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Pray for Higher Rates

It seems like chanting for the opposing team, but I find myself hoping that higher interest rates will come.  I have commented that the rate and equity markets seem disconnected; that rates seem to decline while equities rally.  Low interest rates make bonds look very unattractive versus stocks which implies that one of the markets is wrong.  Either a strong second dip in earnings is coming, or bonds are overvalued versus stocks.   Low interest rates signal slow to negative growth with slow to negative inflation.  Those two items make the fed take more action which means that they print more money in an effort to “stimulate” growth, the economy and inflation.  I am hoping that this is not needed.  I am hoping that we can slowly grow our way out of trouble without dousing smoldering ashes with gasoline.  The other issue that comes into play is that with a low interest rate environment, we often see investors making stupid investments.  When we all want to earn 5% in a 2.5% 10 year treasury market, we tend to invest in riskier and riskier ventures until everything is overpriced….then pop!  We saw it with the internet bubble and we saw it with the housing crisis.  We do not want to stimulate more stupid investments, we want to stimulate employment, deleveraging, exports, savings, and education.  We do not stimulate those areas with cheap financing.  So cheer with me and let us hope for higher rates so that we do not have to witness another bubble form and burst.

Could it be that rates are breaking out to the upside?!

Posted in Economics, Markets.

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