Interest Rates Are Reaching Critical Levels

Treasuries are testing multi-month lows this morning. I believe we are reaching critical levels where higher interest rates will start to negatively effect stocks and the economy. We are not at a make or break point yet, but I believe we are getting there.

What many fail to appreciate is that we are no longer in control of our own destiny. For years China and emerging markets have had a deflationary effect on us as we imported deflation. Now that they face inflation we might import inflation even if our economy is weak.

Many are hung up on the weak jobs market here insisting that it means inflation cannot happen to us. It is not our demand leading to higher commodity prices, it is theirs and it is not our rising labor costs leading to higher costs for manufactured products, it is theirs.

I do not claim to know whether inflationary or deflationary forces will ultimately win out. But I do recognize that inflation and interest rates are a risk and we are reaching the point where they might start causing problems.

11 comments:

PJ said...

That's a great point about importing inflation. That's what's been happening over the last year and it could easily continue for 10+ years.

Anonymous said...

Covered NAk @ 18.61 from average price 19.09 (+3%) OL DAWG

revelo said...

There's an easy way to test your confidence in your inflationary thesis. Which would you rather own for the next 5 years, highly leveraged real-estate, using long-term fixed rate debt, or 5 year CDs? The real-estate must be a broad-market REIT or something similar (i.e. you can cherry pick something that is clearly underpriced). Also, I deliberately limited the number of alternatives to prevent you from thinking about speculative market fluctuations, which may have nothing to do with inflation/deflation.

revelo said...

correction: you CAN'T cherry pick

nicasurfer said...

I hope aapl doesn't disappoint.

Anonymous said...

Sold GNI @ 100.12 , long from 93.50 OL DAWG

Tsachy Mishal said...

revelo,
You are the one with confidence, not me. I am saying this is a risk which is different from saying I believe it will happen. You are so certain in your deflationary thesis that you will not even consoider the possibility of other outcomes.

Anonymous said...

The market stops for no one. We could pass 1300 tomorrow.
Doug kass and the other "all in" short pundits are getting squeezed.

Anonymous said...

Dawg, when do we buy zlc again?

PJ said...

Revelo,

Why is that the test? Deleveraging is going to cause the relative prices of leveraged assets to plummet. But inflation, if it happens, will cause the overall price level to rise.

These two can be reconciled with soaring commodity prices and falling or stable real estate prices.

So you can bet on the inflation thesis, and be unwilling to hold real estate.

Anonymous said...

My strategy is to just watch ZLC for the time being. Although I didn't squeeze every move out for all I could, actually far from it, I think the major opportunities are gone on this one for now.

OL DAWG