Rate Hikes May Create 'Perfect Storm'

How oil, housing, and China could all crash

"Uneven growth rates in the United States, Europe, and Japan especially compared to China are setting up a dangerous situation... Bond and currency markets have recently sounded the alarm, with dramatic climbs in bond yields hitting Germany and the U.S., while the U.S. dollar has begun to fall.

"As Europe flounders in its self-inflicted bowl of economic soup, and Japan muddles along, China continues to outpace them all, fed by still relatively low interest rates, and international capital searching for growth. But, for those who believe that China's economy addicted to cheap money, the withdrawal syndrome will be painful when it happens.

"After 9/11 the Fed flooded the world with dollars. Much of that money went to China, driven by the growth rates of the Chinese economy, and escaping what some thought would be a major Depression scenario in the United States.

"Assuming that the Chinese economy hits what is an inevitable bump in the road, that would mean that somewhere later this year, perhaps in July or August, the traditional time for financial markets to start stumbling and churning, we could be in for another Asian meltdown, as in 1997's Thai Bhat debacle.

"In the United States, million dollar homes are being financed with adjustable rates and low interest only mortgage payments... If U.S. households find themselves in a cash flow crunch, as a result of rising mortgage rates, and the Chinese economy is suddenly drained of foreign cash, being repatriated to the United States due to the lure of rising interest rates, a significant change of scenario in the markets is not just likely, but inevitable. © 2005 Joe Duarte, M.D.