interest rates

Lance Roberts of STA Wealth Management was on CNBC April 30th and was in on the discussion about interest rates. One question which surfaces is whether interest rates are going up or not. The consensus is that they are going up, but Mr. Roberts makes a case for the opposite.

First, there are three components we all need to take into consideration that correlate with interest rates:
  1. Inflation
  2. Economic Growth
  3. Wage Growth
Look at interest rates as a level of demand for capital in the economy. When an economy expands, the need for more capital rises. But we are in a state of a stagnant economy. The need for more capital too is stagnant. This alone can only keep interest rates low. Mr. Roberts points out that consumption is a factor for interest rates. Consumption hasn't increased in my estimation. Levels remain flat, keeping producers from charging higher prices. If our level of inflation goes up, so will the rate at which lenders will charge for their money. So far, we've had no need for bigger capital demand.

The stock market has been going higher. This isn't a good barometer, as Mr. Roberts points out, for what really is going on in the economy when it comes to consumers. I agree. He also points out that stocks are cheap based on low interest rates. The Fed has been buying bonds for the past 4 years to keep interest rates low. We have to wonder if the Fed will continue this policy. I say yes they will as higher interest rates at this time will slow consumption. Consumption is already slow. Why would anyone allow for higher interest rates now? The Fed may be in a corner, but really the choice is clear: more bond intervention.

Rising rates, as Mr. Roberts points out, are a negative for stock market returns. Some may say the bond market is in a bubble, but the chart displays that interest rates in relation to the three components are fairly valued.

Read in the entire story by Tyler Durden on

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