This topic has been going through my head in one form or another for the better part of 5 years… I knew the answer but i have yet to date put my thoughts in a central place where i can look at it all at once and now there is no better place to do it than right here!

I write to clear my mind and scribe all the data into a single place i can use to look back on these thoughts years down the line in order to help me improve my judgement, skills and reasoning. I attempt to give credit where credit is due. I have always been of the mindset that you should only believe what you can verify with your own eyes/effort and reason with your own mind. The ability to not be swayed by any argument without first reasoning it yourself is of great importance for anything in life, whether personal or professional. And as such i ask that anyone reading this or quite frankly anything else online take a minute to think about it and whatever doesnt make sense, i encourage you to do your own digging and legwork.

To reason through alot of technical’s and different assets will take some time to build the logic and/or reasoning. I will have to break it into different pieces as each more or less builds upon certain previous ideas.

SO, you’re probably asking what “this” thought is?

Well, ever since about 05 when the RE mania was in full swing and i (along with everyone else) was able to see the frantic pace and stupidity with which everyone was trying to load up on RE; in the midst of all that up swing i had a matrix moment…. The kind of moment where you feel as if the world around you enters a freeze frame; you know the moment where Neo can slow down time and see the bullets coming quickly enough to get out of the way? Yeah, that one!

I had a moment where i started crunching numbers/scenarios in my head and they weren’t making sense… It was like the ah ha moment where i saw that interest rates were at record lows and house prices were at record highs (being bought with ARM mortgages)…. An atomic wedgie came to mind! I started asking myself questions and every answer kept taking me deeper down the rabbit hole…

What happens if

1) Interest rates rise?

My answer at the time: I knew we were at the lowest rates in the last 50 years (and now they are the lowest in recorded history), it was only logical to assume that they would rise at SOME POINT and since ~ 60% of RE from 02-05 was on bought on an ARM there would be alot of defaults, hence house prices would go down….. Govts (Federal, state and county) would lose income on defaulted property (since they rarely pay property tax) on a national basis there would be a major recession/depression (thinking at the time was that bc RE is a huge part of everyone’s assets it would leave a huge hole in their pocket book)…. At the time i didnt know we were in a MAJOR bubble, since rising RE prices was a major part of my adulthood, i blame it on the normalcy bias. I couldn’t pinpoint exactly what felt wrong, but i just knew that something didn’t fit….

Reality: Well, interest rates havent even gone up YET and house prices have tanked by about 50%+

My answer at that time started leading me to more questions about economics, finance, globalization and how everything fit together, since i was traveling abroad alot during that time i saw a lot of places around the world that looked like stellar deals compared to the US, and when i looked at their economies they were actually growing real jobs in engineering, the sciences and a host of other things while in the US it seemed we were only growing jobs in RE, finance and marketing…. Overseas i saw people that actually OWNED assets, like housing, businesses and gold… While the majority here in the US were just happy to have credit card bills, a huge mortgage and a leased car…

That also added to the things that didnt make sense! How could productive people in other parts of the world actually be on an equal/apparently lesser footing with us Americans when we (generalizing here on a nation wide GDP basis) rarely produced anything and live our lives with debt (US borrows .40 cents for every dollar of GDP) while they live it on equity….

It was at that time that i started reading up and studying on financial markets, currencies, interest rates and by extension gold and how they were all inter-related…. By that time RE was being referred to as a bubble so i started looking at financial bubbles, how they came about, end results, long term implications, etc, etc….

Almost all reading/research had indicated that bubbles occur from currency manipulations, since we live in a completely fiat currency world everything is inter-related to the relative “price”/”value” of an individual countries currency and wouldn’t you know???? The value of a countries currency has a huge impact on its citizenry, from the quality of their lives to the value of their salaries, savings, houses and almost everything else you can think of….

Lets start off by looking at the chart of US interest rates bc all asset valuations/returns are essentially based off of the supposed “risk free” return on treasuries; since the dollar is supposed to be “as good as gold”… Rates which can/are sooooo easily manipulated by the FED…. The value of the dollar, housing, stocks and all else is based on US interest rates…

We are in a period of low interest rates but the trend is clearly beginning to change…. Markets are cyclical, they go from periods of under valuation/apathy to over valuation/hysteria (with regard to US debt, think 1981)….. Low interest rates imply a trust in the dollar, but the fundamentals just dont stand by that view…. The market is in a complete apathy phase with regard to the interest rate it charges for US debt, bc every other sovereign debt in the market right now is f-ugly and US debt is just the least ugly for the moment…. But, there will come a time when that wont matter. I would not be surprised if we were to test the upper end of the interest rates we had in the 80′s (and possibly surpass them). And as should be clear by now, countries will enjoy low interest rates until well, they DONT… Think Greece, Spain, Italy, etc… Thats gonna come home to the US soon….

The question i began asking myself is what happens when interest rates rise? How does that impact housing, the dollar, stocks, bonds, govt (federal, state and municipal) solvency and everything else?

There is another bubble and as far as i can tell its just in the early stages of popping.

With the ruler through which all assets are priced in danger of having cataclysmic shifts in value due to the US debt position and the jar in interest rates i expect, its only prudent to start looking outside the traditional investment thesis of “average into stocks” and “investing for the long run”…. The rise in interest rates will leave alot of fixed income investors that get caught on the wrong side of that trade in deep trouble.

Since as i stated above, i believe that markets are cyclical i think we are not far off from a 1970′s/80′s type scenario where interest rates are forced higher (but this time its a market event not an engineered one) and commodities soar as the dollar loses a large chunk of value.