It is the longest cycle we consider.  In the chart, you can see the 10 year interest rate of the US treasury bill. Watch the major ups and downs over the last 180 years. The interest rate obviously shows pretty regular  upward and downward swings. An entire cycle including a decline and an upward move takes about 60 years. The two latest ones (1861-1921 and 1921-1980) have a duration of 60 years both. The low point of the interest rate has not been exactly in the middle. In 1900, it happened 39 years after the last major high and in 1944, it happened 25 years after the last major high.

Please be aware that the article continues below the chart.

The key drivers of this long-term cycle are obviously the interest rates. Underlying interest rates have a huge impact on the markets. We will just name a couple of them: Higher interest rates make it difficult for enterprises or consumers to borrow money. At high interest rates, investors will rather invest in treasuries or bonds than in the stock market. They get a nice return in the form of interest payments. With low interest rates, the opposite holds. In this case, as it is so cheap to borrow money, usually liquidity increases much faster. This was especially the case in the years 2005-2008.

There is another important aspect to consider when looking at the interest rate cycle: Not only does the interest rate itself push the markets at any point in time. In addition, the rate of change of the interest rate has repercussions on investors’ behavior. When interest rates are falling, investors in long-term treasuries or bonds make significant gains in the underlying paper. This effect will be explained in a separate article on the mechanism of interest-bearing securities. The years 1980-2008 have been great days for bond investors overall.

As you can see in the chart, we are approaching the natural end of a 30 year period of declining interest rates. Experience shows that we can expect a turning point that will happen over the next few years or it might have already happened. This means that financial markets will enter new territory. A lot of very experienced investors will not be able to take advantage of the experience that they have collected in their life. The knowledge that is needed for the next 30 years would best be based on the years 1946-1980 which also showed increasing interest rates. Who of us has that experience? Who would still remember? We will base our forecasts on historic data from that period in time.