Conference nyoss1::market_investing

Well.....

You have asked a CRYSTAL BALL question so you are going to get a variety of 
replies.  Keep in mind that the LAST DOWN TICK that everyone wants is the one 
that NO-ONE GETS. 

The PROBABILITY for the short term rates to fall further are less than 10%, 
but there is a chance that pressure may be applied to reduce the STEEPness in 
the YEILD curve (i.e difference between the short term rates (3 month T Bill) 
and the 30 year Bond rates) by reducing the LONGER Term Rates.  Fed can do 
this indirectly.  MONETARY POLICY is everything for the stock market and FED 
will do everything in it's power to get BUSH re-elected.  Alan Greenspan told 
the markets today that "Economy is recovering although slowly" and that MAY be 
the reason why the market went from an TECHNICAL BOUNCE of 16-18 points 
(Oversold Condition) down to a closing price of only 5-6 for the DOW.

If you are trying to get a loan I think this is a very good time (so you loose 
out on the last 1/4%).  It is better than taking to risk of the mortgage/loan 
rates ticking upward just like it did between Jan and Jun.  

Time to run.

Kiran 
        

    The yield curve will continue to steepen.  Look for lower short-term
    rates and steady-to-higher long term rates.

    This is interesting stuff... I read today on Prodigy that Greenspan
    hopes for a reduction in long term rates once the fear of inflation
    wears off and people recover from the 80's "excesses". I presume this
    projected decrease in long term rates would mean that mortgage rates
    would continue to decline and signal a return to a slightly improved
    real estate market. 
    
    I enjoy asking open ended questions like this!
    
    

	I also think that the long-term interest rates will at least stay flat,
or, more likely, go up.  (I'm talking the 6-12 month+ timeframe.)  The problem
as I see it is that the usual medicine of lowering short-term interest rates
just isn't doing the job of pulling the economy up.  There is simply too much
debt (both personal and corporate) for the "carrot" of taking on more debt,
albiet at lower interest rates, to look attractive.

	Wiping out debt can be done in one of three ways:

	1) Direct repudiation or bankrupcy.  Possible, but not pleasant,
especially on the national level.

	2) Making payments for a long period of time.  Yeah, even 30 year
notes will eventually be paid off, but it takes a long time and our economy
can't afford to wait this long.

	3) Inflation.

	I think that eventually someone is going to figure out (I'm pretending
to be a politician in the rest of this paragraph) that the gov't can
simultaniously lower their market borrowing pressures caused by the annual
deficit, inflate their way out of personal, corporate and national debt and
do this _without_ the gov't having to spend an extra dime on new projects (very
attractive to Republicans).  How?  Instead of borrowing the entire annual
deficit, why not print bills to cover, maybe, 25% or 50% of that deficit?  A
"little controlled inflation", like an annual inflation rate in the 8-10% per
year rate for the rest of the decade, would write-down a lot of the current
debt.  Yeah, interest rates will go up, but so will salaries, eventually, and
people will start to feel rich compared to their debt load once again...  The
people feel better, buy more, get the economy going and, of course, reelect
the Administration. ( <- remember, I introduced this paragraph saying that
I was going to think like a politician. ;-)

								-c

    RE: -1
    
    Interesting reply.  Just one problem with the "political" logic.  The
    government doesn't just print money.  It uses interest rates to control
    the "supply" of money.  They have already lowered the interest rates 
    and people are still not borrowing, or "increasing the money supply".
    
    The classical response to inflation is to raise interest rates, which
    limits borrowing and therefor slows down the money supply.
    
    My view is that interest rates are low enough now and will probably not
    go much lower.  The real problem here is not the interest rates, but
    the lending requirements imposed on the banks by the FED and FDIC as a
    result of all the bank failures and loan losses.  Don't get me wrong,
    I think they should put some strong controls and rules in place to
    prevent any further bank failures or insider bank heists.
    
    The other classic tool that is used to pump up the economy is the tax
    code.  They could significantly lower taxes or lower the capital gains
    tax to start money flowing again.  This is a catch 22 as well because
    if they lower taxes it will likely increase the deficit.  Ronald Reagan
    spent 8 years telling us that this wouldn't happen.  Of course we now
    know that Bush was right.......this is voodoo economics.
    
    No easy answers.
    
    Don

    
    	Re: .5
    
    >Interesting reply.  Just one problem with the "political" logic.  The
    >government doesn't just print money.  It uses interest rates to control
    >the "supply" of money.
    
    	They have used interest rates as the primary means of controlling
    the economy, but there is nothing to say that they can't print money if
    they decide that the interest rate medicine alone isn't doing the job.
    
    								-craig

.6>    	They have used interest rates as the primary means of controlling
>    the economy, but there is nothing to say that they can't print money if
>    they decide that the interest rate medicine alone isn't doing the job.
    
    $ SET MODE = WILLIAM_BUCKLEY
    
    Oh, -DO- tell us just what your plans here are, Craig.  The process
    of printing money is limited by law to the U. S. Mint, an arm of the
    Treasury (golly, Washington isn't totally screwed up :-).  The Mint
    can print sheets and sheets of paper money, huge bags of it, and ship
    the money to, umm, ahhh, exactly where?
    
    In order to move the paper money into the economy the Mint must follow
    certain procedures.  Dropping cash from helicopters is not one of them.
    In particular, the mint can accept paper money in trade for paper money.
    No net progress there.  Or the Mint can deliver money to a bank in return
    for U. S. Treasury securities.  So you have to convince your friendly
    local banker to sell some of his Treasuries in order to acquire paper.
    Now paper doesn't pay interest, Treasuries do, so why would your banker
    do that?  Perhaps because there's not much cash on hand?  But that would
    imply people are making net withdrawals, which is not the case these days.
    And in any event, "the government" has no power to force paper on banks.
    
    As .5 noted, the government doesn't just print money.  You must mean
    something else, but it isn't ovbious exactly what that is.
    
      John

    
    	Re: .7
    
    	Gee, and I sorta thought the idea of dropping money from
    helicopters was a good one... :-)  <- note the smiley!!!!!  And no, I
    have no plans here.  Frankly, I hope they _don't_ decide that inflation
    is the best way to shrink the debt, but I see it as a possibility.  How
    would the gov't print/distribute the money?  Sheeze, I now wish I
    remembered the exact details when I heard this about a week ago, but it
    did involve buying up Treasuries with the incentive that you are
    looking for being that the bank/whomever is offered more money for the
    Treasuries than their market worth.  Make the offer price high enough,
    and the holder will trade in the Treasuries (which lowers the future
    obligations of the gov't) for the cash.
    
    							-craig

.8>  looking for being that the bank/whomever is offered more money for the
>    Treasuries than their market worth.  Make the offer price high enough,
>    and the holder will trade in the Treasuries (which lowers the future
>    obligations of the gov't) for the cash.
    
    Make the offer prrice high enough and the holder will hold, realizing
    that still higher prices are ahead.  That's human nature.
    
    Of course, there will be SOME selling, but then what?  Banks awash with
    cash they don't want to put into U.S. Treasuries will do what?  My
    guess is they will lend the money to foreign governments, which will
    provide both a higher yield and greater safety than local lending.
    This is the "pushing on a string" scenario.  Without banks willing to
    lend to borrowers wishing to borrow (it takes two sides to do the deal),
    there won't be any money supply increase, thus no inflation.
    
    Unless, of course, you bring on the helicopters. :-)
    
      John

    I'll readily admit to not being an expert, but if the government wants
    to introduce 'new' money why wouldn't they just borrow less?  We're
    running a $100 Billion/quarter deficit.  If the government only
    borrowed part of this, and 'printed' part, they would be introducing
    more money into the system, would they not?  
    

>    running a $100 Billion/quarter deficit.  If the government only
>    borrowed part of this, and 'printed' part, they would be introducing
>    more money into the system, would they not?  
    
    Either I don't get it or you don't.  The Mint is -not- allowed to print
    up, say, $100 Billion dollars and deposit it in the Treasury's account.
    If that had been the case this country would have been bankrupt long ago.
    
    If such were to happen (say, a desperation move under Clinton, i.e.,
    rewriting the underlying monetary control laws with a cooperative
    Congress) other nations would unload U.S. Treasuries and dollars at the
    speed of light. If politicians were allowed to "print" money, they
    would print so much that it would all rapidly become worthless a la
    Germany 1923, Hungary 1945 etc.  Interest rates and unemployment would
    shoot through the roof.  We'd all be impoverished millionaires.
    
    That's why the FED is structurally independent and why they have to
    make all their moves on the open market, not directly with the Treasury.
    Of course what Congess maketh, Congress can destroy.
    
      John

    This is getting to be an interesting discussion.  It has been 15 years
    since I took an economics course but let me try to recall how the
    monetary system works.
    
    INTEREST RATES
    	
    The Federal Reserve sets the interest rates to member banks.  The rate
    is now somewhere around 3% - 4%.  In inflationary times the FED
    typically raises interest rates until borrowing slows down which in
    turn slows the money supply.  In recessionary times the FED lowers
    interest rates to stimulate borrowing and increase the money supply.
    As another noter mentioned, the FED does not order the Mint to print
    more money and distribute to from helicopters.  Raising and lowering
    interest rates does not actually increase the money supply, it simply
    provides the fuel to make it happen.
    
    THE BANKS
    
    This is where money is actually "created" and added to the money
    supply.  The FED also sets the "reserve requirements" for banks.
    I think the reserve requirement is currently around 4% to 5%.
    Reserve Requirement means that the banks must have in hold in reserve
    4% to 5% of their assets against the loans they make.  Deposits
    (assets) minus liablilities (loan reserves, etc) equals net assets.
    So for example if a bank takes in $110M of deposits and has $10M of
    liabilities, then they have $100M of net assets and can make loans of
    $2 BILLION !!!  By lowering the reserve requirement from 5% to 4% the
    same bank would be able to loan $2.5 Billion.
    
    THE CUSTOMERS
    
    When the FED lowers the interest rates, the banks tend to lower their
    borrowing rates to customers.  This tends to stimulate loans, which as
    described above actually adds money to the money supply.
    
    THE GOVERNMENT
    
    There is one other way to actually add money to the money supply.  When
    the government overspends its budget they sell treasury notes to fund
    the deficit.  To the extent that Japan, Germany, and other countries
    buy those treasuries, this adds money to our supply.  If only Americans
    bought the treasuries it would just be trading greenbacks for
    treasuries with no net add to the money supply.
    
    TAXES
    
    As I mentioned in a previous note another way to stimulate or kill the
    economy is with the tax code.  If Capital Gains taxes were eliminated
    there would be an incentive for people to sell idle or long held
    assets.  This would generate new cash available for investment since
    there would be little or no tax on the gain.  Investment tax credits
    also stimulate investment.  Personal tax cuts are supposed to
    stimulate some investment too.  I'm not convinced.
    
    The mechanics of the monetary process are fairly simple.  The
    management of the process is incredibly complex.  Bring back former
    FED chairman Paul Volker.  He knew how to run it.
    
    
    __Don

    
    I just hate to see the rate went down so fast.  I mean
    the long term rate.  I really missed the opportunity on
    the bond.  What can I do now?  Do you think the long term
    rate reached the bottom?  There is a hugh federal bond sale
    coming in one week.  What the sale will affect the rate?
    
    Jason

    Spending is required to stimulate the economy; short term spending
    will stimulate in the short term.
    
    Since everybody's disposable income (individuals governments business)
    is tied up in paying down 10+ years of debt, they have no ready source
    of funds to increase spending, therefore somebody has to borrow.
    
    Individuals are largely risk averse to taking on more short term
    debt.  Lending institutions are taking a very conservative stance
    vis-a-vis new/risky business ventures.  Therefore, the spender of
    last resort is government.  (I'm a fiscal conservative, so I 	
    HATE this alternative, but.....)
    
    The government is trying to get itself out of the last 40+ years 
    of foreign/military spending to focus on domestic issues, so it's
    not likely to just provide a net increase in the present spending
    level.
    
    The bottom line is that it took us the better part of a score to
    get in this predicament, it'll take us considerably more than
    a year or two to get out--long term rates will stay high, short
    term rates will stay low (relatively speaking) for years to come.
    
    We need a new strategy....
    
    tom

    Hi,
    
    Where are interest rates going in the short to medium term?
    
    I believe that in the US most of the party is over.  I believe that the
    short term rates could go down a bit but they are historically very low
    and that this is probably an election Phenomenom.  (The FED is
    independant right!... :-)
    
    Long term rates are a little different story.  There is some room to 
    manoeuver here with the real rate of return being somewhere in the 
    4-5% area which is historically high.  The kicker however is that
    markets look to the future and at future inflation levels.  
    
    Getting off the fence.... I believe that some captal gains are left on
    the long term bonds but not much.  On a risk/reward perspective it's
    still a reasonable argument but getting risky.  
    
    Try the market (probably the secondaries).  It's had a good run but
    there's lot's more left.  International markets look more attractive.
    
    On the bond market side.  Try a look outside the US.  Canada, Germany,
    Japan all have relatively more attractive Bond markets.
    
    JD
    
    

    I know how to make money when rates are high and about to fall.
    Buy shares in a bond fund, as rates fall the value of the shares
    will increase, sell when you've made the expected return.

    How do you make money when rates are low and about to increase?
    If I was looking to take on debt this would be a good situation,
    but I'm not, so I'm at a loss to use this opportunity.

    Martin H.

> How do you make money when rates are low and about to increase?

First of all, you can only make money when you can predict the direction of the
market better than the other participants in the market (either by skill or by
luck).  The market currently expects a gradual rise in short term and long term
rates.  If you correctly predict a fall or rapid rise, you can bet on it and
make money.

Secondly, it's a lot harder to bet on falling interest rates than rising ones. 
It is also harder to bet on falling stock prices than rising ones.  To bet on
rising ones, you just buy stocks.  To bet on falling ones, you have to sell
short, buy "put options", or do something even more sophisticated.  Betting on
rising interest rates is even harder.  You can sell bonds "short", but unless
there is an almost instant collapse, the interest and expenses almost always
make this a losing strategy.  You can buy "puts" on bonds on the options
exchanges, but they are not very popular, you'll have a hard time finding a
broker to help you, and you'll get burned on the spread.  There are some
esoteric bond-like mortgage obligations that go up with interest rates, but I
wouldn't touch them (and there isn't much I wouldn't touch).

The best way to bet on interest rate increases is in the futures markets.  You
can sell short futures in T-bonds (betting on rising long rates) or T-bills
(betting on rising short rates).  There are also options on those futures. 
Unfortunately, it's a high rollers game.  T-bond futures go in multiples of
$100K; I think the bills might be $1M.  Not for the dabbler.

Good luck.

    For about $2600 you can sell bond futures short (even on downticks). 
    In reality you'd want about $4000 per contract.  Every point is worth
    $1000, so if you see Paul Kangas say bonds lost 5/8 of a point, you'd
    have gained (or lost) $625 for that day.  ("point" in price, not yield).
    
    The 30-year bond market is the most liquid, cleanest-run futures market
    in the world, with many small traders no richer than you.
    
      John

    
    	Re: .17 and .18
    
    	From reading .16:
    
    	"I know how to make money when rates are high and about to fall.
         Buy shares in a bond fund, as rates fall the value of the shares
         will increase..."
    
    This doesn't sound like someone who is likely to dabble in options.
    
    
    	Re: .16
    
    	Without getting into the options market, the general "rule of
    thumb" when rates are going up is to play a capital preservation game
    by staying in liquid investments (and I do include very short-term CDs
    or short-term bonds held to maturity in this category) so that the drops
    in bond values doesn't hit you.  This also allows you to roll over
    these short-term investments at, hopefully, higher interest rates as
    the rates go up.  Yeah, you don't make a killing, but when rates are
    going up (and, as is often the case, the market going down at the same
    time), staying a little bit ahead beats losing.
    
    							-craig