inflation and interest rates...

Reading the winterwatch today, several thoughts occurred to me.

The first was regarding interest rates rising around the word. The reason that most countries around the world are raising interest rates is because dollars are flowing into their economies.

The second insight I had was that if there's a flight to safety, the dollar will go up.

It seems that everything is a bet on the dollar going down: oil up, carry trade, gold up, DJIA up, metals up, emerging markets, Euro, Pound Sterling, Yuan, Australian $, New Zealand $, etc. A flight to safety will destroy all these bets, and the best thing to hold will be US $. Is it close to the time for a flight to safety? (A real one, not like February or last May) US Treasury bonds are usually a barometer of the demand for safety. Lately, Treasury bond prices have dropped. The flight to safety hasn't happened yet; in fact the bond market is very slightly on the side of a flight to safety. With the recent run up in bonds, the bet on a flight to safety has gotten smaller.

Should there be a flight to safety? Probably not; there are many things which show a great trend without being ridiculous right now: industrial commodities, global growth, the US stock market. The problems are in homebuilding and subprime mortgage lending. To a lesser extent, we will see problems in hedge funds and the financial sector. However, problems in housing don't necessarily translate into problems for the stock market.