My jaw dropped when I heard this story. A friend of mine was in his early career on Wall Street; he was a trainee under a man by the name of Kevin, the Managing Director of the Govt Bond Trading Desk.
Interest rates had just reached 15% on the 30 year U.S. treasury bond. Kevin thought rates would never be this high ever again in his lifetime (bond prices extremely low). So he quit his job and raised $10 million from family and friends and arranged a pool that bought that bond on 10 to 1 leverage. In other words, he used the $10 million capital raised to borrow another $90 million to purchase bonds.
Within a few years interest rates came down and those bonds more than doubled in price which meant Kevin and his family/friends made more than $100 million for themselves. The sad ending was that Kevin got bored in life and longed to return to a trading desk. He was the head govt bond trader at Cantor Fitzgerald when the first plane hit the World Trade Towers.
Today, we are at the opposite end of this cycle. The Fed is in a tough position. If they raise interest rates, they can’t service the debt, and the economy will crumble. So they have chosen to lower interest rates. Nearing 0%, bond prices are very expensive, and the return isn’t very good. Once interest rates hit 0% or go negative, the cycle will turn violently—meaning the value of the bonds will plummet and interest rates will rapidly rise. Unless you are willing to pay the government to borrow YOUR MONEY, you will get out. The downward spiral will escalate even more rapidly when countries abandon the U.S. dollar as the world reserve currency.
At the end of a credit cycle, wealth transfers, the gap between the rich and the poor diminishes, and there’s rebirth. Corruption gets scrubbed and the economy gets a chance to start again from a new place and monetary system. We are ripe for a new financial system, as the debt has distorted everything. New life always comes from dark places.