I am optimistic about 2017. Not because of who got elected president, or because I think that the economy is about to heat up. Rather, it is about business prospects that I have been mining for several years which I think will finally evolve and mature to my satisfaction. Having lacked such optimism for a while, it’s a nice change.
Apropos of that sentiment, the notion that interest rates should rise will facilitate the ideas that I want to take action on. And, courtesy of 720 Global, I think the following summary explains why such a reality is likely:
“While the increasing interest rate risk and price sensitivity coupled with a decreasing margin of safety (lower coupon payments) of outstanding debt is alarming, the story is incomplete. To fully appreciate the magnitude of this issue, one must overlay those risks with the amount of debt outstanding. Since 1982, the duration (price risk) of nominal U.S. Treasury securities has risen 70% while the average coupon, or margin of safety, has dropped 85%. Meanwhile, the total amount of U.S. public federal debt has exploded higher by 1,600% and total U.S. credit market debt, as last reported by the Federal Reserve in 2015, has increased over 1,000% standing at $63.4 trillion. When contrasted with nominal GDP ($18.6 trillion), one begins to gain a sense for how radically out of balance the accumulation of debt has been relative to the size of the economy required to support and service that debt. In other words, were it not for the steady long-term decline in interest rates, this arrangement likely would have collapsed under its own weight long ago.”
To all, I wish a happy and healthy new year. I look forward to bigger and better things.
