Caution's Key for This Part of the Cycle

The fact is that we've seen an inflection point come and go for our economy's cost and access to capital. From a very long-term perspective, we've never seen rates as low for as long in such a steadily growing economy as we have for the past 20 years. That steady decline in the cost of capital for the U.S. and most other developed countries during the last couple decades culminated in then-Federal Reserve Chairman Alan Greenspan & Co. dropping the target short-term interest rate to 1% back in 2002.

Think about what a 1% rate of return on loaned capital from our government means. Would you ever consider such a low rate of return as an investment opportunity? When you get a 1% annual rate offer from a credit card company, you obviously realize that's a teaser, temporary rate at which the credit card company is offering you capital. The Federal Reserve gave our economy and every other dollar-tied economy (read: the whole globe) those teaser rates for years.

And just as the rates on the 10-year have climbed steadily higher since bottoming out around 3.5% back in 2002 when the Fed was offering that 1% teaser rate, so too have the non-teaser rates on your credit card bills, mortgage payments and any other capital you borrowed steadily climbed higher since bottoming out back in 2002 or a little bit thereafter.

The point is that rates bottomed out back in 2002. They've been going steadily higher for a few years now, which is exactly opposite of what we saw rates do during the great bull market of the last couple decades.

You seeing the synchronicity here? Rates went lower for 20 years and stocks went higher. If we've truly seen an inflection point in the cost of capital come and go, then by definition that means that rates are headed higher for the next 20 years.

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Cody Willard is the manager of CL Willard Capital Management, LLC. He is a regular guest on Fox News, CNBC and other networks, and he writes a monthly column for the Financial Times. He is also an adjunct professor at Seton Hall University and the author of TheCodyReport.net, a monthly stock market newsletter. Willard appreciates your feedback -- click here to send him an email.