Friday, May 08, 2009

Interest rates, commodity prices, the dollar, and the stock market

Blogger Win said...

Yesterday's weak auction and the subsequent effects upon rates are an issue for the rally. The government does not want 30 year rates to be up here, and, now that the stress tests are out of the way, there is no longer as much incentive for them to hold up the market. Rather, they may want to drive money into bonds.

I have another view on the auctions.

The entire problem experienced by the stock market and the economy over the past 7 months has been an "uncertainty" shock. People became fearful because the value of assets and the banks that held them was called into question. Assets were therefore priced on the basis of the worst that could happen. People began to anticipate economy wide deflation. For this reason the preferred asset was treasury securities. Commodity prices fell (gold, silver, especially crude oil) and the dollar strengthened. All these things were manifestations of a monetary policy that was too tight in the face of this uncertainty shock.

But the worst is now over, and the markets are beginning to realize that. The fact that yields on treasury securities are rising and that auctions are "failing" shows that people no longer expect widespread asset price deflation - that the Federal Reserve's policy of reflation/inflation is working. This is going to pull the economy out of its slump. Asset markets are slowing returning to normal. Commodity prices are strengthening and the dollar is weakening - also signs of reflation.

So for these reasons I regard rising interest rates, rising commodity prices and a falling dollar as very, very bullish for the stock market. These phenomena reflect the success of the U.S. governments reflationary policy in staving off a second great depression.


David said...

Well-reasoned and refreshingly, but not naively, positive. Thanks.

Win said...

Thanks, Carl. I very much appreciate your response.

Win said...

The only issue is - as rates creep higher, the incipient recovery in the housing market falters.

Dennis said...

How can OUR interest rates go UP and the dollar DOWN? Makes no sense. The Euro is bullish. I am confused

mral said...

because interest rates aren't the ONLY thing that determines the value of one's currency. it is merely one variable. in fact, the cuasal relationship is such that a weakening $ will HELP to drive treasury bond prices down (and hence yields up) since foreign holders of US debt are spooked by an asset class that is generating returns (i.e. interest income) that is depreciating in value (vs it's own currency).

Anonymous said...

Carl, That's a fine and very clear analysis.

I do think that gold logically also benefits from the reflation as do forex rates (up) and interest rates (up).