Interest Rates - Higher?

From Bloomberg:

Marc Faber Says World Heading for `Major Inflection Point'

Global markets are heading for an “important turning point” as interest rates begin to rise within about three months and the U.S. dollar gains, according to investor Marc Faber.

Investors should buy stocks and sell cash and bonds because governments are continuing to print too much money and may create a new “credit bubble,” Faber, publisher of the Gloom, Boom & Doom report, told reporters during a forum in Seoul today.

“Instead of interest rates going down, they could start to go up, instead of the dollar being weak, it could strengthen,” Faber said. “I’m ultra-bearish on everything, but I believe you’ll be better off owning shares than government bonds.”

Further Fed Easing Could Alarm `Bond Market Hawks,' Historian Meltzer Says

The Federal Reserve’s efforts to boost the economy by expanding its balance sheet probably won’t succeed while increasing the chances of higher long-term inflation, said Allan Meltzer, a historian of the central bank.

“Sooner or later the bond market hawks are going to say, ‘How are they going to get rid of that $2 trillion of excess reserves?’ and the answer is they don’t know,” Meltzer, a professor at Carnegie Mellon University in Pittsburgh, said today in an interview on Bloomberg Television’s “In the Loop with Betty Liu.”

“They can’t do much about the near term but they can do a lot about the longer term. But they ignore that,” said Meltzer, author of a history of the Fed.

Hoenig Doubts Effectiveness of Additional Fed Large-Scale Asset Purchases

Thomas Hoenig, the Federal Reserve’s longest-serving official, cast doubt on the effectiveness of a possible new round of asset purchases to stimulate the economy, saying the costs are likely to outweigh the benefits.

Undertaking such a move without clear terms and goals “becomes an open-ended commitment that leads to maintaining the funds rate too low and the Federal Reserve’s balance sheet too large,” Hoenig, president of the Kansas City Fed, said in the text of a speech today in Denver. “The result is a further misallocation of resources, more imbalances, and more volatility.”

“These are difficult times, no doubt, and it is tempting to think that zero interest rates can spark a quick recovery,” he said. “However, we should not ignore the possible unintended consequences of such actions.”

 Comments:

If interest rates begin to rise - as Dr. Faber contends - any significant amount, it would indicate the bond market has become fearful of longer term repayment on the sovereign debt.  This seems to be in line with Dr. Meltzer's thoughts that the Fed has no credible way to get rid of massive amount of excess reserves yet will embark on more asset purchases.


Mr. Hoenig believes that more asset purchases will not stimulate the economy and in fact may have unintended consequences, as I have indicated for some time.


To think of how important the bond market is, let us conduct a thought experiment.  Consider if the 30 year mortgage rate rises from the low 4% range to 6% or so.  A relatively small rise would substantially increase mortgage payments, crush the fragile real estate market further, and bash the commercial market too.  Even more foreclosures would result with massive write offs for our impaired banking system.


Not a recipe for social stability or economic recovery to say the least.