In theory if we get strong signs that we are going into a recession, traditionally the stock market will correct and you will have a flight to quality i.e. bonds which will send interest rates down. Usually this results in an inverted yield curve which generally precedes that recession. It also signals the FED is getting ready to cut rates. The wild card we are facing is the global economy. We are looking at probably one of the worst housing corrections in this country’s history yet the stock market is on a bull run and interest rates are rising primarily due to the strong 4% to 6% growth in the global economy. We are also feeling the effects of a 30% drop in the US dollar and traditional foreign buyers of our bonds chasing higher yielding assets around the globe. I guess the answer to your question is “you got me”.
The thought that keeps running in my head is that much of the global economy is dependent on the good ole USA consumer. If the US consumer goes so goes the global economy. Now think about this, higher interest rates at this stage of the housing bubble more than likely will prove to be devastating. Especially California. We just had the weakest May since 1995 which was the weakest May of that entire decade. At this stage of the last housing bust of the early 1990’s the FED was already in the process of lowering rates. What would the housing bust of the 90’s looked like if interest rates were going up?? It makes a case that we are sitting on ground zero of a global economic downturn. Do you think June will be any better when interest rates just shot up?? This is really getting interesting don’t you think.
