Won't Rising Rates Crush the Hard Asset Boom?

 

Conventional investors stay away from hard assets because, the argument goes, they provide no yeild.

Absolutely true.

After all, if you put a million dollars into a bank CD, after a year you have a whole $1000 for free!  Woo hoo!  The problem is that your million is worth $10,000 less in real purchasing power.  

But what if rates rise to 2 percent?  Well then you get $2000 dollars but your million is still woth $10,000 less.

But wait, what about Junk Bonds. you could get 6 percent threre, take on immeasurable risk and only lose $4000 in purchasing power over the year.

Or what about a massively debt laden dog liker ATT that pays a steady 6 precent and only costs market risk, default risk, and you still lose that pesky $4000 in purchasing power.

Arguing that thse investments will look more and more attractive as rates lift off of zero and head towards one or two percent are not very convincing.

Moreover, there are three huge flaws in the rising rate scenario.  

One is that the better part of inflation is currently the result of a massive supply chain disruption that is only getting worse, not better, as the world de-globalizes.   Raising rates does nothing to ameliorate this disruption.

Two is that rising rates slow an economy that is debt laden as the entire world economy is. especially the US economy.  The Fed's idea that this won't happen is absurd.

Three, the fable that the US consumer is in great shape only works on a average consumer basis.  The mean US consumer is debt strapped and struggling.  In other words put nine average US consumers in a room and then have Elon Musk walk in.  The average consumer in that room will be in terrific shape.  But nine of the ten are still near broke.  Or more accurately, six of the ten are near broke, three are doing fine as long as they keep working their tails off and one is super wealthy,

This means US companies will not be able to continue to pass on commodity prices to their customers as almost every analyst claims.  As earning contract and commodity inputs remain high everyone will feel the squeeze.

Thus rising rates will do much to slow the economy and very little to slow inflation.

This will do nothing to slow the hard asset boom.  

Nada.  Zilch.  

Quite the opposite.  As inflation remains high and the the economy slows, that hard asset boom will only be fueled.

If rates were to rise near the real cost of holding money, say 10 percent, then we can start to have a real conversation about hard assets slowing,

It won't happen this decade though.