Curiously, the prospect of higher
interest rates is good for stocks....at least that is the conculsion you'd get by reading the pundits today.
The argument seems to be:
If Greenspan raises rates, the dollar will be bought, bonds will be well bid, and rates stay low. Indeed, that PARADOX was the big story of 2004.
THUS, HIGHER RATES IN THE US, ARE THE KEY TO GLOBAL PROSPERITY!
So, why is Greenspan being so "measured" in giving the world and the markets what they obviously want.....
Well, because it's a Catch-22.
Sooner or later, the beloved high rates, high dollar start to impact the consumption side of the economy.
People buy less, real estate becomes harder to finance.
And when consumption falls in the US, those "export economies" of China Japan and most of Asia and even Euroland fall off a cliff! Hence, all of this gloom and doom in Asia and Europe recently.......
So, as rates go up, Asia and Europe get gloomy, and they buy dollars!
And this helps the US dollar, bond market, and perhaps keeps oil prices lower.
IN SHORT, GLOBAL INVESTORS LIKE HIGHER YEILDS ON DOLLARS, BUT THAT VERY FACT REQUIRES SLOWER AMERICAN GROWTH...... WHICH THEY DON'T LIKE,
SO WHAT BENEFITS THE DOLLAR AND BONDS SHORT TERM, MAY NOT BENEFIT STOCKS IN THE LONGER RUN.
THEREFORE, A STRONG DOLLAR IS BAD FOR STOCKS BECAUSE IT MEANS HIGHER RATES ARE KICKING IN.
AND A WEAK DOLLAR IS BAD FOR STOCKS BECAUSE IT MEANS WEAKER BONDS, AND EVENTUALLY HIGHER RATES TO BOOST THE DOLLAR. That's why economics is the "dismal science!" You can't win.
But a lot of this is simply background noise in the long run....
The real issues are debt, deficits, productivity, wages and political and corporate corruption.
These core numbers and notions will trump the short term "paradoxes" eventually..... But often it takes a very long time for markets to "go rational."
And when they do it's often quite "Sudden" and you're usual "broke" from trying to figure this all out!
