Lock In Rates Now

Reader Walter has asked an important question on the recent actions of Goldman Sachs and Warren Buffett. Link here.
These investing behemoths are locking in long term debt at low, low rates and retiring variable rate loans.
Goldman's strategic 50 year move in the bond market at a hair over 6% is fascinating.

Who can possibly predict yields 50 years on the future?

In my view, yields on the 10 year rate will soon skyrocket.

The timing will depend on several factors, including the rollover of debt in Europe (Spain, Ireland and Italy are on my radar), and the cooperation in Congress on controlling Federal spending.

In my estimate, we will see the 10 year rate at close to 5% or higher by year end with steady increases into 2012.

I suspect that GS and WB have analysts that have also reached this conclusion which explains their actions.

It is more important to pay attention to what they do rather than what they forecast.

Will the dollar continue to rise?

Yes it will, in my view, as I noted in my 2011 forecast targeting 92 on the US dollar index.

However, it will not rise due to growth prospects as the majority of economist expect.

This phenomena is due to deflationary forces that are still building.

This is the negative consequences of high sovereign debt levels - rising interest rates. Each nation has what I refer to as a "carrying capacity" for debt. Many European nations have already exceeded this level. The US probably has too, but murky accounting rules hide the full picture.

Yes, we have seen a number of signs of recovery, due to massive government spending that has finally reached the economy.

The problem is these borrowed funds will begin to dry up soon, driving investment down once more.

Will gold take a little vacation from its relentless rise of the last 2 years?

Probably for a few months.

Then it will rise rapidly when European defaults again raise their ugly collective heads.

What we need to ask ourselves as investors are these questions:

What has changed since the credit crisis?

Have governments reigned in spending?

Are deficits no higher than the annual GDP growth rates?

Are central banks operating neutral overnight rates?

Have TBTF banks substantially increased their Tangible Capital Ratios and applied honest, transparent accounting methods to their balance sheets?

My answer to all these questions is a big NO!

So what happens?

Stocks drop due to competition from higher yield bonds and interest rates rise. Those unfortunate enough to have a mortgage would be wise to lock a long term interest rate.

My collapse day target remains in place.

March 18, 2011.