samwheat
12-07-2004, 10:52 PM
Here is an important article By Michael Dogariu
The Fed Faces A Dilemma (http://www.gold-eagle.com/editorials_04/dogariu120304.html)
http://home.flash.net/~rhmjr/index.html
The hidden danger of the stock and bond market may cause some serious market moves this winter. I will try to keep a complex situation very simple.
The Fed is in a vice presently as they have no more room to cut interest rates as the Fed Funds Rate is already perilously close to zero. If it were not for the supporting of the markets, we would be faced with a deflationary spiral a la Japan, only much worse.
Interest rates cannot be adjusted to negative levels. In order that the Fed is not cast onto the trash heap of history, it [has] only one saving alternative. Interest rates must be orchestrated up. Despite knowledge of this, the Fed allowed rates to stay low, while simultaneously flooding the market with liquidity to make sure that the economic bias would shift into an inflationary mode. If this strategy is successful, the Fed can then raise rates to arrest inflating price levels, while still maintaining some attraction of foreign capital via higher interest rates -- and thus making the current debt owed cheaper.
We are at the starting point of this cycle now. The dangerous ramifications of the Fed's actions in keeping rates very low for such a long period of time is they have created real estate and debt bubbles. Individuals and corporations have borrowed the cheap money offered, and in many cases spent beyond their means to repay.
Low rates and high amounts of money creation through printing of it, loaning of it, etc., create inflation. The definition of inflation is an increase in the volume of money; the associated price increases are the result of the money inflation. We now have inflation on the grandest of scale, resulting in higher prices for gas, food, real estate. The above creates yet another dire problem. The Fed's action of raising rates will eventually and negatively affect the bond market and the dollar, which are the supports beneath the real estate market and the debt bubble. Imagine the financial plight of about 30% home owners with variable rate mortgages on their homes, who will be faced with the prospect of house payments going up in the hundreds of dollars per month. At some point, even the lucky ones that are able to keep their jobs could suffer the inability to amortize their home loans., resulting in painful foreclosures…(ie they lose their homes).
<CENTER>http://home.flash.net/~rhmjr/c1206-dogariu.gif</CENTER>
The Fed is facing a ominous dilemma. The Fed knows that it cannot continue to inflate the bubbles, if bond prices continue to slide as the buying demand dries up. One must appreciate the humongous size of the bond market. It is much bigger than the stock market, which includes sundry money instruments the banks buy to be able to loan money to you for mortgages, cars and to corporations for their financing. To be sure the bond market has many other uses in our system, including foreign currency swaps and payment settlement for commodities such as oil.
Here is the hidden danger I see that may soon appear. Locked into its strategy, the Fed must keep the bond prices stable. Otherwise falling bond prices would scare away the domestic demand, and much more importantly foreign investment capital. Japan and China, the biggest buyers of our bonds, would run for the hills and not come back until stability returned which might be years later. When the Fed finally raises interest rates (as indeed they must), bond prices will inevitably fall. There is only one way to keep this from happening, albeit a very short-term fix. You allow the stock market fall as you raise interest rates. The Fed's strategy is simple. As investors flee stocks in panic, they would seek 'safe haven' in the bond market, and therefore keep the bond market artificially propped up -- and at least temporarily stable. Of course the hapless investors still holding stocks will be big losers. TAKE PRECATION [that] you [are] not one of the losers. There is also a Part 2 to this story, which would materialize after the stock market falls. Part 2 would include the eventual fall of the bond market, and ultimately real estate. All this will happen as rates go up…it is just a matter of when. The Fed is just buying time, while trying to engineer the slowest burn possible.
Because the Fed will surely be slow in implementing the rising interest rate cycle, this will virtually guarantee that inflation will not be stemmed any time soon as the Fed will be 'behind the curve'. This guaranteed inflation cycle will bring higher prices in hard assets.
This article barely touches on some of the reason's why you must protect yourself by diversifying your asset allocation. I know many people who have all their assets in one or two mutual funds, while having virtually zero equity in their homes, and no other assets to speak of. Diversification is the key to future security.
Things like gold, silver, zinc, copper, natural gas, oil, uranium, grains, water, cotton, coffee, and other commodities are a good place to diversify into. Gold and silver are easily purchased, and in my opinion should be a part of everyone's investment portfolio. The companies that produce the aforementioned materials will provide high leverage to the sector. To be sure, picking the right ones takes some skill. Investors may look to some well-known mutual funds smart management. Additionally, there are some outstanding newsletters that research commodity stocks that can help in putting together a good portfolio. Some non-dollar investments in stable foreign currencies are also a good place to research.
Inevitably the necessities of life will suffer inflation going forward. On the other hand, luxury items might be subject to deflation . The latter would include real estate in trendy areas and in the suburban mini-mansion market…but that is a subject for another day.
The Fed Faces A Dilemma (http://www.gold-eagle.com/editorials_04/dogariu120304.html)
http://home.flash.net/~rhmjr/index.html
The hidden danger of the stock and bond market may cause some serious market moves this winter. I will try to keep a complex situation very simple.
The Fed is in a vice presently as they have no more room to cut interest rates as the Fed Funds Rate is already perilously close to zero. If it were not for the supporting of the markets, we would be faced with a deflationary spiral a la Japan, only much worse.
Interest rates cannot be adjusted to negative levels. In order that the Fed is not cast onto the trash heap of history, it [has] only one saving alternative. Interest rates must be orchestrated up. Despite knowledge of this, the Fed allowed rates to stay low, while simultaneously flooding the market with liquidity to make sure that the economic bias would shift into an inflationary mode. If this strategy is successful, the Fed can then raise rates to arrest inflating price levels, while still maintaining some attraction of foreign capital via higher interest rates -- and thus making the current debt owed cheaper.
We are at the starting point of this cycle now. The dangerous ramifications of the Fed's actions in keeping rates very low for such a long period of time is they have created real estate and debt bubbles. Individuals and corporations have borrowed the cheap money offered, and in many cases spent beyond their means to repay.
Low rates and high amounts of money creation through printing of it, loaning of it, etc., create inflation. The definition of inflation is an increase in the volume of money; the associated price increases are the result of the money inflation. We now have inflation on the grandest of scale, resulting in higher prices for gas, food, real estate. The above creates yet another dire problem. The Fed's action of raising rates will eventually and negatively affect the bond market and the dollar, which are the supports beneath the real estate market and the debt bubble. Imagine the financial plight of about 30% home owners with variable rate mortgages on their homes, who will be faced with the prospect of house payments going up in the hundreds of dollars per month. At some point, even the lucky ones that are able to keep their jobs could suffer the inability to amortize their home loans., resulting in painful foreclosures…(ie they lose their homes).
<CENTER>http://home.flash.net/~rhmjr/c1206-dogariu.gif</CENTER>
The Fed is facing a ominous dilemma. The Fed knows that it cannot continue to inflate the bubbles, if bond prices continue to slide as the buying demand dries up. One must appreciate the humongous size of the bond market. It is much bigger than the stock market, which includes sundry money instruments the banks buy to be able to loan money to you for mortgages, cars and to corporations for their financing. To be sure the bond market has many other uses in our system, including foreign currency swaps and payment settlement for commodities such as oil.
Here is the hidden danger I see that may soon appear. Locked into its strategy, the Fed must keep the bond prices stable. Otherwise falling bond prices would scare away the domestic demand, and much more importantly foreign investment capital. Japan and China, the biggest buyers of our bonds, would run for the hills and not come back until stability returned which might be years later. When the Fed finally raises interest rates (as indeed they must), bond prices will inevitably fall. There is only one way to keep this from happening, albeit a very short-term fix. You allow the stock market fall as you raise interest rates. The Fed's strategy is simple. As investors flee stocks in panic, they would seek 'safe haven' in the bond market, and therefore keep the bond market artificially propped up -- and at least temporarily stable. Of course the hapless investors still holding stocks will be big losers. TAKE PRECATION [that] you [are] not one of the losers. There is also a Part 2 to this story, which would materialize after the stock market falls. Part 2 would include the eventual fall of the bond market, and ultimately real estate. All this will happen as rates go up…it is just a matter of when. The Fed is just buying time, while trying to engineer the slowest burn possible.
Because the Fed will surely be slow in implementing the rising interest rate cycle, this will virtually guarantee that inflation will not be stemmed any time soon as the Fed will be 'behind the curve'. This guaranteed inflation cycle will bring higher prices in hard assets.
This article barely touches on some of the reason's why you must protect yourself by diversifying your asset allocation. I know many people who have all their assets in one or two mutual funds, while having virtually zero equity in their homes, and no other assets to speak of. Diversification is the key to future security.
Things like gold, silver, zinc, copper, natural gas, oil, uranium, grains, water, cotton, coffee, and other commodities are a good place to diversify into. Gold and silver are easily purchased, and in my opinion should be a part of everyone's investment portfolio. The companies that produce the aforementioned materials will provide high leverage to the sector. To be sure, picking the right ones takes some skill. Investors may look to some well-known mutual funds smart management. Additionally, there are some outstanding newsletters that research commodity stocks that can help in putting together a good portfolio. Some non-dollar investments in stable foreign currencies are also a good place to research.
Inevitably the necessities of life will suffer inflation going forward. On the other hand, luxury items might be subject to deflation . The latter would include real estate in trendy areas and in the suburban mini-mansion market…but that is a subject for another day.