Salad Days

If you leave I won't cry
I won't waste one single day
But if you leave don't look back
I'll be running the other way
--OMD

The Cobb Salad Question of the Week last Saturday was, "If all inteference was miraculously removed on interest rates, and free market forces were permitted to do their thing, where do you think US long bond yields would be?"

We know that rates are being held artificially low not only in the US but worldwide by central banks to encourage credit growth. Why the forced suppression? Because we're nearing completion of a multi-decade debt super cycle, and after years of gorging on cheap credit, the market's natural tendency here is to raise the price of borrowing and wipe out the imbalances that have grown with excess.

But bureaucrats and their constituents don't want to cope with the downside of this excess. Borrowers are lugging more debt than they can service, and lenders are looking at big time defaults. So the bureaucratic solution is another fix (multi meanings here) of cheap credit.

Right now troubled sovereign debt (Greece, Portugal, etc) is trading in 7-9% range but such 'junk sovereign' yields would trade lots higher if intervention was removed from the mix.

We thought that perhaps 7-8% would be about right for the US in a free market world, although I wouldn't be at all surprised to see higher.

Personally, I'm not sure where long bond rates would have to be to find me buyin' 'em. The first number that came to mind was 15%. But as Don suggested, if rates are 15%+ then that may mean the dollar's value is getting smoked, thus crushing real returns on fixed income. Recall that late 70s, early 80s period w/ 18% CDs?

Gold remains a reasonable hedge in an unpredicatable world that teeters between inflationary and deflationary extremes created by government force.

position in CDs, gold