1. Inflation – persistent inflation at or above 5% has never existed with securities markets as overvalued as they are today. Three things will probably keep inflation high: rapidly rising rents and housing prices, much higher electric rates because of the rapid rise in the price of natural gas, and rising wages, which cause business owners to pass on those costs to consumers.
2. Rising Interest Rates – the real return on bonds is negative, as the rate of interest that bonds pay is less than the inflation rate. Since investors expect a positive return from bonds, bond yields must rise. Eventually, the Federal Reserve Bank will need to raise interest rates to constrain inflation (see above). Rising interest rates kill securities markets.
3. Diminished Economic Growth – economists, now know, that there is a direct correlation between total debt in an economy and future economic growth. In the last three recoveries from recessions before March 2020, economic growth has averaged 3.6%, 2.8%, and 2.3%. This entire period was a time of steadily increasing debt as a percentage of the Gross Domestic Product. The United States’s rapid economic growth since March 2020, which gets attributed to a significant increase in debt, may soon wane. There is evidence that this may be happening already.
