Contrarian View: Higher Interest Rates and Deflation

Most analysts arguing for rising interest rates are also forecasting rising growth or rising inflation (stagflation). Contrarian view: instead of rising inflation, rising interest rates signal normalization of monetary policy. Real interest rates are going higher. The rise in rates will more than offset a pick-up in growth or inflation. The air is coming out of the bubble in asset prices.

Northman Trader posted the chart below earlier this year, the ratio of the Dow to the 10-year Treasury yield. (I've posted a similar one, most recently update here: Dow-Bond Ratio Moves Higher Again.) This chart screams quantitative easing to me. The sharp rise from 2011-2016 can be reversed if the 10-year is at 4 percent and the Dow slides to 18,000. A 30 percent decline from the top and a 27 percent decline from today.

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