Interest rates are the trade of the decade, says Bud Conrad in his new book, Profiting from the World’s Economic Crisis: Finding Investment Opportunities by Tracking Global Market Trends (2010). They are at 50-year lows, currently, but with governments so heavily indebted, they will be going on a multi-year rise.
Government debt puts upward pressure on interest rates when its borrowing needs clash with those of businesses, especially during the recovery phase of the economic cycle. Government debt also causes rates to rise, says Conrad, because ofthe escalation in inflation created when the central bank prints money topay down the overwhelming burden of government debt.
Conrad thinks that the rise in interest rates will go quite far, even above the levels reached back in the early 1980s (when short-term Treasuries for a time yielded more than 20%). Thats because he believes imbalances have built up so much at this stage in the debt supercycle that there is no way to return to stability through normal means. The only option left for government is to inflate away its debt, and this will eventually lead to a collapse in the U.S. dollar.
Conrad feels that betting on interest rates to rise isnow the best way to play currency debasement. Gold is a logical choice but it has staged a huge rally since 2001 and is no longer cheap. Oil and gas are other choices but they are up a lot too. Interest rates are much better bargains than gold or commodities.
In my next post, Ill discuss what investment vehicles to use to play the upward trend in interest rates.