Up, down. Down, up.

Yesterday, the Dow reversed recent declines. It rose 180 points. Gold, too, seems undecided as to what direction to take. It fell $14 an ounce.

We’ll carry on… trying to figure out what is really going on.

The typical post-war boomer has lived with just one complete interest rate cycle. Rates hit a low after the war… as the US faced the biggest fiscal cliff in its history.

The biggest stimulus program of all time – World War II – had come to an end. Millions of soldiers and defense industry employees were out on the streets looking for a job. Most economists and investors thought they’d never find one. They thought the war had pulled the economy out of the Great Depression. Now that the war was over, they expected it would fall back into its depressed state.

And they believed that interest rates – which had been falling for nearly a quarter of a century – were a forward indicator. Instead, they turned out to be nothing of the sort. The low interest rates of 1946-50 reflected the past, not the future.

The GIs went to work. They took out their wartime savings and started businesses… and families. Soon, the economy was booming.

And interest rates rose…

My Life in Bonds

In fact, interest rates in the US rose for the next quarter century… until the early 1980s.

And once again, investors who looked at interest rates for a hint of what lay ahead were misled. The high rates – the Fed funds rate was at 21% at one point – reflected the rising inflation rates of the 1960s and 1970s… not the lower inflation that lay ahead.

And here we are. Another quarter century has gone by – and more! Once again, interest rates are at record lows. In fact, they are now close to where they were when we were born.

That’s a complete roundtrip!

And once again, they tell us more about the past than the future. They are rising. From the New York Times:

It has been a reliable fact of life for investors, corporations and ordinary borrowers: interest rates, for the most part, keep heading lower.

But all of that may be about to change. For prospective homeowners, the cost of mortgages has been going up in recent weeks. Governments are also facing the prospect of higher borrowing costs down the road, and they are projecting increases to their debt burdens. Savers with money in bank accounts, on the other hand, have the prospect of finally earning more than a pittance on their deposits. […]

Over the last few months […] investors and banks have been demanding higher payments for their loans, pushing up interest rates and bond yields.

“I think you all should be ready, because rates are going to go up,” Jamie Dimon, the chief executive of JPMorgan Chase, told a financial industry conference at the Waldorf-Astoria Hotel in Manhattan on Tuesday.

As investors brace themselves for a new era of higher interest rates, global markets in bonds, currencies and stocks have experienced spasms of turmoil. On Tuesday, the catalyst for the market’s volatility was disappointment over the Bank of Japan’s decision not to take new steps to address rising bond yields. That heightened worries that other central banks – the Federal Reserve in particular – will soon pull back on pumping money into the financial system.

We have been witnessing a fight between Mr. Bernanke and Mr. Market. We know who will win it. Mr. Market always wins in the long run. But we have no idea when… or how… he will win.

The latest news from the bond market suggests he is hitting Mr. Bernanke right where it hurts. Bond yields will go up. Mr. Bernanke will go down.

But watch out. Mr. Market is a wily and cunning fighter. He never likes to win his battles in a straightforward way. Instead, he dodges. He feints.

He fools us all…


Bill Bonner