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Interest Rates Must Rise Before They Can Fall
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2008 May 29, 12:54am 23,481 views 236 comments
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Duke,
I empathize with you. I am still lost on options for 401K. looking out like you.
Danville Woman,
commodity itself, even without the intricacies of derivative contracts, is a very risky business, particularly soft commodities like agriculture, because we can "manufacture" it. DBA is an ETF and RJA is an ETN, and if you decide to get involved, these are the leading funds, so at least there are lot more eyeballs (inherent monitoring) looking at them. Before RJA came out, Rogers fund moved its account to Refco, and up till today, some clients were still not able to get back 100% of their funds. The macro factors are very favorable for agriculture, but the inherent risk in the trading mechanism is high no matter how you do it.
How to mitigate the risk? I hoard physical gold. If there is a counter-party failure that will bring down some major banks (all major banks have a substantial share in derivatives), the financial system as we know it today will just collapse. When that happens, physical gold price will shoot through the sky because we will have to resort to the most primitive and fundamental way of recognizing wealth.
Duke,
if you are faced with a poor choice of funds, TIPS is actually better than money market. No matter how the government manipulates data, the extent of inflation will have to be reflected after they exhausted all possible substitutions, changed all weighting mechanism etc.. You are just losing on the time lag, which could be a few years. And once inflationary trend is established, it won't go away soon. It will be here to stay for a while.
Money market funds just track the Fed rate, which can completely ignore the inflation data. So TIPS is the least bad instrument in a 401k account with limited choice. You should perhaps look at conversion of 401k to Roth in 2010, which opens up a whole new world of alternatives.
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Hi Patrick,
thought it would make for an interesting write up if
someone highlighted the difference between the housing
downturn in the early 80's vs today.
Back then, inflation was rampant and the only way to
stamp it out was through very high interest
rates--which subsequently pummeled the housing market.
Once inflation began to improve, it would have been a
great time to buy property as interest rates
dropped--spurring cheaper credit and ultimately
raising the value of real estate. (As opposed to the
NAR propaganda of "now being a great time to buy"
because interest rates are low)
Fast forward to today. Real estate is in a downward
spiral while inflation rages. The only way to contain
inflation will be a return to Volker-esque interest
rates.
Problem is, housing is in free fall. I suspect what
the Fed is trying to do is create a floor under
housing through inflation, then raise interest rates
to tamp it down.
While many economists see a recovery after another
10-15% devaluation of real estate, no one has touched
the potential long-term implications of current(and
near term) monetary policy and its effect on long term
price appreciation (or lack thereof) in the US market.
The net effect of this policy will be a long,
sustained bottom of prices that will not appreciate
again for years due to necessary increases in interest
rates.
It will not be until AFTER interest rates have been
raised substantially and then begin to reduce again
will we see another substantial increase in the value
of real estate in the US.
Any thoughts on why this hasn't been covered yet?
Best,
Bill A.
#housing