Jim Rogers expects much, much higher interest rates
Posted on 08 December 2010 with 1 comment from readers
Legendary investor Jim Rogers has joined Marc Faber in predicting ‘much, much, much higher interest rates’ in the US over the next few years and is shorting US treasuries.
He told a Reuters summit this week that ‘everybody in this room knows that prices are going up for everything’, saying that the Federal Reserve uses information on house prices that relies far too much on house prices which have been falling.
Commodity bull
The author of ‘Hot Commodities’ remains bullish on commodities as a defence against inflation: ‘If the world economy gets better, commodities are going to go up in price because there are shortages. If the world economy does not get better, you should own commodities, because [central banks] are going to print more money. Real assets are the way to protect yourself.’
But higher interest rates would generally be bad for both stock market and real estate prices as well as treasury bonds. It is easy to understand that bond prices will fall as they move in exact reverse to interest rates.
Real estate is also a real asset but it is one largely financed in the US through debt and so as debt costs rise, real estate prices fall. For stock markets higher interest rates usually mean lower stock prices because higher interest is a cost against business profits and a dampner to demand in the economy.
Of course, Rogers and Faber’s predictions fly in the face of the stated intention of the Federal Reserve and comments from Pimco boss Bill Gross that interest rates will stay low for several years. They also completely undermine the investment portfolio positions of many private and institutional investors.
Who’s right?
Who will be proven right? Well, it has to be said that Rogers and Dr Faber’s predictions of the past decade have been singularly more prescient than anything from the Federal Reserve or many of Wall Street’s top analysts.
If you accept the logic of money printing and quantitative easing then inflation is the inevitable, if unwelcome consequence, and the only way to control it is with higher interest rates. It is not just the US that has gotten into this position.
China is going to have to tighten up its money supply to prevent runaway food price inflation from getting out of hand. Bond holders in the eurozone are bidding up interest rates to cap government spending and force debt reduction programs.
Mr Rogers is right. It is only a question of whether his timing is right. Listen to what he said on inflation two years ago in this video:
1 Comment posted by readers:
The question is how long can the Federal Reserve keep the interest rates from rising? If you knew that, you could make a LOT of money.
I could be wrong, but I think the USA has passed the point where a financial collapse can be avoided. The majority of the population thinks that transferring even more of the national income to the richest 2% of the US population will actually create jobs. Unfortunately, building new mansions ,and buying gold and Chinese stocks, doesn’t employ that many people inside the USA. The VERY wealthy don’t even contribute much to reducing the National debt, because their taxes are quite low, as Warren Buffett has said. Obama has shown that is still under the illusion that Republicans in Congress want to work with him for the good of the country. What planet is he living on? He learned nothing from the Wall Street banksters nearly destroying the world economy for their own insatiable greed. Some of them even admitted it on TV! Of course, Obama could be just a good actor. He did a nice performance yesterday, pretending to get mad at a bunch or reporters.
All this means that it will be business as usual for at least the next two years. The US deficit will probably be a record next year. To get the Federal debt of the USA under control now would take a combination of huge tax increases for those with high incomes AND huge spending cuts. Spending cuts now will probably reduce demand so much, that another recession would start within a year. The newly elected members of Congress will never raise taxes on the very rich. Too many of them are quite wealthy themselves. They keep repeating on TV that more tax CUTS are needed. That sounds good to some people, but it would explode the deficit. There is no way that the economy will grow fast enough to generate enough new taxes to replace the lost revenue from any more tax reductions. Another Internet isn’t going to come along, nor is the cost of oil going to decrease. The Clinton era is over. And we now know that Obama has no leadership qualities. I thank God he wasn’t President during the Cuban missile crisis. Palin might be able to see Russia from Canada, because Obama might have given Alaska back to Russia in exchange for them taking their missiles out of Cuba. The guy isn’t Presidential timber. You kids won’t see him on any mountain.
And just where do they plan to cut the US budget? Are they going to cut the defense budget? And pull out of where, South Korea? Iraq, and watch Iran take the botton half, right up to the Kuwait border? Are they going to cut weapons systems and close a lot of big plants with very well paying jobs? Will they cut the ‘earned income tax credit’ that sends working class families with children government checks at the end of the year, instead of having them pay income tax on their meager income? Get ready for a LOT more real estate problems with that option. It won’t happen, but a lot of debate will.
And when interest rates do go up, those interest payments on the National debt will too. No, there are only two answers to the debt problem now, double digit inflation, or default. I think we will see the inflation, but within this decade, the default option is no longer out of the question. The weird thing is that for another few years, it could seem like everything is just fine. Just like in 2006.
I just wish that I could see a few nights when the temperature would stay above 0.
Ed Note: You will be lucky to get another couple of months, not years…