Several weeks ago DOW 16,000 was a foregone conclusion…it was practically guaranteed. Now the DOW’s wildly spiking and diving above and below 15,000. What gives?
From what we gather, markets are anxious about what central bankers can and can’t do to suppress interest rates. After five plus years of a Fed funds rate at practically zero and 10 Year Treasury yields bumping along around 2 percent for the last 20 months, the feeling this can’t last forever has begun to set in. Alan Greenspan’s even talking about it.
Perhaps the economy is improving and no longer warrants all the monetary stimulus. Or maybe a mass devaluation is approaching. Regardless, rates must eventually rise. But what are the consequences?
No doubt, asset prices have been inflated by ultra-low rates. Take the housing market for instance. Low rates first cushioned the fall. Then they floated prices back up.
So what will happen when rates normalize to 4 – or even 6 – percent? Connecting the dots brings us to the very simple conclusion: when rates rise, prices will fall. Continue reading
