What If I’m Wrong About Interest Rates?

It’s clear.

The mainstream almost gets it.

It’s halfway there.

But as usual, when it comes to interpreting the direction of the market, it comes up short.

It’s the issue of whether interest rates are heading up or down. Once again, it’s our old pals at Goldman Sachs who are in the firing line…

According to yesterday’s Sydney Morning Herald:

‘The Reserve Bank may be forced to cut the official cash rate before the end of the year to beat back a wall of foreign money that has driven the Australian dollar higher, according to Goldman Sachs Asset Management’s bond expert Phil Moffitt.’

What a turnaround.

That seems to be a bit of a theme this week — the mainstream doing or forecasting the complete opposite to what it was saying just a few days before.

It really wasn’t so long ago that there was talk of Aussie interest rates going up. But now Goldman’s have suggested that Aussie interest rates could fall. It follows the news earlier this week that the four big Aussie banks had cut the interest rate on five-year fixed rate loans.

The message is simple — rates are staying lower for longer.

Oh, and forget the junk about the US Federal Reserve raising interest rates this year. The mainstream is still touting that idea, even though there’s a 0% chance of it happening.

Even if we’re wrong, stocks are still set to rise

But what about European interest rates?

Even the mainstream is on board with that story. As Bloomberg reports:

‘German 10-year government bonds rose, sending yields to the lowest on record, surpassing levels set at the worst of the European sovereign-debt crisis.

‘Unprecedented European Central Bank stimulus measures imposed to stave off deflation are boosting bonds across the region, with yields on debt from Finland to Italy falling to new lows today.’

How can we be sure interest rates will stay low?

It’s simple. Just as central banks thought that issuing more debt was the solution to a debt crisis, they’ll figure (if they haven’t already) that the solution to a low interest rate crisis is to cut rates even lower.

It seems like crazy talk.

Then again, seven years ago the idea that central banks would print money like no tomorrow probably seemed like crazy talk too.

But let’s stop for a moment.

Let’s say we’re wrong. After all, we don’t get everything right. What happens if interest rates start to rise? What will that do for company profitability and share prices?

Given our view on where interest rates are going, our answer may surprise you. The truth is it may not make any difference to stock prices at all. The market could still go up!

The non-relationship between stocks and interest rates

After that last paragraph we figure only about half the readers who opened this email are still reading.

They’ve gone away thinking, ‘He’s done it now. He wants to have his cake and eat it. Stocks go up with low interest rates, and they go up with high interest rates.’

And if you’ve kept reading to this point, you’re probably only doing so to see how we get out of this seemingly hypocritical jam.

Read the rest of this article at Money Morning