Unless you believe that the real economy is such that we can have a new, secular equity and dollar bull market (like the 80s and 90s), rising interest rates are going to spell disaster for financial markets. And this morning, we are once again bouncing up against the 2.2% area on the ten year treasury. Can this economy take rising inflation? Can the mortgage market handle rising interest rates? I say no.
At some point here, all of those equity bulls out there are going to have to face the likely fact that asset values cannot always and forever be disconnected from the real economy. Furthermore, these same bulls will have to face the truth that the Federal Reserve and other central bankers do possess people who understand the risk of hyperinflation. I am not saying that hyperinflation isn’t a possibility, but by the same token some credit has to be given to central planners that while they cannot generate a recovery with quantitative easing, I believe they are also responsible enough to know when to stop it in order to save the dollar (remember Paul Volcker in 1980?).
When faced with the choice of a serious recession or hyperinflation (neither of which are ideal, I realize), I still believe that the central planners will choose a serious recession.
Of course and as always, I reserve the right to be wrong.
But in both scenarios those who recently sold gold to chase equities might be in for a rude awakening.