Interest rates going up means future cash flow becomes less attractive compared to current cash.
This lowers the price of stocks and bonds.
The US Gov can't afford to pay more on its debt, so I bet the rates will be driven back down eventually by the Fed, and the USD inflationary debasement will continue (and prices will resume going up).
Failing this would lead the US to insolvency and a hard default, instead of the soft inflationary one.
Bonds yes, stocks are weird though because as you mentioned inflation can cause draw downs but it also has upward pressure as well do to rising prices of assets at large. Value stocks (firms with "now" cash flows), I believe tend to do well in an inflationary environment, verses growth (firms with "future" cash flows) stocks.
Right, future earnings are discounted by interest rates meaning if you're a company whose earnings are heavily weighted towards the future, ie a growth stock (think startups who lose money but have huge valuations based on potential future earnings), you can get decimated by rate rises.
On the other hand, if you are a consumer goods stock paying a dividend, your value is much more based on the cash you can generate right now and you aren't particularly susceptible to future discounted cash flows affecting your valuation.
Your comment contains a lot of info that is not the consensus view of economists and businessmen.
Yes, interest rates going up lowers the price of bonds because "interest rates up" is mathematically equivalent to "bonds are cheaper."
The notion that changes in interest rates, which generally correlate with inflation, would alter the price of stocks is not obvious to me. Not sure what mechanism you would propose that would cause that to happen.
The US Government has the right to print USD. The notion that they could someday be unable to pay USD-denominated debts is therefore obviously wrong. Also, it is very much in the interests of exporters like China that USD remain strong, and they will likely just add the newly-minted USD to their USD reserves.
When proposing financial disasters, you can take these same types of fears and make them more plausible. E.g. propose that the US Government will overspend, weaken the dollar, cause the dollar to lose status as a reserve currency, and force future US debt to be denominated in something other than USD. Or propose that a sudden increase in inflation might cause effective salaries to decline or be uncertain, leading to a decline in consumer confidence and a recession.
Inflation uncertainty worries me the most. But I don't think there are any nightmare scenarios coming soon.
> The US Government has the right to print USD. The notion that they could someday be unable to pay USD-denominated debts is therefore obviously wrong.
That turns into a hyperinflation, though - where you print the money to pay the interest on the debt, but that creates more inflation, so interest rates go up, so you have to print more money, which creates more inflation...
The end of that process is often a total loss of confidence in the government. That in turn often leads to a change of the form of government - usually not for the better.
Hyperinflation happens when you print USD to pay non-USD-denominated debt, because you'd have to print an infinite amount. The interest rate describes how much you have to print to pay USD debt, and it's consistently not been much (or even a negative amount) for decades.
> That in turn often leads to a change of the form of government - usually not for the better.
If this is a veiled reference to Nazi Germany, that was not Weimar inflation, it was caused by deflation later. Why hard money people are terrified of hyperinflation instead of deflation, when that's worse, I don't know.
An example of a country that does everything wrong economically and has constant inflation is Argentina, but oddly it's still there and nobody seems to be overthrowing it.
It's not the only way to get there, but it is the fastest way, and an important difference between large and small countries is the US doesn't have this problem.
> The notion that changes in interest rates, which generally correlate with inflation, would alter the price of stocks is not obvious to me. Not sure what mechanism you would propose that would cause that to happen.
Higher rates -> reduced accessibility of personal credit -> lower spending -> lower corporate revenue -> higher cost of borrowing -> higher cost of debt service -> lower profits -> stock price
Rates act as a global parameter that impacts performance of companies differently, with the consensus understanding that it impacts debt-fuelled (or what we now usually call growth) companies the most.
This. As bond rates rise capital moves out of stocks over to bonds. Bonds are higher in the capital structure as well. When bond rates go absurdly low capital moves into stocks (as we have seen).
Doesn't matter. People don't invest exclusively in one of stocks or bonds, but diversify. A higher interest rate might make bonds slightly more attractive on a continuum.
This lowers the price of stocks and bonds.
The US Gov can't afford to pay more on its debt, so I bet the rates will be driven back down eventually by the Fed, and the USD inflationary debasement will continue (and prices will resume going up).
Failing this would lead the US to insolvency and a hard default, instead of the soft inflationary one.