What if interest rates rise? Governmental Control Problem?
Posted: Sat Oct 09, 2010 8:49 pm
My understanding is that interest rates are destined to rise once the Fed stops screwing around. Many people believe this will result in inflation. My understanding is that gold prices have skyrockets, as well as TIPS have gone up substantially over the last 2 years, while people expect interest rates to rise.
Now interest rates have not risen due to governmental controls. Thus LT Bonds have not decreased, but increased substantially in value due to government artificially reduced interest rates. Even though inflation is expected, the bond market must price towards current interest rates, or arbitrage will occur. Until interest rates actually rise, LT Bond principals cannot fall. And even if the market expects higher interest rates, the Fed has the power to keep pushing interest rates down against market forces.
Let's say that I am correct in the above, which seems reasonable (Although I believe I've read, perhaps from Harry Browne, that the Fed actually doesn't have as much power in driving down rates as we think, something about the Fed only making up 1% of the total market).
If the above is true, then once government regulation on interest rates change, and rates rise, then LT Bonds will drop. Gold and TIPS can't go up, because the rising interest rates is already priced in.
Stocks cant go up, because rising interest rates means a higher cost of capital for businesses. In fact, if interest rates rise, but not to the current level that gold is pricing it in, then gold may even decline as well. Or gold may decline when people start pushing money back into stocks and reaping the gold wins over the last few years.
This seems like a "perfect storm" for the PP, that may cause problems for PP investors. I don't think the PP would work anymore if the government stepped in and said "Gold is now $1400 an ounce forever. It will only change when we say it changes." The PP was not possible back when gold was fixed at $20 an ounce (or whatever it was).
Essentially, LT Bonds are being "fixed" by the government as well.
Then again, to play Devils Advocate with myself, Harry knew that the Fed did things to screw with interest rates and wasn't concerned. And also, in the situation I wrote above, if everything is going down, then whats the alternative to the PP? There is none. I just heard on an old Browne radio cast where he describes one year that all 3 went down, and it caused a 6% decline that year, and that was rare, and followed by an unexpectantly high return.
Thoughts?
Now interest rates have not risen due to governmental controls. Thus LT Bonds have not decreased, but increased substantially in value due to government artificially reduced interest rates. Even though inflation is expected, the bond market must price towards current interest rates, or arbitrage will occur. Until interest rates actually rise, LT Bond principals cannot fall. And even if the market expects higher interest rates, the Fed has the power to keep pushing interest rates down against market forces.
Let's say that I am correct in the above, which seems reasonable (Although I believe I've read, perhaps from Harry Browne, that the Fed actually doesn't have as much power in driving down rates as we think, something about the Fed only making up 1% of the total market).
If the above is true, then once government regulation on interest rates change, and rates rise, then LT Bonds will drop. Gold and TIPS can't go up, because the rising interest rates is already priced in.
Stocks cant go up, because rising interest rates means a higher cost of capital for businesses. In fact, if interest rates rise, but not to the current level that gold is pricing it in, then gold may even decline as well. Or gold may decline when people start pushing money back into stocks and reaping the gold wins over the last few years.
This seems like a "perfect storm" for the PP, that may cause problems for PP investors. I don't think the PP would work anymore if the government stepped in and said "Gold is now $1400 an ounce forever. It will only change when we say it changes." The PP was not possible back when gold was fixed at $20 an ounce (or whatever it was).
Essentially, LT Bonds are being "fixed" by the government as well.
Then again, to play Devils Advocate with myself, Harry knew that the Fed did things to screw with interest rates and wasn't concerned. And also, in the situation I wrote above, if everything is going down, then whats the alternative to the PP? There is none. I just heard on an old Browne radio cast where he describes one year that all 3 went down, and it caused a 6% decline that year, and that was rare, and followed by an unexpectantly high return.
Thoughts?
