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Old 11-18-2001, 08:44 PM
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Default interest rates

as interest rates have a big bearing on the value of companies and real estate what do you think the view is for them about one and two years out. now is the time to make you investment plans thinking out that far. will they still go down a little or start the large up swing that happens after war production.
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Old 11-19-2001, 03:50 AM
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Default Re: interest rates

I'm probably wrong but I think we won't see rates on the short end get very much lower. On the long end I'm hopeful for lower rates but I'd have to say that overall I think we'll probably see long rates slightly lower and on the shorter end they'll be higher in two years. I'd expect the yield curve to flatten out over the next two years. Just my take.
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Old 11-19-2001, 05:02 AM
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Default Re: interest rates

I would not overestimate the impact this "war" will have on the economy or rates. It's really limited considering the opponent we are facing. However, rates aren't going to go much lower. I think the Fed has learned from Japan that low rates doesn't always equal economic expansion.
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Old 11-20-2001, 04:11 AM
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Default Re: interest rates

Fed has no other tools at its disposal, what do you expect them to do, raise rates? The can increase the liquidity of the market all they want, that only causes a temporary spike and the moment the market figures it out they mercilessly sell. The Fed has really one weapon at this point and they are using it. Problem is its a weapon for next year and there is no way to create increases in demand other than to get help from immediate government spending, whether it be tax cuts or pork barrel spending. The price we pay for having an independent Fed, but its important to keep it that way. Fed is just hoping the market turns and creates some wealth effect again with its cuts because they know that low rates won't really do much for the economy other than get some mortgage refinancing going, but that has almost run its course as well. Right now everyone just has to sit back and wait for the recovery. People are getting anxious, but it looks to me that it will be a blockbuster recovery once it gets going. It won't get going instantly as some hope, but it will build momentum slowly and then be a big boom. Companies have used the slowdown to make long-term staffing and capacity cuts to the point that productivity will be huge and it looks like it will take at least 18 months until OPEC gets oil prices up to high levels again. Low inflation, low interest rates, low energy costs, and very productive businesses looks to be a blockbuster combination for the market and I expect it to really be going by middle of the summer. Besides people need to remember that other recessions haven't seen the economy end in the good shape this one will end in. Usually unemployment is over 7% and real incomes are stagnant. As the end of this recession comes (barring any more terrorist disasters), unemployment should be at or under 6% and all this time real incomes are still growing.
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Old 11-21-2001, 02:34 AM
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Default Re: interest rates

I doubt we will have any sort of blockbuster recovery. And I really think the economic impact of the terrorism is far overstated. On a grand scale (beyond the regretable loss of life) it is almost irrelevant to the economy what has happened. Wall Street is using this as an excuse for being bullish all year and economists love to use this because the recession started long ago. Probably last year.
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Old 11-21-2001, 05:46 PM
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Default Immunization (Re: interest rates)

Betting on where interest rates will be in a year or two does not offer very attractive rewards compared to the risk.

In the present yield curve, one year rates are at 2% and 10-year rates are at 5%. If we make the simplifying assumption that interest rates can only wind up at two equally probable levels a year from now, then the present yield curve implies that there's a 50% chance that the 10-year (or more precisely, the 9-year) interest rate will drop to 3.6750%, and a 50% chance that it rise to 7.2833%.

Your bet is to either buy or sell a 10-year zero coupon bond.

[In terms of your ability to predict where interest rates will be, other bets, including for example the S&P 500, are effectively leveraged versions of this wager, with some extra noise. They offer the same ratio of expected profit to risk. Actually, more often than not, they offer a somewhat poorer ratio due to the extra noise.]

If you predict that interest rates will go down (to 3.6750%), you'll buy the 10-year; if you predict that they'll go up (to 7.2833%), you'll short the 10-year (and park your principal plus the proceeds of your short sale in a one year zero).

With either bet, if your prediction is correct, you'll make 18.4%; if your prediction is wrong, you'll lose 14.4%.

If you flipped a coin, then in terms of arithmetic average, your expected profit is 2%, which equals the return on a one year note. However, in the long run, you'd be better off sticking with the one year note if you're going to flip a coin, because your expected compounded rate of return will be 0.69%. This is because a given percentage loss hurts your rate of compounding more than the same size percentage gain helps it.

But let's suppose you're good at predicting interest rates. How good? Well, let's suppose that in the long run you can expect to win 60% of your interest rate bets. My guess is that it's very unlikely that anyone is this good: the yield curve represents the consensus of an ongoing debate between many highly capable arbitrageurs. It figures to be tougher than a point spread sports bet. ... But let's suppose you're this good.

Then your expected compounded rate of return is a whopping 3.93% per year. Not too exciting, eh? And don't think you can improve this by leveraging up. Leveraging up will will actually reduce your expected rate of compounding (if the one year and ten year zeros are your only investment options, you should actually leverage *down* in order to maximize your expected rate of compounding).

If you're looking for an edge in the financial markets, you really should look someplace besides betting on where interest rates are going. Furthermore, you should try to *avoid* betting on interest rates: if you're unwittingly exposed to rates (and most investors and traders are), you're tossing a large amount of volatility into your results with no compensation. And even if you happen to be very skillful at predicting rates, you really only get to make statistically independent bets every couple of years. In a lifetime of investing, you might make 15 to 20 bets. ... Many investment managers with stellar track records just made one or two lucky interest rate bets, even though they and most of the financial world didn't recognize it. And of course, there's no reason to believe that winning one or two coin flips is a strong indication of enduring skill.

One way to avoid betting on where interest rates are going is to have a very long investment horizon (and holding period) and invest primarily in dividend paying securities. Warren Buffett comes to mind (he doesn't like dividend paying companies because of the tax disadvantages, so he actually prefers to buy positive cash-flow companies outright. But if not for the tax penalty, he'd much prefer that the companies he invested in pay dividends rather than retain profits).

Another way to avoid betting on interest rates is called "immunization" in the fixed income world. A typical textbook example is buying 3 and 5 year bonds and shorting 4 year bonds. The resulting portfolio doesn't fluctuate as interest rates change, at least in the short run. But you don't have to completely flatten your results, and it isn't necessary to take short positions. Many bonds have implicit options (e.g., mortgaged-back bonds) which give them "interesting" total return profiles vs. interest rates ... for example, it's possible to create bond portfolios that will outperform Treasuries regardless of where interest rates wind up a few years from now. Working stocks into an "immunized" investment strategy is more difficult (unless you want to change less than 10% of your portfolio annually), but it can be done.

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Old 11-22-2001, 09:26 AM
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Default 30-years to continue slide

Our institutions are practically printing money/currency, and encouraging consumption, to the point where we will have more cash than products - and a corrsponding high demand for capital formation but a relatively low supply of goods to convert. I was going to write an essay on this, but instead I just sold bond futures at what turned out to be the high A slightly sad ending though, client sent me an email "we don't do bonds" - customer always right, bought bonds back, missed 6-point slide for $1,000.00/point per contract

Anyway, here's the text of an old essay I wrote last winter that you can build to write your own essay about the present situation

************************************************** ******

Okay, let's settle this already, the Fed doesn't "stimulate" the economy. The Fed simply attempts to correct a self-perpetuating price signal which would otherwise mislead economic actors as to the equilibrium duration of assets, and the profitability of investments.

Given an arbitrary national pool of short-term assets -- which dollars are non-specific claims on -- a certain amount are set aside for near-term consumption, the remainder are set aside for some rainy future day, through the process of capital formation. Apples, which would otherwise rot, are fed to workers, who would otherwise sit idle, to assemble bricks into buildings -- which buildings will stand to provide worker-housing and apple-storage for many years to come, but cannot be reverse-converted immediately back into bricks and apples.

When the relative glut of short-term assets available for investment increases, money -- or unneeded immediate claims on these assets -- becomes available to borrow, driving interest rates down. This relative excess of assets available to consume today, relative to assets available to consume five years from now, signals a businessman whether a certain scheme of capacity investment and production will be profitable. He is performing an arbitrage between the present and the future. (Incidentally, if you tell him his P/E ratio looks too high, and to therefore increase his short-term production, market share, and profits out of a fixed immediate pie, you are short-cicrcuiting this natural signal, and perpetuating the duration bubble/imbalance!)

But, as the availability of short-term assets climbs, and as short-term production is scaled up (potentially feeding back into the immediate-goods glut), the relative price of longer-term investments rises. As this happens, economic actors learn Darwinistically that it is easier to convert longer-term investments into cash, and cash into goods for immediate consumption, than vice versa. There is a self-perpetuating demand for longer-term assets, which creates a signal that such longer-term investments can be converted into cash at ever-rising rates.

But this convertibility is naturally extrapolated past the point when the ratio of short-term goods to investments reaches and passes equilibrium. People have learned to hold investments instead of cash, because in the recent past investment opportunities have been convertible into cash, by venture capitalists or whomever, at an apprently unlimited and rising rate. But at some point the demand for investments crosses over to where it is actually a demand for cash, in part (meanwhile no mirror demands for investments are left partially in cash), such that cash is denominated in investments, not dollars -- meaning that the demand to consume short-term assets is actually partially priced into an intermediate demand for investments, masking the hidden intention to convert those investments into cash in a shorter time horizon than the liquidity of the investment itself.

If the Fed suspects we are passing this point, they simply start contracting the multiplication and velocity of claims on short-term goods so that, at equilibrium, some investments would be attempted to be converted back into money claims on the national short-term asset pool. At this point, all the people who were holding investments when they only wanted them for their convertibiility into short-term cash, see the investment-cash tradeoff see-sawing back the other way, and start looiking to hold cash as cash instead of investments as cash. Sometimes it can be uncovered that a great many people were holding investments on only a short-term or cash basis!

If it goes too far the other way, people can start holding cash, or claims on short-term assets -- even though they have an excess of such claims available to invest -- because natural selection dictates that those holding the most cash, or decision-making power in the economy, are those who for whatever reasons were choosing to hold cash even when investments were king, even before the cross-back. Again, our friend Darwin selects who is in control. At this point, the apparent profitability of businesses that seemed profitable when duration was extending, but for which it is now physically impossible to shorten or speed up their harvesting length or duration, evaporates.

So when the Fed starts increasing claims on short-term assets again -- to reflect the true size of the actual pool, they are not doing it to stimulate consumption, or to stimulate more immediate production to meet the claims, but to stimulate investment, and to create a signal of the profitability of certain ventures which actually remove consumable assets from the pool in the short term! It's to overcome deflation, to the extent some goods (like bricks) are manufactured to be included in capital formation, not to reinflate claims on a bucnh of crap nobody wants, not to prop up a bunch of errors. It's to start fresh.

So, in conclusion, it is people putting money into the things they actually want to comsume, the product and duration, that instructs producers to make things we need and not sqaunder the short-term pool on things we don't. And the job of the Fed is to overcome what I have for years been calling "the currency effect" where the learned illusion of convertibility of one thing into another (which runs out past some point), and the redundant or over-compensating reactions to time-series events, creates a false price signal, where people manufacture the intermediately demanded assets, rather than assets that anybody really wants to consume, or something, you get the idea...

Quiz: If people are competing to buy a limited pool of oil, how does gold become a substitute good? Where is the underlying physical ability to convert oil into gold? The price of oil is not rising because there is an excess of non-specific claims, but because there is a shortage of oil!

I guess my main message is that consumption is death, whether it's slaughtering pigs and burning piles of fruit during the depression, or an excess investment of the same short-term assets in doomed or ridiculous projects. So when people ask "Are consumers going to spend the Bush tax cut, and stimulate the economy by pissing it away on plastic trash, or are they just going to put it in the bank?," understand that you want them to put it in the bank, assuming their current spending patterns are already robust and autocorrelated enough to instruct manufacturers as to in what what category of capacity to invest the borrowed money, the borrowed claims.

This silly notion of consumption stimulating the economy is a Marxist relic from the idea that when workers are repalced by machines, there will be nobody with cliams to purchase the goods the machines produce, or some such scare story, some Say-esque pure nonsense. Again, consumtpion is death, and the less of it, the better off the economy, that is not what the Fed is trying to stimulate... you dolts! The economy is self-stimulating, thank you, through price-supervision, and the Fed is just correcting for malcoordination in the relative prices of assets of different durations, and the illusion that you can bang one into another (like the illusion that Portfolio Insurers could bang into short futures in Chicago in 1987). They say "Let's force a dry run fire drill, and see how many people try to squeeze through the door at once."




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Old 11-23-2001, 07:19 PM
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Default Re: interest rates

Opinions of the Family Man -- a Gardena and LA County Poker Type since 1959 -- so you know I'm not a spring chicken. I have been about 40% in stocks for the last 18 months and the dent in my net worth on an absolute basis is/was about 10%. Probably only ten percent since my portfilio is well deversified. My dot coms & techs "of course" got hurt the most, but since I bought most of them about five years ago -- my losses are declines in profits -- but still they are losses. My Vanguard U.S, Growth Mutual Fund really got clobbered -- I lost about 70% of my profit over the last six years in about the six months starting the year 2001 -- another big loss. On a relative basis, considering lost of interest also, I estimate I down about 18% since Sept of 2000, if things would have continued as they did in 1998 & 1999. Also, I was laddering about 10% of my available liquid assets in mostly 1,2, and maybe 3 year Treasury Bills & Notes at 5.5 to 6.2 percent. I should have laddered them in five year notes to maintain a 6% yield -- a big mistake -- caused by & because of the drastic drop in the prime rate. Luckily I don't have a cash flow problem, and I'm going to hang in their with the rest of us Americans and hope the world leaders can get things straightened out -- let's hope. I'm not buying any low interest bonds or long term bonds -- I guess I'm going to try to get "somehow" a relativly safe 5% on my liquid accounts. I'm OK, but probably many or some guys in their sixties who were relying some on dividends or interest are hurting some.... The low interest rates have caused real estate prices to go up in good location-location. But some other average neighborhoods have not much increased in value. My wife's sister had a house "just an average shack with an ocean view -- 3/4 of a mile away" in Pacifica, CA below SF & Daly City. They recently sold it for $550,500 in one day --$20,000 over what they ask. They paid about $300,000 four years ago. Things do go up in some areas.Twenty years ago, Pacifica neighborhoods were very low priced. But that has changed.

I have friends my age who have dropped 40% to 60% of their net worth since OCT 2000, mainly because they had too much high tech stuff, thought there was going to be a big recovery in the market after March of 2001. These friends of mine no longer like to talk about the markets. Another PHD friend of mine who teaches artifical intelligence and information science at UCLA and was working at a Dot.COM company in Culver City, CA -- anyway two years ago he predicted he was going to be a millionair in stock options at this Culver City Co. -- not to be. Now he works at an aerospace company and is not a millioniar type. I have also have a few friends who lost much money in trying to outsmart the options game.

Regards Family Man
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