Mike Larson here with an urgent heads up: Short-term interest rates are jumping again, while bond prices plunge to new lows!
10-year yields are jumping virtually nonstop, up 7 out of the last 9 days.
Short-term interest rates are going up even faster, rising 12 out of the past 14 days.
And next Thursday is game time. On that day, the Fed’s two-day interest-rate huddle wraps up.
All the Wall Street chit-chat — sound and fury — will suddenly turn to silence when the Fed makes its announcement at about 2:15 that afternoon.
A little history: The Fed started this whole rate-hiking campaign almost two years ago to the day. The federal funds rate was at 1% in June 2004, its lowest level in more than four decades. Now, after 16 consecutive increases, it’s at 5%. On the surface, that looks impressive — a supposedly serious, severe hiking cycle the likes of which we seldom see.
But is it? Is money really tight? Have the Fed’s rate hikes worked? In housing, yes. But so far, nowhere else.
Just consider what has happened since June 2004 …
- Gold has surged $183 an ounce — or 46%. Crude oil has jumped more than 81% to $69 a barrel. The price of everything from platinum to copper to gasoline to aluminum to steel has skyrocketed.
-
Consumer inflation has accelerated from 3.3% to 4.2%. Wholesale inflation has climbed significantly, and so have import prices.
- Investors’ appetite for risk has exploded. They have shown little hesitation in paying sky-high prices for ridiculously risky junk bonds, mortgage investments and debt with skimpy collateral.
- Bond traders have refused to pass through a big chunk of the Fed’s hikes. Ten-year Treasury yields have climbed less than 60 basis points, despite a 400 basis point rise in the funds rate.
If anything …
The Fed Needs
A Megadose of
Steroids
Typically, if the Fed were really out to score …
We’d see the Dow falling a few hundred points at a time, not just 100.
We’d see high-risk debt get crushed.
We’d see concrete evidence, besides weak housing data, that the global economy was really slowing.
So far, though, we’ve seen none of this. If anything, the Fed has just been punting, weak at the knees, needing a megadose of steroids.
Indeed, all we’ve experienced is some corrections and pullbacks. But they’re blips on the radar screen. If money were truly tight, we’d see much bigger declines. And only in that scenario would the Fed be ready to end its rate hiking.
That leads me to one — and just one — conclusion: The Fed is not only going to hike short-term rates next week … it’s going to do it again, and again, and again. The whole “one and done” idea is pure fantasy!
When and how can the hikes end? Only when and if the Fed stops its water torture and starts jacking rates up much more quickly, getting ahead of the curve. That’s what Fed Chairman Paul Volcker did in the early 1980s to stop inflation cold. Even “Easy Alan” Greenspan threw in a few 50-point hikes — and a 75-point hike — in the 1994-95 tightening cycle.
But right now, I don’t think the latest crop of Fed governors has it in them. They should have acted aggressively a long time ago to keep the housing boom from turning into a housing bubble … to keep oil from climbing to $40, $50, $60, and higher … and to keep wild speculation from infecting the stock and junk bond markets.
Yet they didn’t. So there’s no reason to think they’ll suddenly come up with a new game plan now. They’ll probably stick to that same old predictable play — a 25-point increase.
What about that “no hike” idea? In my humble opinion, it’s baloney. Not only is U.S. inflation still going strong, central banks around the world are still tightening their OWN short-term rates.
|
Lots of Central Banks Are Raising Rates: |
| United States |
| Canada |
| European Region |
| Sweden |
| India |
| Denmark |
| Hungary |
| Norway |
| Switzerland |
| South Korea |
| South Africa |
| Peru |
| Colombia |
| Israel |
| Jordan |
| Turkey |
The European Central Bank just raised rates a third time to 2.75% … Bank of Japan officials hinted at an imminent hike … and a series of second-tier central banks have also raised rates.
In short, it’s the first synchronized, global interest rate-hiking cycle we’ve seen in years.
That puts the Fed in an incredibly tough spot. It knows that the domestic housing market is falling apart, but the global economy is still going strong.
The Fed can’t afford to stand pat next week. A Fed pause, coupled with ongoing hikes overseas, would allow foreign interest rates to rapidly catch up to — or overtake — our rates. That, in turn, would likely prompt foreign investors to shift their money to higher-yielding economies and investments overseas.
The result: A fresh dollar decline. Nasty, eh?
How to Protect Yourself
I hope you’ve prepared yourself for this. Personally, I’ve been warning everyone I know to avoid adjustable rate mortgages like the plague and to cut back on spending and pare back debt. That advice is as good now as it was back in June 2004. Plus, two more important steps:
Step 1. Steer clear of the stocks that are most likely to get clobbered in this environment. Late yesterday, Martin and Tony recorded a special audio alert on these dangers with very practical, specific instructions on how to protect yourself. If you’d like to hear it now, just turn on your computer speakers and go to this page.
Step 2. Continue to keep your fixed income money in short-term instruments. Those include money market accounts, short-term bank CDs at highly rated institutions, and short-term Treasuries.
Here’s our list of the banks that merit the highest and lowest Weiss safety ratings. Or, for a free rating on your bank, visit www.WeissWatchdog.com. Just be sure you have the full name and state of domicile.
Also take a close look at our list of money market funds that invest exclusively in short-term Treasuries or equivalent. The advantages: No state income tax and no early-withdrawal penalties.
Until next time,
Mike
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