Food For Thought!
I received a very interesting e-mail today from a source whose observations I have found to be fairly reliable, and I wanted to give you the essence of what he had to say.
"Next week will be the beginning of one of the greatest interest-rate moves of our lifetime. That's when the Federal Reserve will meet in Washington, D.C. to decide on what to do about its official rates."
"It's a foregone conclusion that the Fed will raise rates. They've done precisely that six times in a row. But those rate hikes were a mere quarter of a point each. Now, the Fed is going to have to jack up rates much more quickly, lifting the lid on a pressure cooker that's been building up for months. They have no choice. The dollar has been falling, and events are now coming to a head."
Why Interest Rates Are About To Move Up So Sharply
"The dollar has been falling nearly nonstop for almost three years, and the largest holders of U.S. dollars are foreign investors and central banks which are getting sick of swallowing continual losses on their holdings. So now they're getting ready to cease buying U.S. dollars and U.S. dollar bonds."
"That alone is a disaster in the making because of the trade deficit which, according to a report that just came out on Friday, now stands at nearly $60 billion per month, or $2 BILLION A DAY. That's what we have to borrow from foreign investors and central banks to cover the trade deficit."
"The way we borrow is by getting them to buy our bonds. And until recently, buying our bonds was pretty much the only thing they could do with the extra billions they earned from all the goods they exported to the United States. But now they have virtually zero incentive to buy our bonds. Other choices, like the strengthening euro, are becoming increasingly attractive. The big danger: As soon as they STOP buying and begin shifting their money elsewhere, our bonds will immediately fall in value, driving interest rates higher."
"Last month, China's central bank was the first to hint at reducing their purchases of U.S. bonds. That alone was enough to trigger a mini-panic in our bond market."
"Two weeks ago, it was South Korea's central bank that caused another mini-panic when they said they might begin moving away from the dollar. Then just last week, it happened AGAIN - this time with one of America's closest allies, Japan. Just the HINT by Japan's central bankers that they were THINKING about a MINOR shift away from U.S. dollar bonds sent our bond market into a tailspin."
"And for good reason: These three countries alone hold a huge chunk of the trillions in U.S. dollars and bonds held by foreigners. Even if they hold onto every penny of their current holdings, the mere fact that they're slowing down their purchases of new U.S. bonds is an instant calamity to our bond markets. But with so much of their current holdings at risk, they're not only looking elsewhere for new purchases, they're also thinking about SELLING some portion of their massive U.S. dollar holdings."
Greenspan Is Between A Rock And A Hard Place
NO MATTER WHAT HE DECIDES NEXT WEEK, BONDS WILL PLUNGE!
"The only way Fed Chairman Greenspan can convince foreign investors to continue buying U.S. bonds is by paying them more - much more - in interest. He doesn't want to raise U.S. interest rates sharply because U.S. bonds will naturally fall sharply in price to adjust to the higher interest-rate levels."
"But if he DOESN'T do that, foreign investors are ready to stop buying U.S. bonds - or even start selling. And then, you won't just see a mini-panic in U.S. bonds - you'll see an all-out uncontrollable PANIC in U.S. bonds."
So What Should An Investor Do...?
First, get out of the way of falling bond prices and rising interest rates. If you own any long-term bonds, get rid of them - immediately. Bonds are ALREADY beginning to fall in value. After the next Fed rate hike - no matter how small or large - they're going to fall a lot more.
Second, if you must borrow, then you'd better make sure you lock down a fixed rate. Avoid adjustable-rate loans like the plague!
Third, thanks in large measure to the dollar decline I've been telling you about, investments in gold and energy are going through the roof so stick with them!
"Finally, if Mr. Greenspan decides NOT to raise interest rates sharply very soon, foreign central banks are going to start selling their dollars and dollar bonds. And when they do that, I believe there's going to be a panic in the market of dramatic proportions. But I don't think that Greenspan is going to be that stubborn. He sees the handwriting on the wall. He knows how close to pulling the trigger the foreign central banks are. So the most likely scenario is for Greenspan to finally step up to the plate and start raising interest rates more aggressively - to help prevent an all-out panic."
So there you have it and I have to wonder if anyone cares to comment on what you have read here?
* * * * *
"Next week will be the beginning of one of the greatest interest-rate moves of our lifetime. That's when the Federal Reserve will meet in Washington, D.C. to decide on what to do about its official rates."
"It's a foregone conclusion that the Fed will raise rates. They've done precisely that six times in a row. But those rate hikes were a mere quarter of a point each. Now, the Fed is going to have to jack up rates much more quickly, lifting the lid on a pressure cooker that's been building up for months. They have no choice. The dollar has been falling, and events are now coming to a head."
Why Interest Rates Are About To Move Up So Sharply
"The dollar has been falling nearly nonstop for almost three years, and the largest holders of U.S. dollars are foreign investors and central banks which are getting sick of swallowing continual losses on their holdings. So now they're getting ready to cease buying U.S. dollars and U.S. dollar bonds."
"That alone is a disaster in the making because of the trade deficit which, according to a report that just came out on Friday, now stands at nearly $60 billion per month, or $2 BILLION A DAY. That's what we have to borrow from foreign investors and central banks to cover the trade deficit."
"The way we borrow is by getting them to buy our bonds. And until recently, buying our bonds was pretty much the only thing they could do with the extra billions they earned from all the goods they exported to the United States. But now they have virtually zero incentive to buy our bonds. Other choices, like the strengthening euro, are becoming increasingly attractive. The big danger: As soon as they STOP buying and begin shifting their money elsewhere, our bonds will immediately fall in value, driving interest rates higher."
"Last month, China's central bank was the first to hint at reducing their purchases of U.S. bonds. That alone was enough to trigger a mini-panic in our bond market."
"Two weeks ago, it was South Korea's central bank that caused another mini-panic when they said they might begin moving away from the dollar. Then just last week, it happened AGAIN - this time with one of America's closest allies, Japan. Just the HINT by Japan's central bankers that they were THINKING about a MINOR shift away from U.S. dollar bonds sent our bond market into a tailspin."
"And for good reason: These three countries alone hold a huge chunk of the trillions in U.S. dollars and bonds held by foreigners. Even if they hold onto every penny of their current holdings, the mere fact that they're slowing down their purchases of new U.S. bonds is an instant calamity to our bond markets. But with so much of their current holdings at risk, they're not only looking elsewhere for new purchases, they're also thinking about SELLING some portion of their massive U.S. dollar holdings."
Greenspan Is Between A Rock And A Hard Place
NO MATTER WHAT HE DECIDES NEXT WEEK, BONDS WILL PLUNGE!
"The only way Fed Chairman Greenspan can convince foreign investors to continue buying U.S. bonds is by paying them more - much more - in interest. He doesn't want to raise U.S. interest rates sharply because U.S. bonds will naturally fall sharply in price to adjust to the higher interest-rate levels."
"But if he DOESN'T do that, foreign investors are ready to stop buying U.S. bonds - or even start selling. And then, you won't just see a mini-panic in U.S. bonds - you'll see an all-out uncontrollable PANIC in U.S. bonds."
So What Should An Investor Do...?
First, get out of the way of falling bond prices and rising interest rates. If you own any long-term bonds, get rid of them - immediately. Bonds are ALREADY beginning to fall in value. After the next Fed rate hike - no matter how small or large - they're going to fall a lot more.
Second, if you must borrow, then you'd better make sure you lock down a fixed rate. Avoid adjustable-rate loans like the plague!
Third, thanks in large measure to the dollar decline I've been telling you about, investments in gold and energy are going through the roof so stick with them!
"Finally, if Mr. Greenspan decides NOT to raise interest rates sharply very soon, foreign central banks are going to start selling their dollars and dollar bonds. And when they do that, I believe there's going to be a panic in the market of dramatic proportions. But I don't think that Greenspan is going to be that stubborn. He sees the handwriting on the wall. He knows how close to pulling the trigger the foreign central banks are. So the most likely scenario is for Greenspan to finally step up to the plate and start raising interest rates more aggressively - to help prevent an all-out panic."
So there you have it and I have to wonder if anyone cares to comment on what you have read here?
* * * * *
posted by Bob Moser at
5:22 PM
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