Interest rates right now are a joke; Banks are paying ½ to 2%. My wife and I stopped buying T-bills that were paying a ¼ percent. Interest rates usually measured risk, the lesser the risk, the lower the rate.
Look at bonds as a long term investment. The investor might be willing to take more risk to increase his rate of return. If there is no risk (because of government guarantees), the interest paid will approach zero. With inflation running in a range of around 6 to 15 percent (pick a value) bonds look like a real dumb investment.
Consider that the bond market is 5 times larger than the stock market, where is money going to go? The stock market appears to be the only option left.
The real question is, what level do interest rates need to rise to keep money in the bond market? A 10 percent rate would ruin the housing market, and a 20 percent rate would spell financial disaster for the country. Now we have the European Union printing up one trillion Euros to save the Euro. This frees up the money from bad loans (unredeemable) made to Greece. Where are investors going to put this money, in other markets? What’s a trillion Euros trying to find a home? Answer: Inflation.
Notice, governments never question markets that reach to the sky. But have one that takes an ugly dip like the real estate market or the stock market and they hold an inquisition.
Where to from here? Dow 30,000, Gold $3,000? So as the Dow Jones average rips through 40,000 next week, look for Obama to declare the recession over. Even though I am joking around here, this is the last party in town and they just refilled the punch bowl.