The Most Important Chart of the Year

Okay, I’ve been saying it since the summer. I’ve been writing about it almost weekly. And now I want you to see it.

Below is the price chart of the 10-Year U.S. Treasury Note.

A close look at the price chart of the 10-Year U.S. Treasury Note, and what it means for the U.S. economy

Chart courtesy of

From this price chart, you can see that the yield on the bellwether 10-year Treasury has risen from 2.4% in October of 2010 to 3.7% yesterday, an astounding 54% increase in long-term interest rates in only four months!

The Federal Reserve can manipulate short-term rates, as it sets the Federal Fund Rate, but the Fed cannot manipulate the direction of long-term interest rates. The current $600-billion QEII the Fed is implementing is case in point of failure to change the direction of long-term interest rates.

Why is this the most important chart of the year?

The chart of the 10-year U.S. Treasury is so important, because it shows that long-term interest rates are rising sharply. Obviously, this will eventually have a negative impact on the stock market and the economy.

Three events (or a combination of them) could be causing long-term interest rates to rise so sharply:

The bond market could see U.S. economic growth better than expected over the long term. The bond market could be predicting higher inflation ahead. The bond market could be pricing in higher rates on U.S. Treasuries (government debt), as foreigners demand greater return on their funds, as the greenback devalues in light of growing national debt.

Short- to long-term, a stock market does not rise when long-term interest rates are rising so quickly. Nor does an economy grow in the wake of sharply higher long-term interest rates. Think the housing market. How can it ever recover if rates for mortgages keep rising? Long-term, this chart tells me there is trouble ahead.

Michael’s Personal Notes:

I’m sad to say it, but it’s true. After being married for 20 years, I’ve run out of ideas on what to do for my wife for Valentine’s Day this year. Here’s the problem. My wife does not like gifts. She prefers any gifts to her (from me or the kids) to be in the form of a donation to a worthy cause, even if it’s $100. She’s at the point in her life where she only buys what she needs and that’s it. Chocolates and flowers? After 20 years, too boring for me to even consider.

To compound things, if there are two days of the year I hate going to restaurants it’s Valentine’s Day and Mother’s Day. There are 363 other days of the year we can go out where service will not be poor, it won’t take three hours to eat a meal, and the restaurants won’t be so full that you need to become best friends with the table next to you.

This morning I thought, hey, I have a couple of hundred thousand friends; why not ask them for some ideas on how I can make this Valentine’s Day memorable? I’m serious. If you can send your comments and ideas, I would really appreciate it. In fact, I promise to read every one.

The trials and tribulations of Valentine’s Day!

Where the Market Stands; Where it’s Headed:

Up, up and away, that’s where the market is headed. Day after day, stocks are rallying and the naysayers can’t believe it. Hmm. Who has been saying four times a week, since December, that stocks would rally in the immediate term? Oh, that’s me! (Forgive me, dear reader, in this business, where the market’s job is to trick analysts like me at every step of the way, you need to grab that limelight when you can.)

The Dow Jones Industrial Average opens this morning up 5.7% for 2011…a great start to the year. But short- to long-term, I’m still turning bearish. The pressure on long-term interest rates to rise is boiling (see lead article today) and there’s too much bullishness out there. Enjoy the rise in stock prices while it lasts.

What He Said:

“Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way, because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time that Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying “…the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”