Consenheim: Call it a mania or simply a trend gone too far, it's still a bubble

When I was first being introduced to the financial world, a few wise men advised me to read a book by the name of Extraordinary Popular Delusions and the Madness Crowds. The book was written by Charles MacKay in 1841 and it examined what the author saw as manias - basically trends gone way too far.

His most renowned sections covered financial manias or bubbles. I think we can all understand the term bubble as something that inflates until it pops.

The two most notable were the South Sea Company and the Mississippi Company. Both companies were, for the most part, empty shells trading primarily government debt and or currency. They both rose to great heights only to fail miserably. This all happened in or around 1700. Bubbles, it seems, have been around for a long time.

Once every now and then I make an educated guess at what I think may be happening in the financial markets.

I do this with much trepidation, but sometimes a trend will present itself. It is easy to see the bubbles in hindsight (tech wreck and housing bubble) but much more difficult when they are out in front of you.

So, let's talk about interest rates. In the early 1980s, mortgage rates topped 19 per cent per annum while government and corporate bonds were as high as 14 per cent. That was a great time to buy bonds and not a great time to have a mortgage. Many analysts will argue that we are in a bond bubble right now.

I know I have gone over this many times before, but just in case you forgot, bonds do well when interest rates are falling. Unfortunately, they do not do well when rates go up.

I think we can all agree that rates are substantially lower today than they were 30 some odd years ago. Yes, they could go down, but for the most part there is only one way they will go and that is up.

That is good if you can lock in long-term debt at low rates and not good to buy long-term bonds.

For those daring souls who would like to play the potential upward move in interest rates, you may want to explore a few of the ProShares Short funds that allow you to bet against bonds.

It is my opinion that interest rates will go up - just not for some time yet.

We may see little moves here and there, but for the most part I would expect little movement for at least a few years and maybe as long as 2017-18.

The U.S. government has set certain goals for unemployment and growth numbers and until they see those goals they are unlikely to raise rates; that, and the fact that they have somewhere around $15 trillion in government debt.


Les Consenheim is a financial adviser with Raymond James - Consenheim and can be reached at 250-372-8117 or les.consenheim@raymondjames.ca. Raymond James Ltd. is a member of the Canadian Investor Protection Fund. Unless otherwise stated, opinions expressed in this email are those of the author and are not endorsed by Raymond James.

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