What Do Rising Rates Mean For Investors?

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September 11, 2013 11:18am NYSE:GDX NYSE:GDXJ

ratesLarry Edelson: There’s no question that interest rates bottomed last year, just as I predicted. This is the chart I showed everyone for the 30-year U.S. Treasury.

Click for larger version

As you can see, the yield on the 30-year Treasury was due to bottom in June 2012, and that’s precisely what happened.

Since then, interest rates have shot up, especially since late April of this year.

The 30-year yield soared from a low of 2.58 percent on June 4, 2012, to 2.86 percent in April of this year, and then it jumped an amazing 102 basis points to its current yield of 3.88 percent.

That’s a 130 basis point move since last June, or a full 50.3 percent rise in interest rates in just 14 months. That’s as if the Dow Industrials had advanced from 12,414.79 at the end of June 2012 to 18,658.98 today. Amazing.

As I recently pointed out, interest rates are not just rising in the U.S., but in every corner of the globe.

It’s also a blatant sign that the Federal Reserve is losing control over interest rates, another prediction I made not too long ago.

So what do rising rates mean? What are the short-term consequences? The longer-term ones?

Naturally, I can’t cover all the consequences in every sector of the economy or the markets in such a brief column. So I will confine my comments to the most basic impact of rising interest rates.

Rising interest rate environments are where you see the biggest gains in real estate prices.

First, as I noted previously, investors all over the globe are starting to see that the U.S. sovereign bond market is the world’s biggest bubble and it has to burst.

There’s simply no way investors are going to keep putting money in to bonds when the U.S. government’s balance sheet is in such horrible shape. So you should expect rates to continue to rise, and bond prices to fall.

Second, the short-term impact will be largely deflationary. Rising rates are why you are seeing the dollar now jump in value … and commodities largely selling off.

The dollar has gained a huge 2.1 percent just since Aug. 20. Meanwhile, most commodities are now tanking again. Copper is starting to roll over to the downside. So is platinum and palladium. The grain markets are getting whacked too, with the prices of corn, soybeans, wheat and more all getting hit hard.

Gold and silver are now rolling over to the downside as well. Almost no one believed me when I warned that the precious metals would head lower into September.

They told me I was nuts for two reasons: First, September is typically a seasonally strong month for gold and silver buying. Second, with Syria about to erupt into a war for the U.S. — there’s no way, they said, gold and silver would fall.

Click for larger version

Yet fall — and fall hard — is exactly what they are doing. You can see it in my latest updated cycle chart for gold.

Notice how it shows an extended decline through September, with a low not expected until the Sept. 26 to Oct. 3 time frame.

Rising rates are now also taking a bite out of the stock market. Short-term. Investors are fearful that rising rates means lower corporate earnings, debt disasters, sluggish economic growth and more. So the stock market remains caught in a corrective mode, with lower prices to come.

But here’s the irony of it all: While most investors are caught up in the short-term consequences and knee-jerk reaction of the economy and most markets to rising interest rates …

They are going to get the long-term consequences completely wrong. Worse, they’re going to misinterpret them and get caught flat-footed on the wrong side of the markets.

Go back and study history, as I have, and you will see that in most rising interest rate environments …

A. Commodities took off to the upside like a bat out of hell. In fact, throughout history, gold and silver’sbiggest bull market moves higher occurred simultaneously with rising interest rates.

B. Major stock market averages have behaved similarly. After the initial scare, most major bull markets in U.S. equities also occurred during periods of rising interest rates.

C. Rising interest rate environments are also where you see the biggest gains in real estate prices! Yes, that is absolutely 100 percent true. Rising interest rates are often associated with rising property prices.

So then, why are rising rates historically related to commodity bull markets, to equity bull markets, even to property bull markets?

The answer is simple: Rising interest rates means the cost of money and credit is going up, and if the cost of money and credit is going up — so then must the cost of just about everything else.

In summary, the long-term consequence of rising interest rates is not more deflation, but inflation.

Keep that in mind and you will be able to make more money over the next few years than you ever dreamed of …

While those who keep touting another real estate crash or a collapse in the stock market or a long-term bear market in commodities … will end up with nothing but egg on their faces, not to mention huge market losses.

Previously in this column, I’ve recommended a bearish position on U.S. equities via the ProShares UltraPro Short S&P 500 ETF, symbol SPXU, to capitalize on a short-term decline. Hold that position for now but be ready to switch back to the long side as soon as I give you the signal.

I have also suggested a long position in the U.S. dollar via the PowerShares DB US Dollar Index Bullish Fund, symbol UUP. Hold that position as well.

And I also suggested — in my column of Aug. 19 — buying the Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ) mining-share ETFs. Hold these positions as well. Though gold and silver are likely to decline this month, mining shares should hold their August lows. Consider these mining share ETFs to be long-term positions.

Lastly, as to Syria, I have no doubt that at some point in the not-too-distant future Washington will bomb strategic targets there. But fair warning: Do not trade or make any investment decisions based on any singular type of event such as Syria. That’s a recipe for disaster.

Do, however, realize that not only are we now in a rising interest rate environment that will lead to more inflation — we are also in a war environment that is just heating up.

As I showed you many times in previous columns, war is very predictable. I showed you how the war cycles started pointing higher in March of this year, and like clock-work, they are now ticking away and will not dissipate until at least the year 2020.

Rising interest rates, a worsening war environment, Western governments being essentially bankrupt. If you think the financial storm has passed, fasten your seatbelts because you haven’t seen anything yet!

Larry EdelsonWritten By Larry Edelson From Money And Markets

Money and Markets is a free daily investment newsletter published by Weiss Research, Inc. This publication does not provide individual, customizedinvestment or trading advice. All information is based upon data whose accuracy is deemed reliable, but not guaranteed. Performance returns cited are derived from our best estimates, but hypothetical as we do not track actual prices of customer purchases and sales. We cannot guarantee the accuracy of third party advertisements or sponsors, and these ads do not necessarily express the viewpoints of Money and Markets or its editors.

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