U.S. Interest Rates Follow Japan's Low Road

Experience is what you got when you didn't want to get it.
-- Ken Harrelson

Perhaps it is a good thing on more than one level that I did not live through the Great Depression. Not only was the time dreadful, the experience was so searing for those who did that they framed all subsequent events in their lives through that lens. Only 50 years after World War II did they discover that their experiences earned them the sobriquet "The Greatest Generation."

However, I combined secondhand accounts of the Great Depression with my own experiences of the Great Inflation of the 1970s, the 1987 crash, the 1990s deflationary recession in Japan and the two booms and busts we have had here over the past 15 years to create my own lens, displayed most recently last October.

But experience can arrive in humorous packages as well. I was on a dinner cruise on Lake Michigan in June 1996 when the company chairman sidled up to me and said, "You should write something on Japanese interest rates. They can't stay here forever."

Quite true: Three-month yen Libor was at 0.5547% back then; both the time and the rate are marked with black cross-hairs on the chart below. Please note that with only a brief and small exception in the first half of 1998, these Japanese rates did not rise over that level for good (for now, at least) until December 2006, 10 and a half years later.

Dollar LIBOR Has Room to Decline Raw data from Bloomberg

I began that Japanese history, scaled in red for both yield and time, on Dec. 29, 1989, the all-time high for the Nikkei 225. If we add the history of three-month dollar London inter-bank offered rate from the March 24, 2000, local peak in the U.S. market, scaled in blue for both yield and time, we see a sobering pattern, one first noted here in October 2002. U.S. interest rates, long-term as well as short-term, are following a Japanese path lower.

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Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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