Interest rates have soared dramatically over the last two weeks. The 10 year yield has jumped from 1.80% to 2.35%. This is the equivelant of two interest rate hikes from the Federal Reserve in less than two weeks. Normally, the stock market would collapse on this shock, but instead it has rallied.
Let me explain. The stock market is putting 100% of its faith in Donald Trump. The stock market believes that he will be able to conjur up solid economic growth. In other words, the stock market is looking far ahead and thinking things will be so good, that interest rates can be higher and it will not matter. Another way to put it is that investors view the future earnings growth in stocks to more than compensate for the higher yields they could get in bonds.
Now let's talk about a negative aspect of the rate rise. President elect Donald Trump is known for taking companies and putting them into bankruptcy. The market does not realize this but the interest rate surge may be foreign governments and entities pricing in the risk that Donald Trump may at some point reneg on the United States' debt obligations.
This would be one of the most catastrophic events ever if it happened. Again, the stock market is not thinking this way but investors looking far down the line realize the jump in rates makes that buyers of U.S. debt are demanding a higher return if they are going to purchase it.
When all is said and done, we know this is a house of cards. I do not just mean the Donald Trump presidency, but the whole system. It is a luke warm, then bust economy and it is just a matter of time until the music stops and there is no seat left to sit in.