Beware rising interest rates

Markets are responding to the view that the new president will stimulate the economy though increased defense and infrastructure spending. This is causing interest rates to rise, so much so that in a week's time more than $1 trillion was erased from world bond markets. With a view toward cutting taxes while increasing spending, investors are betting that the coming administration will rely on debt to finance this effort. That will lead to increased competition for funds, thereby causing interest rates to rise.

This may bode well for stocks of companies that will benefit from government stimulus but suggests that interest rates will track higher at a much quicker pace than originally anticipated. What does that mean for you?

First of all, don't panic. Interest rates remain historically low. But if you haven't refinanced your home mortgage during the past few years the time is running short for locking in an attractive interest rate. Your credit card rates are unlikely to rise because they're already astronomical! Shame on you if you're carrying a balance needlessly.

But remember that when the cost of borrowing goes up consumers often pay the price. This can come in two ways and I'll use a candy bar to explain this. You can either buy the same Snickers bar for a higher price or get less for what you've already been paying. Some consumers opt for a third choice: substitution. For example, maybe you like apples but pears are cheaper now; you substitute.

I'll provide some more on this tomorrow. Next comes inflation (which doesn't have to be a bad thing) and a stronger dollar (which isn't necessarily a good thing).