Detroit says:

        I’ve lived in California and I’ve lived outside of California and the equation always adds up to: Stay in California, stupid!

    • Your Dallas rates imply hurricane and flood, your CA home insurance rates do not imply Earthquake, that is optional. There are also high risk areas for flood and fire, depends on where you are at. You also have Prop 13 and while your rates are high, they can only rise 2% a year, and if your home can be appraised lower you can ask for a reduction. Most cities have a sales tax rate north of 8%. On the upside the state has made weed legal depending on your local laws, you can grow some and maybe earn enough to pay your taxes.

  8. So bond buyers move down the curve and they ladder up their purchases. Rising rates aren’t a special problem, especially this rate hike cycle which is not supported by fundamentals. The fact that raising rates has some effect on the indicators only proves the Fed was too late. (ten years too late) The momentum in this collapse in rates (twenty some years) will not resolve itself quickly or easily. Rates will wash out and it will take time to contract global credit without popping the bubble.

  9. Scott says:

    Listening to Wolf reminded me of the increased yield of my Vanguard money market fund. After years of no yield, it’s now at 1.47%, which is very close to 10-year yield a few years ago as mentioned by Wolf. It’s not looking good for those who bought then. By contrast, it should help people who have cash.

    I also wonder about the impact on Hedge Funds and Private Equity, as it means they can’t borrow as cheaply, which should depress the prices paid. However, the dry powder cash is not the complete drag it has been for the better part of a decade.

  10. raxadian says:

    The FED wants to keep raising rates for at least two years, including this one. That will make many unicorns and zombie companies that depend on cheap credit bankrupt. Blockchain currencies are two steps away from started to get banned, in fact I wouldn’t be surprised if Internet providers don’t start to outright block Monero soon as is the one most used in mining malware.

    The US dollar is the cheapest it has been on a while.

    The tax cuts will hit hard in the economy and that combined with other factors will make 2018 hell for some. Not to mention budget cuts and that sime taxes will need to be raised until the US president olants for the government to be shut down until the elections.

    And who will actually make profit? The usual suspects of course.

    • alex in san jose AKA digital Detroit says:

      How will the tax cuts “hit hard in the economy”? My understanding is that my own taxes, being a little guy making about 13 grand a year, will be cut in half.

      I’m out playing my trumpet every weekend making grocery money and saving like crazy, on the assumption that my taxes will be what they’ve been, amounting to 20% of my *gross* income. Ah, the life of a 1099. But, if they really are cut in half, it means I’ll be able to pay them right on the dot on April 14th and I’ll have enough to buy a new Getzen cornet, that’s $1200-$1500 going right to American workers in flyover country. This hurts the economy how? Other worker bees will fix their cars, fix their teeth, put money into the economy all sorts of ways.

      • raxadian says:

        There is so such thing as a free lunch.

        In other words the money the government is not getting due to the tax cuts has to be obtained from somewhere else. Be is budget cuts, raising different taxes, firing people, lowering wages, taking more debt and so on.

        That tends to cause more economic troubles for the US that if there was no tax cuts in the first place.

        Remember that next time people complains about public services getting worse, now you know why, is thanks to your beloved tax cut.

  11. Nodak65 says:

    In reply to Ranger I just came back from a scouting mission to Houston and am looking to leave cali to goto TX. I just would like to point out that me and my wife’s cali state and local taxes will pay for the rent of a nice 2 bedroom apt in the spring woodlands area until we decide to buy. yes property tax is 2.4 to 2.8 depending but prices and what you get is way better.

    • Jim Mitchell says:

      I suggest a vacation in Houston. I lived in California for forty years, retired and moved to Colorado to play with my grandchildren while they’re still young enough to care. I concluded that we Californians don’t transplant well. I found it difficult to breathe in Colorado at 6000 feet. (Colorado Springs) So I went to Houston. My Texas grandkids moved there after my daughter’s house was destroyed by Katrina. (New Orleans). Last summer, their house in Houston was destroyed by Harvey. Houston is a swamp. Weather guy says humid subtropical. Have you lived in a swamp before? Now I’m in Oklahoma (Norman). Crazy football town. OU. Ford dealer sells only two colors of cars. Crimson or cream. Kidding, kinda sorta. Property tax is low. So is everything else. There’s a reason that OK is at the bottom of every list. It deserves it. Terrible health care. Education scores lousy. Rotten judiciary. Recently, a young woman tried to kite a check at Walmart. It’s a low level offense in California. Here, a felony. The judge made her a deal. If she agreed to be sterilized, he would give her a lighter sentence. She agreed and was sterilized. District Attorney said no deal. Be careful if you think you want to move to Texoma for lower housing prices. BTW, since I moved here I have developed the perfect contraindicator for choosing which state to live. Are groceries taxed? OK, yes. TX, no. A tax on groceries will cost a family a thousand dollars a year. That’s a regressive tax, affecting everyone. A state that taxes groceries is run by cruel and stupid people. Next Christmas I’ll be in California to stay.

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