On a hideous day like Wednesday on the market, Jim Cramer likes to remind investors that there are still a few positives lingering out here. It is just a matter of willing to do the work to find them, such as the case with low interest rates—a big positive for the housing sector.
"The idea that rates could be headed lower, perhaps a lot lower, is something to hang your hat on. Especially at a time when many people still believe that the Federal Reserve will try to tighten in the near future, despite the fact that the global economy is in turmoil and a rate hike would do serious damage to the market," the "Mad Money" host.
That is why Cramer decided to take a closer look at what the charts predict for interest rates with the help of Bruce Kamich, a chartered market technician, professor at Baruch College and colleague of Cramer's at RealMoney.com.
First, Kamich took a look at the long-term chart of the yield for the 10-year U.S. Treasuries, a key benchmark for long-term interest rates in the past 50 years. Kamich pointed out that Treasury yields have been on a multidecade downtrend, and will continue to slide, despite talks of a Fed rate hike.
The next stop was to take a look at the yield from Moody's Triple-A bond index, another important benchmark for interest rates that is often used for the highest quality bonds out there. Kamich liked this chart because it allowed him to look at what has happened to high-quality bonds in the past 90 years.
Kamich pointed out that a bottom in long-term interest rates can take years to play out and added that the current cycle is reminiscent of what occurred in the 1940s and 50s. So, while he does believe that long-term interest rates will rise eventually, it will take a long time.
It is also important to review inflation when dealing with the topic of interest rates, because rates go higher when inflation is higher. However, rates tend to do nothing or go lower when we have no inflation or actual deflation.
Kamich took a look at the chart of crude oil futures going back to the late 1980s. On Wednesday, the price of oil dropped to a near six-and-a-half-year low, breaking the $41 level, and Kamich believes that the price can go a lot lower. In fact, he thinks oil futures could sink all the way down to where oil bottomed during the Great Recession.
Why does this matter for interest rates?
It matters because oil prices are a good indicator of inflation, so when oil is in a free fall that is a powerful sign of deflation. When there is deflation, it typically means that bond prices are headed higher, and yields will go down.
Additionally, when he looked at the chart of the TLT, the long-term Treasury ETF, it also indicated that Treasury yields could be headed lower. Kamich thinks that the TLT will keep climbing higher, which translates into lower long-term interest rates.
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"For anyone who is thinking about taking out a mortgage right now, this is a glorious chart," Cramer said.
All of these indicators put together equal a large case of deflation, coupled with charts that suggest bond prices are going higher and yields are going lower in the near future. Kamich speculated that interest rates could head down for the next three months in this deflationary spiral.
So, while this is bad news for banks that need higher interest rates to make money, it's good news for investors who need to borrow money to buy a house or want to invest in high-yield bond market equivalents.
"I think that's a very important story to tell, because it gives this market at least one bullish prop on a hideous down day like today," Cramer added.