This is leading to the rise of the "dollar vigilantes." In addition to
countries with large dollar holdings in foreign exchange reserves, hedge funds with almost $2 trillion would be included in
this group. This $2 trillion can be magnified many times by leverage. Hedge funds are naturally mercenary in their investment
choices and are a potential destabilizing force on the dollar. Remember what happened when George Soros cracked the British
pound in 1992? In 1992 George Soros a major hedge fund manager forced a devaluation of the British pound by shorting close
to $1 billion of British pounds. At the time it was widely assumed that the pound was too large to be attacked. Consider that
hedge funds are now overall a hundred times bigger in today's financial markets. This could force the US to reign in deficit
spending in the future. This will also make it more difficult for the Federal Reserve to reliquify if the economy slows down
in 2007 as we expect. Starting in 2001 the Federal Reserve took Fed Funds down to a low of 1% due to concern about an economic
slowdown and deflation. They do not have the ability to repeat the decline to 1% if we enter a recession because the dollar
could begin to freefall as dollar holders around the world assert their concern about debasing the dollar.
Recessions and the Fed
As
can be noted on the chart below (Fig. B), as the economy slows the Federal Reserve tends to cut the Fed Funds rate to cushion
the declines. With the concern about dollar vigilantes the Federal Reserve will have less flexibility in cutting the Fed Funds.
It will be very difficult to cut rates again to 1%. If the Fed's rate were to be cut to 1% the dollar could fall precipitously.
This could be result in the Fed lagging the markets on interest rate moves more so than they have in the past as they keep
one eye on the economy and the other on the dollar. This is similar to what happen in the last 25 years as investors watched
the long bond as a gage on the economy and the Fed.
Much
Lower Interest Rates?
At MaxOut Savings Advisors we believe that these changes will manifest themselves in a
number of ways. This will force the Federal Reserve to be much more vigilant on inflation. This can be seen in the remarks
made recently by a number of Federal Reserve Governors concerning inflation and the need to stay vigilant. They are being
very clear that they will keep up rates and fight inflation. We believe the dollar is the main reason they are making this
case. We expect interest rates to stay higher than anticipated as the economy weakens to support the dollar. This is why we
see the dollar drop when the economic numbers show the economy weakening. This will translate into less help for the housing
market than is expected and more concern for financially leveraged companies as the economy slows. This should lead to a longer
term economic slowdown and a slower recovery. Over time the recovery could benefit more from a declining Dollar and less from
interest rates than past recoveries. Given the present situation with the dollar vigilantes, it is important to recognize
we have less room to maneuver in fiscal and monetary policy than we have had in the past.
MaxOut Savings Advisors is an SEC registered investment advisor. As fee only based advisors we charge an annual fee to manage your portfolio investing in stocks, bonds
and no-load mutual funds. We use Fidelity Investments to handle the custodial
and brokerage services for our clients. If you would like MaxOut Savings Advisors
to manage your IRA Rollover or Trust we would be happy to sit down and meet with you.
If you would like to meet with us or have a question please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com.
Remember to Save Aggressively and Invest Conservatively!
Did
you know that the MaxOut Savings Advisors money managers can now manage your IRA Rollover at Fidelity Investments? At MaxOut Savings Advisors we use Fidelity Investments to handle
our investments for our clients. We invest in stocks, bonds
and Fidelity and non-Fidelity no-load mutual funds. If you would like to sit down with us at MaxOut Savings Advisors and discuss
your IRA Rollover or 401-k or just a retirement review give us a call at 713-627-0400 or email me at ted@maxoutsavings.com
Ted K Geoca
President
MaxOut Savings Advisors, LLC
Houston,
Texas
ted@maxoutsavings.com
713-627-0400
Remember to catch:
The MaxOut Savings Show with Ted Geoca Houston’s
leading retirement specialist on Saturday at 11:00am on KNTH 1070AM!
The MaxOut Savings Show and Report does
not give out financial advice. Any recommendation or idea may not be suitable
for all investors. Moreover, although information contained herein is believed
to be reliable, its accuracy cannot be guaranteed. MaxOut Savings Advisors, LLC
may or may not have positions mentioned herein. MaxOut Savings Advisors, LLC is a Registered Investment Advisor with the SEC.
You should always make investment decisions based on your own financial situation.
To sign up a friend for our free MaxOut Savings Report or to remove your name off the MaxOut Savings Report list, email ted@maxoutsavings.com