The selloff in the equity market should be expected. None of us should be surprised…and why you ask? Here are several reasons why:

1. Interest rates (and the fed funds rate in particular) were so low, for so long that it made money “cheap” and induced a borrowing frenzy of epic proportions. The effective fed funds rate dipped below 2% for the first time in almost 40 years. (For those unfamiliar with the fed funds rate, it is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions, usually overnight.)

From a “macro” standpoint, promoting low interest rates will give corporations the incentive to borrow which in turn creates an expansionary environment thus higher economic growth. And, as you will see later, higher cash flows and earnings growth will lead to higher asset prices.

2. Inflation rates never forced …

By Jennifer Yousfi Managing Editor European stocks were gutted yesterday (Thursday) as banks took heavy losses in the face of more hawkish inflation comments from European Central Bank (ECB) President Jean-Claude Trichet that put pressure on already struggling financials. The Dow Jones Stoxx 600 closed down 2.6% to 288.48, the worst finish for the Eurozone index since October 2005. The FTSEurofirst 300 had a 2.5% drop, to close at 1,197.02 points, its largest one-day percentage drop since mid-March, Reuters reported. Regional indices faired the same, as the Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted declines. "Overall, there is unprecedented confusion as investors seek to weigh up credit-led deflation against commodity-led inflation – with the unknown factor being how close we are to our commodity/infrastructure constraints to growth," analysts at Credit Suisse ...

By William Patalon III Executive Editor Money Morning/The Money Map Report The U.S. Federal Reserve will be in the spotlight again this week - and not because of those speaking engagements that seem to help whipsaw investor emotions. Tomorrow (Tuesday) and Wednesday, central bank Chairman Ben S. Bernanke will meet with his fellow policymakers on the interest-rate setting Federal Open Market Committee (FOMC). After one of the most aggressive rate-cutting campaigns in its history - a stretch that’s seen the Fed pare its benchmark Federal Funds rate from 5.25% in mid-September all the way down to 2.0% today - most experts believe the central bank’s next move will be to take interest rates higher to blunt inflation. But few of these Fed-watchers are willing to predict that the increase will be made now, or even in August, although the interest-rate-futures market is ...

Speaking of higher inflation (see previous post) ... there are so many bad outcomes that could come from this especially in an economy which needs its life blood of "cheap money" to exist (solve problems).... I cannot even begin addressing all the myriad issues but let me throw one out - long term rates will be going up as inflation expectations pick up; and you know what is tied to long term rates - mortgages. So what happens to home prices when mortgage rates go up? They must go down - because higher rates means it costs more to own a home. Oh dear. Housing recovery of spring 2008, err summer 2008, err fall 2008, err spring 2009, here we come. But never fear the statistics show a "surprising increase in home sales" in certain areas - they forget to look behind the curtain and mention that these are

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