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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Jim Fleming who wrote (234295)	12/25/2009 12:35:09 AM
From: LTK007	Read Replies (1) \| Respond to of 306849

I quote an excerpt from The Spear Reoprt: and within this text they suggest the Hari-Kari point would be 2%(this being based on the very profitable Carry-Trade now in play by the The Banks) When i quote from TSR, i want to remind they are , in the longterm, quite bearish, seeing in the years ahed a DOW of 3500(that is 3500 and NOT 35000:) They have been bullish however since the first week of April and have been still thinking DOW could likely have a BLOW_OFF to between 10800 and 11000, but they are NOT married to that view.. TSR:"That's Ben Bernanke's bet, anyway, and is why the Fed is not yet raising rates or even talking about it. Here's the deal: if the Fed raised rates to just 2%, it would destroy the carry trade overnight. That won't happen on Ben's watch" <<Easy Money Bottomline, the Fed's policy of super-easy money (near zero short-term interest rates) is working. Assets priced in dollars such as commodities, U.S. equities and bonds are up. Crude oil is 150% higher than its December 2008 low and has attained the $80/bbl level. Wholesale gasoline, heating oil and natural gas prices are increasing. Agricultural commodities are also on the move. Candy will cost more this holiday season as sugar is approaching a 26-year high and cocoa futures are making decade highs, as well. Although the Fed's low interest rates are not stimulating much in the way of domestic demand in the U.S., the falling dollar and the low rates are having a dramatic effect on the global stage. The reason is that the dollar is now the new "carry trade" currency, having replaced the yen. Let's discuss the carry trade. Carry Trade Back in September, a sea change occurred in the global currency markets that you need to know about. For the first time since 1993 it suddenly became cheaper to borrow dollars than Japanese yen. Global central bank rates are part of the LIBOR statistics that are published daily in London, the global center for currency trading and interbank lending. This may not be a piece of data that you as an individual investor will follow everyday, but you can bet that the world's central banks, investment banks, sovereign wealth funds, institutional traders and hedge fund managers pay a great deal of attention to it. As you may remember from the financial crisis of 2008, larger financial institutions tend to be leveraged; some are leveraged on the order of 20:1 or more. This means that incremental differences in interest rates paid for borrowed capital vs the return on the capital, can make huge contributions to the bottom line. The world's deep-pocketed players need to borrow and, like bees to a pollen-laden flower, they swarm to the particular central bank that is offering the lowest short-term funding rates. Right now, that flower looks like a daisy with Ben Bernanke's smiling face in the middle. Picture that. Free Money This capital is used to invest in assets with potentially higher returns. The transaction is almost like printing money because the high leverage these institutions use allows them to buy relatively safe bonds and other fixed rate instruments denominated in foreign currencies. Plus, as the dollar falls, they get the benefit of the currency differential when paying back the loan. It is a doubly sweet deal and it is one of the most lucrative investment games in the world right now. No wonder banks such as Goldman Sachs, Morgan Stanley and JP Morgan are reporting such excellent numbers. The big financial players learned to do this dance by borrowing yen from Japan's central bank and investing in emerging market debt starting in 2002 or thereabouts. The dynamics of the carry trade result in the selling the carry currency and the buying of foreign currencies. Thus, one of the side effects is that it depresses the value of the carry currency, in this case the U.S. dollar. Note that the country used as the source of the capital does not benefit from the transactions, except to the extent that a weaker currency helps exports. There is no investment of the capital in the home country, since the country itself will be burdened by excess manufacturing capacity, falling real estate and bad loans (which is why rates are so low to begin with). Instead, the money is used by investors to fund projects elsewhere. But if the carry currency happens to be the world's reserve currency, then all assets denominated in the currency rise as the currency falls. The yen was not the world's reserve currency, but the dollar is, so the carry trade at this time will help reflate the global asset picture. Up to a point, everyone will be happy about this and no one will want to take away the punch bowl. The downside for the U.S. will be an increase in the cost of imports, but as we manufacture less and consume less, this may not pose serious inflation risks. That's Ben Bernanke's bet, anyway, and is why the Fed is not yet raising rates or even talking about it. Here's the deal: if the Fed raised rates to just 2%, it would destroy the carry trade overnight. That won't happen on Ben's watch. The way to play the carry trade in the dollar is with natural resource stocks, gold and stocks of companies based in foreign countries. These are the type of stocks we have been profiling in TSR for a while. With the market up so much we are not inclined to recommend that subscribers chase this market. Rather, we recommend selling overvalued companies into the bullish sentiment. Next week we will offer a few more ideas in this regard. For now, enjoy the ride.