A huge believer that what we read in the press is always the exact opposite of what we should expect, the universal agreement by pundits that interest rates will remain at rock bottom levels must be a signal. And the scramble for yield that has again caused a bit of a rally in long US Treasuries could be the last hoorah.

Remember when I wrote about my misgivings concerning the stock market? Worry was ignited by Goldman deciding to come out of the ‘risk-aversion’ closet. Here’s the quote that inspired that blog:

“We think it’s time to say a ‘long good-bye’ to bonds, and embrace the ‘long good buy’ for equities” announces Goldman Sachs!”

Like an idiot, I ignored the writing on the wall. Since then (as predictable as dog poop in the park) equities have suffered a serious correction. I now believe the slump is likely a premonition that rates will adjust upwards relatively sooner than anticipated and the stock market, ahead of the curve as usual, has adjusted valuations accordingly. Corporate earnings have been stronger than everyone expected (the good) but will they continue to rise as the cost of capital increases (the bad)? If rates increase rapidly, will growth turn negative again (and the ugly)?

The new writing on the wall? First warning sign for me, is when folks who got it right keep foretelling the same scenario.

“European investors are looking for alternative safe havens where they can earn a little bit more and it’s coming into the Treasury market,” FTN Financial’s Low, the most accurate forecaster of Treasury note yields last year, said yesterday. “The combination of low growth and low inflation is beneficial for bonds everywhere, including U.S. Treasuries.”

The other indicator is less subtle. While governments are trying to warn us about their intentions, banks are encouraging us to hurry up and borrow as if there’s no tomorrow.

The Bank of Canada may be thinking about raising interest rates but there’s apparently no need to because Canadians are hunkering down to cool debt obligations on their own.

“The pace of growth in household credit is no longer a reason for the Bank of Canada to move from the sidelines any time soon,” says Benjamin Tal, deputy chief economist at CIBC World Markets.

So based on what I’m reading, there will be collateral damage when interest rates begin to climb. But once the dust settles, there’s more reason to be bullish stocks again so I’ll stick to the same program I suggested (to myself) in a previous posting:

Hold on to your cash and some growth stocks….if there’s a summer rally (few and far between, but it happens) the stocks will do well, and if there’s a correction caused by rising rates throw your cash into cheaper stocks during the ordinarily slumpy summer months.