Economist Hanke Warns Market Bubble Trigger: Higher Interest Rates

Economist Steve Hanke is warning that rising interest rates, renewed inflation pressures, and geopolitical turmoil could pose a serious threat to a U.S. stock market he says is already firmly in bubble territory.

Hanke, a professor of applied economics at Johns Hopkins University and a former member of President Ronald Reagan’s Council of Economic Advisers, told Wealthion last week that financial markets appear unusually complacent about an expanding list of economic and geopolitical risks.

“The markets seem to be quite complacent about all these risks,” Hanke said. “We can go through a long laundry list of risks and they don’t seem to be priced in.”

But Hanke sees signs that one corner of the financial system is beginning to wake up: the bond market.

He pointed to three major forces pushing bond yields higher: inflation, President Donald Trump’s tariffs, and the U.S.-Israeli war with Iran.

He noted long-term rates are high.

“Everything is geared off the 10-year bond yield, the U.S. government 10-year bond yield, including, obviously, mortgage rates.”

He noted that mortgage rates are extremely elevated and said the housing market is “quite flat.”

Hanke also said the growing federal deficit could effectively be considered a fourth factor because increased government borrowing requires the Treasury to issue more debt.

“The inflation genie is out of the bottle,” Hanke said, arguing that recent money-supply growth is running above the level he believes would be consistent with the Federal Reserve’s 2% inflation target.

Hanke cited Divisia M4, a broad measure of money supply produced by the Center for Financial Stability, which he said is growing at 6.7% annually.

He estimated that growth of roughly 5% to 6% would be consistent with the inflation target.

The implications could extend well beyond Treasurys.

Higher yields mean lower bond prices, while rising interest rates increase the discount rate investors use to value future corporate earnings. That, in turn, can put downward pressure on stock valuations.

Hanke said that dynamic is particularly dangerous because he believes U.S. equities already meet virtually every test of a bubble.

“We know the stock market’s in a bubble,” Hanke said.

“Any measure of bubbles — throw the thing up as a bubble. You take your measurement, you take your gauge, they all say bubble.”

Predicting exactly when a bubble bursts, however, is notoriously difficult. Hanke identified one potential catalyst investors should watch.

“Higher interest rates usually are associated with bubbles popping,” he said.

The economist is also cautious on bonds, arguing that investors face a difficult environment if yields continue climbing.

“Investing in bonds is not a very good idea because if the yields go up, the bond price goes down,” he said.

Meanwhile, Hanke believes oil prices could face another spike if disruptions connected to the Middle East conflict persist. He said releases and drawdowns from oil inventories have so far cushioned the impact of reduced supplies, preventing an immediate, sustained price surge.

But inventories cannot provide that buffer indefinitely.

“Once you run out of inventory, you no longer have a deficit, you have a shortage,” Hanke said.

At that point, he argued, prices would have to rise enough to reduce consumption and bring supply and demand back into balance — what energy markets call “demand destruction.”

Hanke said the bond market may ultimately provide the clearest warning about what comes next for investors.

Rising Treasury yields also feed into mortgage rates and other borrowing costs, tightening financial conditions throughout the economy.

For stocks, that creates an uncomfortable combination: elevated valuations alongside a rising discount rate. For bonds, further increases in yields would mean additional price declines.

And for oil, depleted inventories combined with prolonged supply disruptions could create the conditions for another sharp move higher.

As investors look toward the fall, Hanke said he will be watching bonds most closely.

“I think the bond market is going to call a tune,” he said.

If that tune is one of persistently higher interest rates, Hanke’s warning is clear: The pressure may not remain confined to Treasurys for long.

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