FXstreet

Investors have a short memory when it comes to stock market crashes. For a simple reason: crashes do not last long, as central bankers come to the rescue with lower interest rates that make alternative investments less appealing. The trouble is that central bankers don’t lower interest rates, forever. In fact, they raise them as soon as there are signs that the economy is overheating and inflation heads above official targets.



In either case, higher interest rates raise the cost of funds, especially for investors borrowing from their brokers to up their equity bets, at times of euphoria (margin borrowing). Higher interest rates, in turn, set the stage for the next stock market crash, as alternative risk free investments become more appealing than stocks.

The trouble is that long term interest rates are rising again. The 10 year Treasury bond yields have climbed from 1.46% in July 2016 to 2.93% this week.

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