NEW YORK (TheStreet) -- The summer solstice of 2014 marked a record low in volatility (VIX). Meanwhile, valuations are hitting new highs (for this cycle), the economy is accelerating, interest rates are at record lows and corporate balance sheets are cash rich. It's summer time, and the living is easy ... right?
Or, is it the calm before the storm? Beneath these apparently smooth waters lie some very dangerous risks, risks big enough to sink even the most 'Titanic' and unsinkable of investment funds.
Rising interest rates are not far off. Federal Reserve Chair Janet Yellen has set a course for the Fed which includes the end of QE3 in 2014 and a rising federal funds rate in 2015 and 2016. Dramatic changes in her 3-year to 5-year plan are unlikely, as they would cast doubt on her self-confidence, on the Fed's integrity as an institution and on the reliability of the capital markets in general. Meanwhile, there is a steady drumbeat of increased inflationary pressures right now which suggests that the Fed may be behind the curve on inflation.
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Even more dangerous and unpredictable, however, is the fast-changing situation in the Middle East and its impact on oil prices, which have already risen 10% in response to the civil wars in Syria and Iraq. The war in Iraq threatens more than 2,000,000 barrels per day of oil production without which, experts predict, global oil prices are headed to the $150 per barrel to $200 per barrel per day range. Not even the mighty American consumer is immune to such a dramatic increase in oil prices. Indeed, if such price levels last for an extended period of time, then a global recession is likely to follow.