Higher Rates Will Hurt Stocks Far More Than You Think - Part 1

Federal Reserve Chair Jerome Powell thinks the economy is awesome. And he has no problem telling us so.

What Powell will never discuss, however, is the “way-too-low-for-way-too-long” stimulus that the central bank engaged in to get here. In particular, the Fed has kept the neutral rate of interest far beneath the rate of inflation (CPI) for an entire decade. Consumers, corporations and Uncle Sam predictably borrowed as if there’d never be consequences.

What consequences? Asset bubbles.

Stocks, bonds, real estate, collectibles, cryptos, alternatives, everything. Straight across the ouija board.

Perhaps ironically, we have seen this streaming video before. “Too-low-for-to-long” rate policy in the previous economic expansion (11/01-12/07) created an environment whereby the quality and the quantity of household mortgage debt became toxic.

Granted, mortgage debt is less of an issue in the current credit cycle. Nevertheless, total household debt levels may not be sustainable at higher average interest costs.

household-debt

Meanwhile, the Federal government is making households look downright responsible. Long after the Great Recession ended, the country averaged $1.07 trillion dollar deficits (2010-2017). We’ve now hit $21.5 trillion in our national debt.

Uncle Sammy’s bar tab won’t be getting smaller anytime soon. The new tax law, which has provided a near-term kick start for economic growth (GDP), will keep the trillion dollar deficit train running for years to come.

None of this would be so ominous were it not for the rapid-fire advance of interest expense. Interest expense alone accounts for 11% of the federal budget. Just interest. No debt repayment.

Tack on higher interest rates to new borrowing needs? Pretty soon interest expense will surpass the money that goes to the Department of Defense (13.6%).

us-gross-national-debt-2011-2018-10-01

Some people maintain that debts, deficits and interest rate charges do not matter for the government. It has the power to create money and restore prosperity. (That’s a debate for another day.)

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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Seth Golden 7 months ago Contributor's comment

What’s the household debt to income ratio? Corporations can’t print money, tell that to the banks and autos that recieved bailouts. That’s not to say we weren’t on the brink when they did via the Fed, but if you don’t think the retailers will have the same demand/need and find the same treatment “next time”, ya might be fooling yourself.