After cutting the Fed Funds Rate to 4 ¼% in December, the Federal Reserve Bank slashed the Fed Funds Rate ¾% on Tuesday, January 22nd and another ½% on Wednesday, January 30th to 3%. As we said in our January Investment Commentary, this is nothing more than throwing tennis balls at an oncoming train. The billions of dollars issued in sub-prime adjustable rate mortgages have not yet done all their damage. Many of them “adjust” upward this month and for the next several months, causing more and more foreclosures.
Meanwhile, in the 4th quarter of last year, Gross Domestic Product barely grew at a paltry annual rate of 0.6%. Worse yet, new home construction fell by almost 17% during 2007, the worst rate since 1982 (Ronald Reagan was president and Michael Jackson had just released “Thriller”).
Meanwhile, here are some other headlines that concern us:
- In January, non-farm payrolls (“the jobs report”) declined by 17,000, the worst drop since August, 2003.
- In January, inflation in the Eurozone was 3.2%, a 17 year high and an indication that the European Central Banks are not likely to reduce interest rates.
- It is now estimated that losses on sub-prime mortgage investments has already exceeded $265 billion.
As short term interest rates ratchet lower every month, long term interest rates remain almost unchanged. Why? Because investors perceive we are entering an inflationary period. If you own a bond paying 5% and inflation is 5%, your “real” rate of return is 0%. Investors don’t like to invest and get 0%. Even worse is if inflation is 6% and your return is -1%. This is the kind of environment that encourages people to spend instead of save.
Ben Bernanke is getting a lot of criticism for not handling this economic problem successfully. We think he is getting a bad rap for a problem that was set in place long before he replaced Alan Greenspan. Stay tuned. It isn’t over and Boyer & Corporon Wealth Management continues to have an unusually large allocation to cash (although that is getting more difficult as money market rates are finally beginning to decline).
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
This information is provided for general information purposes only and should not be construed as investment, tax, or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.