The Markets May Be Starting To Worry About Rates

“With an economy pushing $85 trillion in debt, the entire premise of the ‘consumption function,’ as well as ‘valuation justification’ for the stock market, is based on low-interest rates. However, that is rapidly ending as the rise in rates is now approaching a “danger zone” for the markets.”

As discussed in our #Macroview report yesterday, interest rates are rapidly approaching the 1.5% to 2.0% barrier, where higher payments will collide with disposable income. Historically, such has not ended well for markets.

The rise in interest rates is much more problematic than most suspect. Higher interest payments reduce capital expenditures, threatens refinancing, and spreads through the economy like a virus.

As noted by Laura Cooper yesterday:

“The writing may soon be on the wall for the buy-everything-but-bonds rally, with focus on inflation fears and subsequent Fed tightening. Yet it’s rising real yields that might prove to be the ultimate stumbling block for the risk rally.”

Little Margin For Error

Higher rates also quickly undermine one of the critical “bullish supports” of the last decade:

“In a heavily indebted economy, increases in rates are problematic for markets whose valuation premise relies on low rates.”

“Each time rates have ‘spiked’ in the past; it has generally preceded a mild to a severe market correction.

As is often stated, ‘a crisis happens slowly, then all at once.’

So, how did the Federal Reserve get themselves into this trap?

‘Slowly, and then all at once.’”

When combined with higher inflationary pressures due to stimulus injections, such becomes problematic. Higher borrowing costs and inflation compresses corporate profit margins and reduces real consumption as wages fail to increase commensurately.

While the Fed continues to suggest they will let “inflation run hot” for a while, the problem is that the real economy won’t. The impacts of higher payments and costs will derail consumptive spending very quickly, given the real economy is still massively dependent on “life support.”

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