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Peter Schiff: The Bond Yield that Could Break the Camel’s Back

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Ten-year bond yields have hit their highest level since July 2014.

Meanwhile, the stock market has gone up about 45%  since that time. Contrast that with earnings that have increased just 6%. As Peter Schiff pointed out in his most recent podcast, a lot of the justification for that increase in stock market valuation has been lower interest rates.

Well, they’re not lower anymore. They’re back exactly where they were in July 2014. But what’s more ominous is not where they are but where they’re headed.”

In fact, interest rates are still very low in historical terms. Peter said he thinks the bond market is going to go a lot lower, and that means much higher interest rates. He predicted we will break 3% on the 10-year relatively soon – maybe within the next couple of months. From there, if we take out 3.25 Peter thinks it will be a quick jump to 4%.

So, what’s the significance?

The last time we had a 4% yield on the 10-year was before the 2008 financial crisis. Basically, that was the yield that broke the camel’s back. Remember, the financial crisis was triggered by rising interest rates on the debt that had been accumulated in the years prior as a result of Alan Greenspan keeping interest rates at 1% for a year-and-a-half and then slowly raising them back up over the course of another year-and-a-half. So, as the Fed was moving interest rates up at a measured pace, by the time they got to the point where rates had gone back up to about 5%, the yield on the 10-year was about 4%. That’s about as high as it was able to go. Then the market all fell apart.”

Of course, the debt levels today are much higher than they were in 2008. In fact, world debt is growing three times faster than global wealth. We also have a much bigger stock market bubble then we did then. On top of that, the federal debt has ballooned from about $12 trillion to $21 trillion. How does the federal government deal with 4% Treasuries with its $21 trillion debt? Peter said that means it stands to reason that the breaking point is now likely below 4%.

If 4% was enough to prick the bubble in ‘o8, we don’t need a pin that big. A much smaller pin would prick this much more enormous bubble.”

Peter also touched on the housing bubble, noting real estate prices are actually higher than they were in the run-up to 2008.

If mortgage rates are also higher then they were in 2008, and the last time we had mortgage rates and property prices at levels like this – only lower – it produced a real estate crash. So, the point is, if the market couldn’t withstand a 4% 10-year Treasury in 2008, there’s no way he can withstand it in 2018.”

But this is just considering the state of things with a 4% yield. Peter said he thinks it will go even higher if it breaks through that 4% level. He said he sees the possibility of a major bear market that takes rates to 5%, 6%, 7% and even 8%. Obviously, there is no way the economy can withstand those levels, which is why Peter thinks the Fed will ultimately blink and back off its current rate-raising trajectory.

 They’re going to have to cut rates and expand their balance sheet at some point. And that’s the point where the dollar falls off the edge of a cliff.”

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