Higher Rates Approaching

by Addison Wiggin – April 7, 2011

  • Like swine flu, rising interest rates spread westward across the globe… Abe Cofnas on the return of the "carry trade" and prospects for the dollar
  • Another harbinger of a stock rally due for a rest… and why thin volume is about to get even thinner
  • Global food prices take a breather… a new threat to the housing market, starting tomorrow… and new wind in Colombia's sails
  • Up 168% in two years… Inflation greets late arrivals as the Masters gets under way today

0:00 — It started in Asia. Now it's spread westward to Europe. And before it's all over, it might even reach the United States.

Swine flu?

No. "It" is rising interest rates and an end to the free flow of easy money that flooded the globe in response to the 2007-08 financial crisis. The world's monetary mandarins are deciding, one by one, that it's time to close up the spigot, if only a little.

It began last October, when China raised interest rates. Three more increases have followed, the most recent on Tuesday.

0:16In Europe, despite an agreement to bail out Portugal to the tune of some $100 billion, the European Central Bank (ECB) voted this morning to bump up its benchmark lending rate for the first time since July 2008 — from 1% to 1.25%.

"Central banks increase interest rates when they want to slow down an economy that may be overheating and generating too much inflation," explains our currency trader Abe Cofnas. "The central banks' rate hikes reveal a new commonly shared sentiment: fear of inflation.

"Essentially, it is a huge tectonic shift in the fundamental forces that move currencies. For traders and investors, it's also a great opportunity. When a central bank changes interest rates, it creates an imbalance in capital flows. Those imbalances ripple through almost every currency traded."

"This is due to the 'carry trade,', where in which investors sell or borrow currencies with low interest rates and use that capital to buy currencies with higher interest rates."

0:22"The carry trade was a very big deal just a few years ago," Abe says. Japan maintained bargain-basement rates in a futile attempt at stimulus. "Borrowing yen to invest in higher-yielding currencies was an almost guaranteed way to make money."

That came to an end during the Panic of 2008. The whole world began turning Japanese, slashing rates. And borrowers had to bring their capital back home to pay off their debts.

So how can you keep a pulse on the carry trade? "Just watch the iPath Optimized Currency Carry ETN (ICI)," Abe says. This exchange-traded note (similar to an exchange-traded fund) uses the carry trade as an investment discipline. Any gains in ICI reflect a strengthening carry trade."

Abe is closely watching the $47 level on this chart. "If it breaks above this price, it's a clear signal that the carry is back!"

0:47So what if the carry trade is back? Abe sees three consequences…

  • "The yen will once again be a good target for carry traders. With rebuilding from the earthquake a priority, Japan favors a weaker yen."
  • "If rates in the rest of the G-7 countries continue increasing in the coming months, the Brazilian real will become more vulnerable to a sell -off." Brazilian interest rates are an eye-popping 11.75%, but just a narrowing of the spread with other countries could end up weakening the real.
  • "The dollar is still a low-yielding currency and may also suffer from the carry trade effect. In other words, traders may push the dollar's value down as they sell greenbacks and purchase other currencies."

1:12One huge caveat: "If Fed Chairman Ben Bernanke signals that quantitative easing is not likely to be extended, or signals vigilance on inflation, traders may anticipate a rate hike."

For clues to what might happen, Abe took the minutes from the March Fed meeting and plugged them into a "word cloud" to see how often certain words turned up:.

"Clearly, the word 'inflation' came up a lot," Abe says, "and that doesn't bode well for low interest rates. Still, we won't know for sure until the next Fed meeting" on April 27.

In the meantime, Abe instructed his readers yesterday to sell half their bet on a rising British pound — collecting a 104% gain in only two days. That's on top of three winners last week, including 153% on the Swiss franc and 170% on the Japanese yen — both of those in four days.

You can get in on the action in time for Abe's next recommendations Monday morning… and you can still do it at the charter-member rate. Check out Strategic Currency Trader here.

1:48Gold is pausing to catch its breath, the spot price up a tad from where it was yesterday, at $1,461. Silver is huffing and puffing, unsure whether it can break the $40 barrier, resting for the moment at $39.53.

2:07The dollar index is holding steady at 75.6, as its main component, the euro, rests at $1.43. The increase in eurozone interest rates is balanced by Portugal's confession that, yes, it'll need a bailout after all, probably $100 billion worth.

2:14Like the metals and the dollar index, stocks are going nowhere today. Volume is thin. But then, volume's been thin for, well, a really long time:.

Indeed, "The further this rally has run, the lighter the volume has become," observes blogger extraordinaire and Vancouver veteran Barry Ritholtz, who spotted this chart. Healthy rallies are backed by heavy volume. One more reason to be cautious.

And this light volume is due to become even lighter. Next month, Citigroup, tired of being a laughingstock with a single-digit share price, will carry out a 10-to-1 reverse stock split. Citi accounts for 6.2% of all NYSE volume over the last two years, according to Bloomberg data.

The split is due to be carried out on May 6 — the anniversary of the flash crash. Heh.

[Ed note. Barry will be joining us in Vancouver again this year. If you haven't yet booked your seats, you should know they're filling up at a steady clip. Call Barb Perriello at (800) 926-6575 to reserve your seats today. Just a reminder.]

2:47 — Global food prices fell a bit in March, the first drop in eight months, according to the United Nations Food and Agriculture Organization. Demand is down slightly, thanks to trouble in the Middle East and the disaster in Japan.

But at 229.8, the index remains above its 2008 top. "We believe that in the next few weeks, and there are already signs of it, prices will rebound," says Concepcion Calpe, senior economist at the FAO.

3:04If a "partial government shutdown" goes into effect tomorrow night at midnight, it could prove another blow to the housing market.

Among the agencies that would close is the Federal Housing Administration. That wasn't a big deal during the last shutdown, in late 1995, when the FHA guaranteed 12 % of home mortgages.

Now the FHA guarantees 30%. And we're heading right into "prime home-buying season."

3:15 — Another key piece of the puzzle that is Colombia's economy is falling into place. The long-awaited merger of Colombia's stock exchange with the exchanges of Peru and Bolivia will be completed on May 30. The announcement comes after two rounds of successful tests.

The process gets under way in earnest a week from tomorrow, when companies start to list on the new Integrated Latin American Market, which goes by the Spanish acronym MILA.

The precedents are promising: When Scandinavia's markets carried out a similar merger to become the Nasdaq OMX Nordic, Norway's stock market exploded ten-fold.

Readers will recall this was one of two key catalysts that will take Colombia's boom to a new level. The other already came and went days after our return to the States, when S&P raised Colombian government debt to investment grade.

If the trade agreement between the Colombia and the United States can get wrapped up — and that's looking a little more likely than it did even a few days ago — the sky's the limit. We'll share our thoughts on how to seek profits from the Colombia story in the next issue of Apogee Advisory. To make sure you get it in your inbox the moment it comes out, look here.

3:40The Federal Reserve insists inflation is mostly at bay, but that message won't go over well this week at the Masters.

Golfing spectators who show up in Augusta this week without tickets in hand will find themselves paying an average $2,062.50 on the resale market, according to the ticket site FanSsnap.

Last year, you could have shown up without a ticket and paid only $1,371.03. And for that you could have watched Tiger Woods' first attempt to compete since his wife took a club to his Escalade…

And in 2009, the cost was $769.43. In other words, "the toughest ticket in sports" has gone up 168% in two years.

The Masters… where the "cost of living it up" is skyrocketing

This may change next year, when organizers of the tournament will sell tickets (er, they call them "badges," actually) to the public for the first time in 47 years.

3:59 "Why does the government publish an Unemployment rate, as opposed to an Eemployment rate?" asks a reader. "The latter would be SO much simpler: Number of people employed/national population. Sure, the number would be rather low (of course:, children and retirees don't work), but the change in percentage would be a good gauge of REAL employment. And, after all, it is the number of PRODUCTIVE people in a society that matters."

"Oh, yeah, if they used this technique, they couldn't fudge the numbers so easily!'
"I think it would be instructive to calculate this for the past few decades. Might you know where the raw data could be obtained?"

The 5: The Bureau of Labor Statistics (BLS) does publish an employment-to-population ratio. It's one of those numbers the BLS does little to publicize, but we at least look at it every month. In March, it registered 58.5%, bouncing slightly off a 28-year low.

An even more telling figure, one we report each month, is the labor force participation rate — the percentage of working-age adults who are actually working. At 64.2%, this one did not bounce last month. It's still stuck at 1983 levels. Hope you like your "recovery."

4:19"Having been reading only a short time," writes another, "I love Tthe '5's' hard-hitting, no-nonsense forecast (with sometimes tongue-in-cheek comments). Your insight, whether political or not, is right on — for example, Congress arguing over $33 billion in a $14 trillion dollar debt. Give me a break!'

"My only problem thus far is picking which one or however many of your investment experts to follow. I have been investing for over 30 years and have bounced around from one 'expert' to another, with little to show.'

"I would love to follow Abe in trading the forex, but I already spent $1,495 with another 'watch your profits grow' person, and after one year — break-even. So you can see my reluctance. My suggestion, for what its worth: A free trial for 30, maybe 60 days. I will guarantee that if the results are as advertised, then I and others would gladly pay the yearly membership fee and not look back!"

The 5: How about this — a 60-day, money-back guarantee? If you're unhappy for any reason, even if it's day 60, you can still call us and we'll refund every penny you spent.

This comes standard with all our VIP services — including Strategic Currency Trader. We'd love to have you on board, and you have nothing to lose. Here's where to go.

4:33"I would not go so far as to say, Lloyd Blankfein-like, that you are doing "God's work" with your writing," writes a reader with praise. "However, you are indeed doing a very good thing that is adding "incredible" value for all of us poor, unwashed masses here in flyover country. And that value is found in that you are, very simply, educating and informing us."

"Since the lamestream media shrugged off that duty, a massive amount of people have had precious few resources to turn to, until email news like yours, along with other Journalism 2.0 websites, sprung up over the past decade."

"You folks have done a good job of not only helping equip us to retain our self-reliance in this teetering economy, but you are also providing information to help take back our freedom, dignity and right to self-determination that the leftists have so cravenly attempted to steal."

The 5: Thank you… we'll try to keep it up for the next ten 10 years. Once again, newer readers who aren't as familiar with our output during the previous decade have an outstanding opportunity to catch up with our release of Bill Bonner's collection of essays, Dice Have No Memory: Big Bets and Bad Economics fFrom Paris to the Pampas.

If you're still on the fence about buying a copy, you can read Bill's introduction on the house, no charge. It's right here. If you're not on the fence, but you haven't ordered yet, what are you waiting for? Grab yours right now

5:00 "The Nook edition of Dice Have No Memory," a reader notes, "is listed under a different name at Barnes & Noble. Is this an error or marketing? Is the text of the B&N electronic edition the full text of the treeware edition? Thank you."

The 5: Ahh, yes, in the wonderful world of publishing, the wires got crossed between Wiley, our publisher, and B&N. The Nook edition is currently listed with a "working subtitle" we nixed six months ago. We're told B&N is in the process of updating the copy, but we'll believe it when we see it. The content and the book remain the same…

Meanwhile, over at Amazon, we see "javajunki," the reviewer who did not read the book but did accuse us of "game-playing" with Amazon reviews, weighed in one last time in the comments section of his review, only to delete his remarks later — before we had a chance to see what pearl of wisdom he'd gifted us with. Darn.

The back-and-forth this week has been, if nothing else, entertaining. But not as entertaining as the book itself. One last time, here's where to get yours


Addison Wiggin
The 5 Min. Forecast

P.S. "If Rep. Ron Paul is the chairman of the House Subcommittee on Domestic Monetary Policy," an Australian reader inquires, "where is the House Subcommittee on Foreign Monetary Policy?"

"I do understand you Americans meddle a lot in others' affairs, but do you have a subcommittee for it?"

The 5: Yep, there is indeed a "Subcommittee on International Monetary Policy and Trade," formed in 2009. Its purview includes such things as the U.S. role in the World Bank and International Monetary Fund. Dr. Paul is a member.

During our meeting yesterday, Dr. Paul said he's expecting to be on a plane back to Galveston tomorrow night… when the two parties fail to solve their differences over "the bar tab on the Titanic".


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More