Interest Rate Update 20181119

1) Since November 2015 the Fed has told us at every Fed meeting they will raise the Fed Funds rate from the current 2.15% to between 3.25% & 3.75% by December 2020, for confirmation see the Fed’s site

If the market did move to the Fed’s expectations of 3.40% it would still leave the Fed’s funds rate 3.21% below the 1968-2007 per-financial crisis average of 6.61%. 

Period Fed Funds 3 Month CPI Rate – CPI
Current 2.15% 2.25% 2.50% -0.25%
1968-07 6.61% 5.96% 4.49% 1.47%
2008-18 0.75% 0.65% 1.83% -1.18%
Pre/Post + – -5.86% 5.31% -2.66% -2.65%

At the last Fed press conference on the 26th of September 2018 Federal Reserve  Chair Powell told us,

“The US Economy is strong”
“Growth is running at a healthy clip”
“Unemployment is low”
“The number of people working is rising steadily”
“Wages are up ”
“Inflation is low and stable”
“All of these are very good signs”

It was the most glowing report by a Fed chair on the US economy in over a decade.

4:07 into the video below Fed Chair Powell once again reiterates where the Federal Reserve sees the rate they set and when.

2.15% Current
3.10%  December 2019
3.40% December 2020

If the market believed the Fed it should have fueled stocks and rates hike expectation higher.

What did happen shortly after Powell’s glowing report on the US economy

The S&P 500 sold off 310.25 points from 2,913.25 to 2,603.00 by the 29th of  October  2018 down -10.64%


10.7) The NASDAQ sold off  1,160.75 from 7,610.25 to 6,449.50 by the 23rd of November 2018 down -15.25%.


17 trillion in interest rate derivatives positions went from pricing in 0.6550% of the Fed’s anticipated 1.25% rate hikes by Dec 2020 to just 0.1975%.

$16,735.00,  position value 4 October 2018 at 0.6550%
$4,937.50 30, November 2018, at 0.1975%

($11,413.50) Loss on this position from previous high

September through November 2018 chart  Each 0.01 = $250.00

Recovery plan

I am re-entering the market

Long 15 March 2019 GEH19
Short 15 December 2020 GEZ20
Margin requirement  = $5,625.00
Recommended margin = $15,000

I expect the market to price back in at least 2 of the Fed’s anticipated 4, 0.25% rate hikes between March 2019 and December 2020

$6,562.50 position value at a 17.50 entry
$20,250.00 position value at our initial objective of 0.54%
at the minimum objective of 0.5400%

If strength of rate hike exceptions remains strong I will maintain this position, if they start to weaken (as defined by the overall rate of change for the move) I will liquidate.

Maximum upside based on current Fed expectations for the rate they set

$37,500.00 position value at 1.00% (Fed expectations)
+$30,688.00 gain at the Fed’s expectations

Each 0.01 move = $375.00 USD

March 2019 Dec 2020 chart to monitor this move

I wholeheartedly believe US interest rates will rise to more normal levels but,  I believe it will be fueled by deteriorating US credibility and escalating fiscal mismanagement and not economic recovery.

Interest Rate history prior to the current artificial and unsustainable lows

5.70% Average 1954 – 2007
0.07% Low July 2011
19.10% High June 1981

1953-2018 chart and monthly historical data

Powell is telling us

“The US Economy is strong”
“Growth is running at a healthy clip”
“Unemployment is low”
“The number of people working is rising steadily”
“Wages are up ”
“Inflation is low and stable”
“All of these are very good signs”

Reality using the using the numbers posted on the Fed’s and US Government websites is telling us a different story.

  • Employed US population 2007-2018 is down 1.29%
  • Reported Consumer Prices up 47.84%, actual prices up 68.20% to 135.60%
  • 2000-2018 total Federal Revenue increased by 63.54%
  • 2000 to 2018 Federal debt increased by 265.30%
  • Average Treasury yield prior to “Economic Stimulus” = 6.26%
  • Average Treasury Yield since “”Economic Stimulus” = 2.59%
  • Each Taxpayer’s portion of the national debt, $44,069 to $142,698
  • If rates normalize debt service cost would consume nearly 40% of total Federal Revenue.
Actual Median Income Gold Price Income in Gold 2000-2018
2000 $41,990 $280 150 ounces
2018 $59,039 $1,270 46 ounces
Increase or decrease -69.03%
US Income & Population 2000 – 2018
Median Income Adjusted 0.01%
Median Income Actual 40.60%
Actual Income in Ounces of Gold -69.03%
Employed US Population -1.29%
Reported Consumer Prices (CPI) 47.70%
Growth in Federal Revenue 63.54%
US Population Growth 16.60%
Growth In Federal Debt 265.30%
Growth in Debt As A Percentage of GDP 83.60%
Increases To Consumers 2000-2018
Federal Debt Per Taxpayer 223.81%
Median Home Price 98.40%
Mortgage Debt Outstanding 99.60%
Median Rent 74.40%
Groceries 91.90%
Automobile (Honda Accord #1 Seller) 48.97%
All Consumer Energy Costs 89.60%
Consumer Gasoline Prices 115.30%
Heating Oil 151.20%
Consumer Electricity 68.20%
Personal Health Care 135.60%
Consumer Medical Care 89.10%
Tuition, school fees, childcare 132.30%
Water, Sewer Trash 108.80%
All Sectors; Debt Securities and Loans; 152.03%
BLS.GOV Inflation Calculator 47.84%
Average 100.22%
Spending & Debt 2000-2018
Gross Public Debt 247.46%
Federal Debt 265.29%
Interest Paid On The National Debt 21.05%
Total Annual Federal Spending 137.07%
Fed Annual Spending Per Capita 103.31%
Annual Healthcare Expenditures 246.23%
Annual Healthcare Per Capita 197.02%
Annual Defense Spending 142.19%
Annual Spending Welfare 142.18%
Annual Federal Pensions 141.74%
Annual on Social Security 120.51%
Federal Debt to GDP 83.60%
Total State Debt 118.18%
Total State Spending 131.58%
Total Local Debt 113.33%
Total Local Spending 83.83%
Local Annual Spending on Education 117.71%
Average 141.90%
Gross Domestic Product (GDP) 2000-2018
Non Adjusted Growth in US GDP 88.54%
Non Adjusted GDP to Federal Debt 87.13%
Adjusted GDP to Federal Debt 83.60%
Stocks 2000-2018
Nasdaq 100 98.40%
DOW 125.18%
S&P 105.15%
Average 109.58%
Commodities 2000-2018
Gold 356.18%
Silver 212.21%
Platinum 85.74%
Palladium 104.29%
Copper 267.86%
Median Home Price 98.40%
Crude Oil 145.63%
Wheat 125.21%
Corn 82.55%
Soybeans 102.46%
Cattle 61.76%
Cotton 67.82%
Lumber 71.39%
Average 137.04%
Non US Stock Indices
DAX (2001) 146.43%
Swiss Market Index 24.36%
CAC 40 -3.15%
Euro Stoxx 50 (2001) -24.09%
Average 35.89%

Looking at the hard numbers it’s evident that true US inflation is running much higher than reported inflation.

This under reporting might be acceptable if median income was rising as quickly as true inflation but it’s not, Median Income from 2000 to 2018 was up a mere 0.0085% (adjusted) 40.60% (actual) while reported inflation was up 47.70% and true inflation 2000-2017 was up over 100% using pre-1990 US government calculations methods/

During “Economic Stimulus” quality of life for US citizens has deteriorated faster than any other period since the Great Depression.

Why does the BLS.GOV under report inflation?

By under reporting inflation the US Government has been able to suppress interest rates, with it debt service cost. Currently the average interest rate paid on US Government Debt is 2.52% or 3.74% below the 20 year average of 6.26% prior to “Economic Stimulus”.

Average Treasury rates prior to “Economic Stimulus” = 6.26%

Average Treasury rates since “Economic Stimulus” = 2.59%

Governmental Motivation

If inflation was being reported accurately and rates normalized it would cost the US. Government an additional 790 billion annually in debt service cost.

Should rate normalization occur, annual debt service cost would be greater than 1.3 trillion, consuming nearly 40% of all tax receipts.

Projected budget deficits would increase from 850 billion in 2018 to over 1.6 trillion.

Secondary Governmental Motivation

Currently desperate depositors looking for higher interest income to survive have been sucked into Treasuries with longer dated maturities. This has enabled the Federal Government to “fix” its debt for the longest period of time at the lowest rate on record.

As rates rise the liquidation price of these Treasuries will fall for example, if a 10 year is trading at 100.00 = liquidation value $100,000 with a yield of 3.00% should rates rise by 2.00% this Treasury will be discounted by $20,000 with its liquidation value falling from $100,000 at 3.00% to $80,000 at 5.00%. (10 year X 2.00% – $20,000)

My conclusion is the US and other countries will continue their inflation misrepresentations in an attempt to quietly monetize their debt. Their expectation is that incomes will eventually rise from inflation generating more tax revenue while at the same time the majority of Government debt is fixed greater than 6 years.

End result increased tax revenue and discounted debt.

If you have questions send a message or contact me

Peter Knight Advisor


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