Investors are understandably confused about recent price action in stocks, bonds and gold. After a nearly nine-year bull market, stocks have just experienced their fourth 10% correction, and the first since January 2016. This correction is the most mysterious of all, since there is no easily identifiable cause such as the Chinese devaluation that triggered the stock market corrections in August 2015 and January 2016.
At the same time, interest rates are surging and bond prices are plummeting, yet there are no signs of inflation. Finally, gold has mostly been moving in a narrow range, which is actually quite bullish considering the head winds arising from Fed rate hikes and higher interest rates generally. So what’s going on? How can we connect all of these dots?
This link goes to my three-minute interview on Feb. 8, with Stuart Varney on the Fox Business Network. I make the point that the catalyst for the stock market correction is much higher interest rates. But higher interest rates are not due to inflation.
In fact, there is no inflation anywhere in sight. The jobs report on Friday, Feb. 2, was much weaker than was widely reported. The reason for higher interest rates is the sudden fear of huge deficits arising from the Trump tax cuts, the congressional budget-busting deal and surging defaults on government-guaranteed student loans.
The deficit implications of this triple-whammy are so horrendous that gold is showing strength despite higher rates, on fears that huge deficits and credit downgrades will erode confidence in the U.S. dollar itself. So there you have it. Higher deficits = higher interest rates = lost confidence in the dollar = plunging stock prices = higher gold prices. It’s all connected.