Why Higher Interest Rates Will Become a Necessity

A Weak Economy Masked By an Artificial Stock Market RallyLet’s start with the U.S. housing market. Has the recovery for it ended or just stalled?

My answer comes in one sentence: While it’s always a matter of location, only the high-end housing market is doing well, while the general market is weak.

I can see it in the mortgage numbers. People just aren’t taking loans to buy homes in the U.S. economy. In fact, mortgage applications are tumbling.

In the second quarter of 2014, Bank of America Corporation (NYSE/BAC) funded $13.7 billion in residential home loans and home equity loans—down 49% from a year earlier, when it funded $26.8 billion in similar loans. (Source: Bank of America Corporation, July 16, 2014.)

JPMorgan Chase & Co (NYSE/JPM) originated $16.8 billion in mortgages in the second quarter (ended June 30, 2014)—down 66% from a year ago. (Source: JPMorgan Chase & Co., July 15, 2014.)

And Wells Fargo & Company (NYSE/WFC) also reported a massive decline in mortgage originations. In the second quarter of 2014, it originated $47.0 billion in new mortgages—down 62% from the second quarter of 2013. (Source: Wells Fargo & Company, July 11, 2014.)

So even though interest rates continue at a record low, people are not borrowing to buy homes in the U.S. economy.

But it’s not just the housing market that is weak. The entire U.S. economy is soft…masked by an artificial stock market rally and skewed “official” government statistics that don’t give us a true picture of the unemployment situation or inflation.

We’ve all heard by now that Microsoft Corporation (NASDAQ/MSFT) is planning job cuts of almost 18,000. (Source: USA Today, July 15, 2014.) There are already 1.57 million workers in the U.S. economy who have been laid off. (Source: Federal Reserve Bank of St. Louis web site, last accessed July 16, 2014.)

Manufacturing is a thing of the past for the U.S. economy. The industrial capacity utilization rate in America is still below 80%—79.1% in June to be exact. (Source: Ibid.) Unless Silicon Valley continues pumping our technology companies at a very fast pace, the job absorption rate in this country will continue to decline.

Yes, I know the Federal Reserve has told us interest rates will be a lot higher for the U.S. economy at the end of 2015 than they are today. But ask yourself this: can the U.S. economy withstand an interest rate of even one percentage point higher?

I’m sure you will agree with me that interest rates hikes will be poison to the U.S. economy. But with inflation getting out of hand (especially food prices), higher interest rates might be necessary in the near future; interest rates will need to rise to tame inflation. And that will be the proverbial last nail in the coffin for an already weak housing market and the U.S. economy.