Rates Way Up & Climbing Thanks To Bush
August 6, 2003
Mid June the Fed announced a disappointing quarter point decrease in there overnight rate.
At that point yields on the key 10 Treasury note, which determines mortgage rates among others, where at an unfathomable 3.08%.
30 Year mortgages could be had under 5% without points. Bond wonks expected yields to continue down to as low
as 2.75% by the end of summer assuming the Fed would drop their rate by a half point. The day Alan Greenspan announced
the cut would only be a quarter we all got a lesson in how little mortgage rates have to do with Fed rates. In
a month since the Fed REDUCED their rate - Treasury yields have rocketed from 3.08% to 4.41%. If that leap seems
to defy logic, it does. It also defies history.
History tells us that when bond yields rise, stocks rise, usually very closely. There is
a finite amount of capitol out there and when people take money out of bonds (which drives yields up) it goes right into stocks.
While the bond yield has risen over 30% since June stocks have been fairly moribund, raising a mere 4%. Where
is the money going? Overseas where it came from in the first place.
The largest investors in this great economic engine that is the USA are emirs, industrialists and investment
managers from across the oceans who have seen America as a safe investment for close to a decade. Now however
something has changed their minds and they won't be coming back soon. The Deficite Devil has reappeared in the
land of liberty and unless you have a time machine there will be no turning it back.
On monday the government announced that it would be selling 60 billion dollars worth of bonds later
in the month. The US will be selling a lot of bonds for the foreseeable generations to float the trillion dollars
of deficit it will run between this year and next. With no reason to believe that deficits will abate investors
are assuming that any price they get bonds at today will be undercut by the glut of new bonds the treasury will have to issue
tomorrow. Thus bond prices are in a freefall with no safety net in place.
Like many Americans with children I am awaiting our tax rebate in a couple weeks. My advice
is to invest it well because that rebate and the tax cuts the so few of us are currently enjoying are costing us the prosperity
a decade of deficit reduction bought us. Say goodbye to low interest rates and the industrial as well as consumer
spending it brought. Say goodbye to the good jobs this consumer and industrial spending brought. Say
goodbye to the home construction boom which now sees more Americans than ever before owning there home.
If you don't have children under 18 and don't derive income from dividends I feel doubly sorry for you;
you are also statistically more likely to join the ever increasing unemployment statistic.
