Mounting Pressure
at Fed Meeting
Martin D. Weiss, Ph.D.
The last time I saw the Fed under such tremendous pressure to raise interest rates was when Paul Volcker was Chairman and interest rates were surging into the double digits.
The official U.S. inflation rate was running at a much quicker pace back then. But the worldwide demand for energy was tamer, and the average American home wasn’t the object of a speculative frenzy like today’s.
Moreover, in those days, the inflation stats being put out by the government were more or less accurate. In this cycle, they’re a joke.
As Larry Edelson told you last week and as Tony Sagami explained yesterday, the single largest factor in the government’s Consumer Price Index today is a BLATANT error — a so-called “decline” in the cost of housing! It’s crazy.
Looking back, I remember the Volcker days well. I was 35 at the time, living in Japan and working for Wako Securities, a major brokerage firm.
Early one morning, from the din of a trading room in Tokyo, I called my father, who was watching the same markets from the States.
“The asset bubbles over there are out of control,” I said. “Volcker is going to have to do something dramatic. He’s going to have to shock the market.”
This week, nearly on the eve of the Fed meeting that’s now in session, Volcker’s successor, Alan Greenspan, got a similar message, this time from Geneva, Switzerland.
The Bank of International Settlements (BIS), the “central bank” of the world, declared that the Fed and other central banks must take ACTION to raise interest rates more sharply and more quickly. This, they say, may be the ONLY way to combat rising asset prices, especially in housing.
They see energy prices going through the roof. They see housing markets transformed into a gambling casino.
In effect, the Bank of International Settlements is saying to Mr. Greenspan the same thing I said in the last interest-rate cycle: The asset bubbles are out of control in the U.S. and around the world. You have to do something more dramatic. You have to shock the market.
Mr. Greenspan is under no obligation to heed their warnings. So when the Fed announces its decision tomorrow afternoon, there’s no guarantee that it will include the necessary shock treatment.
But the lesson from the Volcker days is unmistakable: The longer Greenspan stalls and procrastinates, the greater the shock will have to be.
Reuters, reporting on the warnings from the Bank of International Settlements, puts it this way:
“The world economy, awash in cheap cash, risks a nasty market disruption if central banks do not act soon to raise interest rates, and governments to cut spending, the world’s central banker warned on Monday …
“In the United States, the Federal Reserve may have to step up its pace of monetary tightening to combat fast-rising asset prices, particularly housing, and early signs that corporations have more pricing power, the BIS said.”
This is precisely what I’ve been warning you about. So make sure your cash is stashed in short-term instruments. This protects you from price declines caused by rising rates AND lets you benefit promptly from the higher yields. (See my Safe Money Report for detailed instructions.)
Then, with money you can afford to risk, transform the interest-rate rise into a major profit opportunity. If you have any assets that are vulnerable to rising interest rates, such as investment real estate, it can be a good hedge. If not, consider it a speculative play.
BIGGER Debt Squeeze!
Michael Larson
At the heart of America’s speculative frenzy is the fact that Americans spend far more than they earn.
We now owe a staggering $10.5 trillion on our mortgages, credit cards, home equity loans, car loans, and more — the highest level in history, more than double what we owed just 10 years ago.
Up until recently, however, the cost of SERVICING that debt was tolerable. Low interest rates kept monthly payments affordable despite the skyrocketing amount of debt being added.
No more! Now, interest costs are mounting and Americans are facing a bigger debt squeeze.
Indeed, startling figures just released by the Federal Reserve show consumers are now shelling out the biggest proportion of their incomes EVER on debt payments.
Just look at this chart:
For specific trading recommendations to profit from this massive megatrend, see our Interest Rate and Currency Trader.
The chart shows the U.S. “household debt service ratio” — how much of the average household’s disposable personal income goes toward debt payments on everything from mortgage to consumer debt. In the first quarter, it hit 13.4 cents on the dollar — the most ever.
And that’s just an average! If you factor out the wealthiest families, you’ll find that typical homeowners are spending 40%, 50% … even 60% of their incomes on their mortgage payments alone — to say nothing of their other debts.
Now, think about what will happen starting tomorrow when the Fed raises interest rates for the ninth time in a row! It will inevitably drive monthly payments still higher on a wide range of variable-rate debts — credit cards, adjustable rate mortgages, and home equity lines of credit.
In other words, an even BIGGER debt squeeze!
Auto Parts Industry Hit Harder
Tony Sagami
Last Wednesday, we shined a spotlight on the auto parts industry and their troubled pension plans. This week, auto-parts supplier Lear Corp. (LEA) announced plans to layoff 7,700 employees, close five plants, and outsource those jobs to Asia to cut costs.
Given the disastrous troubles at Ford and General Motors, the fact that Lear is suffering should come as no surprise.
Lear CEO Bob Rossiter explains, “We are implementing this restructuring plan to improve our overall competitive position in light of extremely challenging industry conditions.”
“Extremely challenging.” Does that sound like business is about to turn around? Not exactly.
That’s probably why both Moody’s and Standard & Poor’s have put Lear debt on credit watch for a possible downgrade. Standard & Poor’s explains it this way:
“Even before Lear’s announcement that it would restructure operations, Standard & Poor’s was already concerned about the company’s weakened financial performance due to lower production levels by its two largest customers.”
Don’t forget to connect the dots to other auto parts suppliers, like Visteon (a Ford spin-off) and Delphi (a GM spin-off).
As we told you last week, if you’re holding onto any auto or auto parts stocks, it’s time to let go.
Wishful Thinking at Micron
Tony Sagami
For the last two years, the U.S. has imposed a 44.7% tariff on chips that are imported from South Korea’s Hynix, the #2 producer of DRAM chips behind Micron Technology.
Today, the World Trade Organization (WTO) upheld the validity of those steep tariffs against Hynix for unfair trade practices.
The reasoning behind the tariffs: South Korean government-controlled banks loaned billions of dollars to bail out Hynix when it was bankrupt. Those subsidized loans breached WTO regulations because they gave Hynix an unfair advantage over Micron.
Indeed, those subsidies have helped Hynix become the second largest DRAM chipmaker in the world and make life miserable for Micron.
So today, thanks to WTO ruling, Micron and the Micron bulls are jumping for joy. According to Micron CEO Steve Appleton, the decision represents “a tremendous victory.”
But anybody that believes that — including the bulls that are dogpiling into Micron as a result of the decision — just haven’t done their homework. Here are the facts:
1. First of all, the U.S. has ALREADY been imposing those tariffs for a year and they have done LITTLE OR NOTHING to help Micron become a profitable company. I say that because:
==> In 2000, Micron pulled in $7.3 billion of sales. In the last 12 months, Micron generated only $4.8 billion in sales.
==> During the height of the tech boom in 2000, Micron made $2.3 billion in profits. Just last Friday, Micron announced that it lost $127.9 million in the most recent quarter.
2. The tariffs only apply to Hynix chips made in South Korea. But South Koreans have already outsmarted Micron. They’re building a chip plant in Eugene, Oregon. And the chips made in Oregon are not subject to the tariffs. Hynix itself says their chips made in the U.S. will cover the majority of the chip supply to the U.S.
Clearly, today’s ruling from the WTO is only an important event to the Wall Street knuckleheads who are too lazy to do their homework.
Anybody crazy enough to pay 45 times earnings for a company with a top line that has SHRUNK from $7.3 billion to $4.8 billion and with a $2.6 billion LOSS in the last four years needs to get his head examined.
If you own Micron, I believe that today’s rally may be the best opportunity to get out.
Best wishes,
Martin D. Weiss, Ph.D.
Michael Larson
Tony Sagami
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Michael Larson is Associate Editor for Interest Rate and Currency Trader and is a regular contributor to Martin Weiss’ Safe Money Report. Tony Sagami is the owner of two technology companies and the president of Harvest Advisors, a money management company.
About MONEY AND MARKETS
MONEY AND MARKETS is written by the editors and financial analysts at Weiss Research. To avoid any conflict of interest, our editors and research staff do not hold positions in companies recommended in MAM. Nor does MAM and its staff accept any compensation whatsoever for such recommendations. Unless otherwise stated, the graphs, forecasts, and indices published in MAM are originally developed and researched by the staff of MAM based upon data whose accuracy is deemed reliable but not guaranteed. Any and all performance returns cited must be considered hypothetical. Contributors: Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, David Dutkewych, Larry Edelson, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Anthony Sagami, Julie Trudeau, Martin Weiss.
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