Rising Rates = Slowing Economy

The US interest rates have been steadily rising but things don’t feel much different. Interest rates in general are historically pretty low across the globe right now. They’ve been this way for quite some time, it might even be safe to say that low rates are the norm. The problem is that it’s not.

The low rates across the globe are at an artificially low level because the global central banks have been keeping them low to keep their economies going. If you can’t afford a $20,000 car at 7% interest a year then how about 6%? When that doesn’t work they go to 5% then 4%, well you get the picture. Japan is at just above 0% right now. It’s ridiculous.

So, when people dump a countries bonds faster than the country can print up money and buy them back themselves (yes, I know, that is ridiculous too) then the yields go up. The rates go higher as a way to entice investors to buy these bonds back but when the rates keep rising this means the investors aren’t having it. To be fair, a country can raise their own interest rates unilaterally in an effort to slow down their economy if it gets too hot or to combat inflation but in the current economic environment that is not the case.

Rising rates cause the liquidity market to dry up because the cost of borrowing money gets more expensive. This has a direct negative impact on assets like cars and houses. Both of these are leverage based assets and if you can’t get the leverage you can’t get the asset so the values will have to adjust on these items accordingly. I know that a lot of you may be thinking “but how can that be when the housing market over in my neighborhood is through the roof!?”. That may be the case now but it is important to know that on these leverage based assets the rising rates have a lagging effect on their respective markets. People can get rates locked in for a month or sometimes 2 so the data may take a while to show correlation but when it slows it slows…

The reason I bring up rising interest rates and the effects on some aspects of the economy is that the larger ticket items are going to give you a heads up as to the direction that the economy is going. If no one is buying cars, there is a problem. How would they get to work? If no one is buying houses where are they going to live? These issues can lead to other problems and so on. Good to know when making directional trades.

In conclusion, no matter what market you can think of, whether it was good or bad there is always someone making money. Doesn’t matter if the sky is falling, someone is going to figure out a way to do well. Hopefully if you can pick up on the market trends before they happen that person could be you?