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This is arguably the best time in history to be a borrower. You can get a 5-year adjustable rate mortgage for 2.75%…but why bother when a 30-year mortgage can be had for less than 4.375%. Car loans are cheaper than 5%. These rates are extremely attractive for one side of the spectrum of individuals, but for the other side these rates spell disaster.

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Savers are getting killed. The best interest rates on savings and money markets barely top 1%. Your broker is paying you a tenth of that. What’s even more frightening is the number of people who are paying the government to hold their money. Yes, you heard that right. Short-term Treasury Bills are actually paying a negative interest rate. Why in the world would anyone lend the government money and expect to get less back at maturity. It’s a great question. The answer is not very pleasant. In fact it’s downright scary.

When investors loan the government money, they get two things back, usually. The first thing is interest on the money lent. This interest is often the lowest interest you can make on your money. The reason for that is the second thing they get back. They get the full faith and credit of the US Government in return. This may sound funny right now on the eve of a debt default (an unlikely event in my opinion) but consider that if the Treasury market defaults, there is no money market fun on earth that will be solvent for very long.

Ok, back to the negative rates of return that investors are clamoring for. This is an indication that they have no faith in either a recovery or in the stock market in the short term, or in banks and money market funds. When anyone accepts a negative real and nominal return on his or her money, intentionally, it is a sign of pure fear. In a few weeks this entire scenario may change completely.

August 2nd, 2011

Everyone loves targets and deadlines. It’s like hanging a carrot in front of the gambling machine aka Wall Street. The more uncertainty there is, as we get closer, the greater the opportunity to make money, lose money and make a killing. Now, let’s play out various scenarios:

Scenario 1: The Congress and the Whitehouse reach an agreement before the deadline with a pact that calls for substantial deficit/debt reduction. The markets will rally on the news, but not as much as you’d expect at first. Consider that we have already rallied some 700 points in just over a week – that’s a 6% rally in the last part of June, first part of July, and you can see that the “deal” is already priced in. For the longer term, this is a very bullish scenario for the stock market, the US Dollar and the bond market…but not so good for gold.

Scenario 2: There is no agreement until the last possible moment. The markets won’t plunge after the fact. They will actually head south in the days right before forcing the hand of government to come to some type of deal. The deal will be ugly and volatility will continue in the market for many weeks to come. Gold will benefit and the dollar will continue its slide.

Scenario 3: No agreement is reached. The markets will NOT plunge. In fact, the markets will not open. They will stay closed as they did for some days post September 11th, 2001. Everyday before the markets open, there is an indicator of how strong or weak the open will be. This is found in the futures market where stock futures are traded. If there is no agreement, the futures market will show a massive plunge at the open. My bet is that there will either be no open or an opening followed by a massive sell-off that will trigger a close. This Congress and the Whitehouse will then both be able to say that neither party caved in and serious negotiations can take place. When the market does re-open, Scenario 1 will come into play.

The coming weeks will again remind us of how idiotic the politicians we elect to our government can be and usually are. In a democracy, there is also freedom of madness.

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Best regards,

Kevin Raymond

One Response

  1. there is another possible outcome that is not mentiond in the article: that barack obama will raise the debt ceiling by executive order


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