I'm Very Confused

For those who know me, this is not an unusual state of affairs.

Earlier today I posted about rising interest rates and the bond market. International bankers are raising interest rates due to inflation fears and their strong economies. With bond prices going into the toidy today, the stock market decided to continue it's downward path of the last few days as well.

The headline explanation I'm seeing for the decline in the stock market is due to fears that, due to a "strong economy" and inflation, interest rates are more likely to go up than down in the future. But then I read this:

Sales at Macy's Inc., J.C. Penney Co. and other U.S. retailers fell in May as shoppers curbed purchases due to higher gasoline prices and a sluggish housing market.

Sales at stores open at least a year at Macy's, the second- largest U.S. department-store chain, dropped 3.3 percent, the most in 18 months. Same-store sales fell 2 percent at J.C. Penney, the third largest. Both trailed analysts' estimates.

U.S. retail sales from February through May rose at about half the pace from a year earlier as consumers reined in purchases of non-essential items such as clothing and home furnishings. The slowdown may continue into June, according to Michael Niemira, chief economist at the International Council of Shopping Centers.

So let me get this straight. The headline strong economy is causing the stock market to tank? And the headline strong economy is accompanied with stories of retail sales being down?

The current situation tells me a couple of things. First of all you have a window into how dependent the economy is on credit. If higher interest rates put a fork into a cooked stock market, it's because all those merger's and aquisitions have now become a bit more expensive. Second, if the economy is so darned strong, why are retailers struggling? Chucky (the affectionate name given to consumers by many blog writers) is two-thirds of the economy. If Chucky stops shopping, how can the economy be strong?

In standing back, it appears to me that the stagflation scenario is continuing. Some have been saying that gross domestic product bottomed last quarter. I'm not sure how that can be true if Chucky is staying home. And when you have rising interest rates to fight inflation, how can the economy be stimulated? A slowing economy + inflation = stagflation.

Added: I next ran across this handy chart that displays the amount of money being borrowed on equity in homes:


Chucky blew a mighty fine bubble is equity borrowing. Is there any question where the cash came from for all those new SUV's and plasma teevees? But it's looking like that party may be over ......