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Rising Interest Rates

Blog May 24, 2013

Many market commentators have painted themselves into the fool’s corner by trying to anticipate just when Interest Rates would rise. As Robert Kuttner, author of the new “Debtors’ Prison: The Politics of Austerity Versus Prosperity” once penned in BusinessWeek, “What do you call an economist with a prediction? Wrong.” Unfortunately, at some point they will be right.

However, according to UBS economist Maury Harris in USA Today, America is close to “unleash a spending spree. Years of self-denial give way to pent-up demand.” His canary in the mine shaft is what he sees in consumer sentiment: “Harris estimates that in the next five years, catch-up consumption will boost annual consumer spending growth by a half point to above 3% from about 2%.” Really? Are we in the summer of actual recovery? Am I feeling some “green shoots” beginning to grow?

Harris maybe spitting against the wind on this one. As Jeremy Grantham, chief strategist of the $100 billion GMO money managers, remarked to InvestmentNews, which for 90,000 professional investment advisers, is the newspaper of record, “3% annual GDP growth is history.”

The result is a long stretch of Japan-style deflation, and is something that very few people are looking forward to. While rising rates are certainly a nightmare for borrowers, there are ways to prepare for what is to come. Did someone say “Own gold?”

In his recent newsletter, Pimco’s Bill Gross advised: “You’re going to lose money investing … because the central banks say so.” This rally is Fed-powered and it’s their game. Soon the Fed will be forced to stop printing cheap money because when interest rates go up it will cease being cheap money and will become expensive money.

The big players who have benefitted from the mountains of cheap money say the crash “won’t happen soon.” There may be reason not to believe them. They’re playing the game with trillions of dollars, and they are beginning to prepare for “when rates take their first turn higher,” and when that happens interest rates will soar “swift and steep.” At that point it will be too late to prepare for higher interest rates.

Sources & References In This Article

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