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[Chart Of Interest] Record Debt + Record Rate Spike = ?

Jun 19, 2022


The [Chart of Interest] post is a weekly blog spotlighting a highly informative chart and the significance on asset markets through the lens of the EPB Secular & Cyclical Framework.


[Chart Of Interest] Record Debt + Record Rate Spike = ?


One of the most reliable indicators of future economic growth is the rate of change in interest rates across the economy.

When interest rates rise sharply, economic growth will cool in the coming months. If interest rates decline rapidly, an economic recovery is likely around the corner.

Interest rates interact with monetary policy and can have an extremely long lead time, up to 12 months, which is why many market participants ignore the warning about economic growth in the future based on a change in interest rates today.

The chart below shows the 18-month rolling change of a composite basket of interest rates, including mortgage rates, corporate bond rates, and short-term Treasury rates.

The chart is graphed inversely so that when the line is moving lower, it means interest rates are rising, and worse growth is ahead.

In 1999, interest rates rose 203 basis points with a total debt to GDP ratio of 272%. A recession followed one year later.

In 2006, interest rates jumped by 150 basis points across the economy, with a total debt to GDP ratio of 334%.

In late 2018, interest rates rose just 129 basis points but with a staggering debt load of 343%.

Today, with a debt load of 370%, higher than any previous period, interest rates have spiked 308 basis points.

The last time interest rates across the economy increased more than 300 basis points was the early 1980s, and two recessions developed in 1980 and 1982. At that time, however, total debt to GDP was only 170%.

Record debt levels + record interest rate spike = ?

At EPB Macro Research, we track these longer-term and shorter-term economic developments while offering ideas on how to prepare/capitalize on the coming market environment. 

In March, when many people were expecting a rebound in economic growth on the back of a "strong consumer," I warned about a major collision on the horizon from the toxic combination of slowing economic growth and tightening monetary policy. 

However, given the US economy is decelerating and forward leading indicators imply that growth will continue on this downward path, the intention of the Federal Reserve to raise interest rates seven more times this year is more than likely to tip the recessionary scales.

Using the same leading economic indicators that allowed us to see this looming recession ahead of time, we will continue to track the cyclical conditions and any signs of a potential economic bottom.

The [Monthly Cyclical Trends Update] is a once-per-month, detailed analysis of the coming trends in economic growth with a discussion of asset class performance, thematic portfolio strategy, and positioning ideas. Click Here To Subscribe



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