I get asked “when will rates fall?” several times every week.
And my answer is always – “I am not sure, but I remain on team-falling-rates for several reasons.”
When Will Rates Fall?
Reasons for lower rates:
- Weak Labor Market. Layoffs are up but not surging yet. Hiring, however, is way down, the downward BLS jobs revisions were massive, unemployment continues to tick upward, and private payroll numbers (outside of the BLS) have been showing job losses instead of the gains we were seeing.
- Inflation On The Decline. A falling money supply, falling oil prices, falling demand, and falling rents are among the many reasons we’re seeing inflation continue to fall (although not in a straight line).
- Tariffs. Tariffs are a tax – and Mr. Trump’s tariffs represent one of the most significant tax increases in history. And major tax increases almost always result in recessions. HERE is an excellent post explaining all this.
- Credit Markets Cracking/Excess Leverage. This is the factor that most people are missing. The world has far more debt than it can possibly manage at every level – government, business, and consumer. We’re already seeing default rates climb, and many banks are over-exposed to bad debts. Analyst Ed Dowd in fact thinks this is why stocks actually fell on Friday.
- Stock Market Correction. I’ve discussed this many times, but record valuations and record speculation buying leave the market ripe for a major correction – that would result in much lower rates.
- Falling Freight Shipments. Freight shipments (global and domestic) have fallen to COVID-era levels. If you search for the topic at on X, you will be inundated with posts expressing extreme alarm.
Reasons for higher rates:
- Inflation. Many analysts believe inflation remains a concern. But tariffs are ultimately deflationary, and the money supply is not growing fast enough to foster inflation, per famed economist Steve Hanke. And yes, government spending can foster inflation, but the bigger factor is the money supply, which is increased primarily by bank lending.
- Too Many Treasuries Coming To Market/Too Much Government Borrowing. Many people believe that if America floods the market with too many treasuries (too much borrowing), rates will have to climb to attract investors. George Gammon, however, often makes the case that more borrowing slows down the economy, causing investors to buy more Treasuries, which will push rates down. We’ve yet to see the supply of Treasuries impact rates on a long-term basis, per Gammon and others.
- Capital Investment. Mr. Trump and many of his supporters believe that the massive amount of investment we’re seeing in the U.S. right now for energy investment, AI expansion, and re-shoring will keep the economy propped up.
I suspect that the reasons for lower rates outweigh the reasons for higher rates. And I still think we will see much lower rates by year’s end.
But – I could be wrong. As I reminded everyone in this recent blog – nobody can predict anything nowadays because we face so many unprecedented factors.
IRONY: Mr. Trump desperately wants lower rates and a strong economy. But – it is very hard to have both, as rates almost always climb when economic growth prospects are strong.
SIDEBAR: What’s the big deal about “rare earths”?
It’s a huge deal because China controls 90% of rare earth processing. The rest of the world desperately needs rare earths for EVs, smartphones, wind turbines, chips, and weaponry (especially jets).
On Friday, China announced rare earth export controls, prompting Mr. Trump to respond with massive tariffs – a move that sent stocks plummeting, bonds soaring, and rates falling.
Interesting thing #1: The U.S. holds enormous rare earth reserves, but it is environmental concerns and regulations that keep America from tapping them – which is what I blogged about on Friday. Energy Will Be Free In Your Lifetime. America is far too vulnerable without its only rare earth supply, so let’s hope we can tap those reserves now.
Interesting thing #2: The market’s severe adverse response to tariffs is one of the reasons I am on team-falling-rates.
