Inflation, Interest Rates, And Short-Term Market View

I think at this point the chances are that interest rates will continue to rise: anybody who knows how to count, knows that the real rate of inflation is closer to 10% than the 3%-4% stated in the announced inflation data (the same goes in Europe) and that slowly, subtly, the Fed (and the ECB with a lag) will begin to acknowledge this.

Personally, as an economist, I think that the economy would be better served with short-term rates at 6% and long-term rates around 8%, reducing liquidity and, hopefully, getting the real level of inflation down to 4%-5% (2%-3% as stated is a joke).

We may be headed for a period of stagflation, or at least slowing growth and stubborn inflation in the next six months, possibly very slow growth or a mild recession in 2007.

Productivity may also rise in the meantime, supporting corporate earnings and so the stock market, and interest rates may not rise as much as anticipated, leaving enough excess liquidity to support emerging markets and international bonds.

But I think the balance of risks is on the side of recognized inflationary pressures, higher interest rates, a draining of some of the excess liquidity, a slowdown in consumption, and a slowdown in growth, at least during the next six months, possibly into 2007. A recession, albeit mild, may even be a good thing.

We'll know better by the end of this year.

Therefore, please quote me your best 3-month and 6-month CD rates at this time.