If some of this seems foreign, just plow through it, because it leads to an anecdote anyone can understand:

Dan Critchett: ‘What do you think the consequences are of the overwhelming incentive in credit markets today to avoid long-term borrowing? REITs are now borrowing zillions at spreads against LIBOR (or swapping their current long mortgages) instead of financing our shopping centers and high-rises with bonds. Corporations opt for credit lines instead of floating 15-year paper. The Federal Government doesn’t even ISSUE some of its formerly-ubiquitous long bonds. And even everyday citizens prefer to borrow at 1.9% on a 6-month credit-card special rather than refinance their 30-year mortgage. All these yield-curve surfers have to come into the shore sometime, no? Where in the world will the SUPPLY of long-term credit come from – or more accurately, at what price will it come – when, one day, everybody wants to borrow long? And what kind of mess will we have gotten ourselves into?’

☞ Let me answer indirectly with an anecdote:

I got an offer from MBNA to sign up for a credit card that would let me borrow up to $100,000 at ZERO interest for the first nine months. So I made the call, as it urged, and had them wire $95,000 to my bank account, which they did. It is now my free money for nine months, which I can put to work any way I want. All I have to pay until next January is $15, the minimum monthly payment. As tickled as I am by this bonanza (if you figure I can earn 2% on the money in 9 months, and I think I may even be able to do better, MBNA just gave me $2,000), it makes me nervous . . . just as the free running shoes that some website gave me made me nervous back during the dot-com bubble.

I hesitated to brag about this – I know I am exceptionally fortunate to be able to get this kind of credit – but I do so because, in the first place, I suppose it will not astonish you to know that I am not entirely poor just because I am entirely cheap (indeed, it may be the cheapness that has spared me from the poorness) . . . and because I think it somehow relates to Dan’s point. One of these days, the low-cost short-term money will be over, to be repaid with higher-cost money. And that could be yet one more reason that the stock market, on average, as anemic as it’s seemed to some, may not be what you’d call a bargain here. Rising interest rates, when they come, will pose a problem.


The yield curve is the line your daughter could draw in a graph that shows where interest rates are for different time periods. Usually, short-term money carries a lower rate than long-term rates. Just look in your bank window: a 30-day certificate of deposit might yield (for the sake of the curve I want you to draw in your mind) 1% interest, a 90-day CD might yield 2%, a 1-year CD might be yield 3%, a 2-year CD might yield 4%, and a 5-year CD might yield 5%. These are not real-world numbers, but do you see the ‘curve’ you could draw if you made a graph of that? Sort of like a wave.

REIT = Real estate investment trust.

Libor = London Interbank Overnight Rate (or something like that) – a floating benchmark for very short-term money.

Long bonds were the 30-year bonds the U.S. Treasury used to issue.

Coming soon: The Wisdom of Dick Davis


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