Thursday, April 29, 2010

UPDATE to Rising Rates Just Around the Corner

Original article.

UPDATE--What to do about it:

" time passes, the Fed will be forced to “follow” the bond market. It won’t be able to keep the fed funds rate pegged near zero percent. It will have to raise rates — whether it wants to or not — in order to show it’s trying to tamp down inflation and to reassure fleeing bond investors that it’s not going to let the value of their money collapse. When that happens, rates on these other kinds of loans will rise.

Remember the 70's and double-digit prime rates? We're going to relive them--don't be surprised if odd-even gas rationing makes a comeback. According to the PPI, the Fed's already about 6% behind the interest rate curve--there is a strong possibility that we may see a sudden big jump in interest rates as soon as the employment picture brightens a little.

So what can you do to protect yourself?

1. Lock in the longest-term mortgage you can get now if you’re buying a house or refinancing your existing loan. A rate of 5 percent and change is much better than you’re going to get six, 12 or 18 months down the road, in my view.

2. Pay down or close any home equity line of credit you have — and work at paying off credit card debt. The interest costs on those debts are going to go up when the Fed is forced from the sidelines.

3. Many banks also allow you to fix the rate on a portion of your home equity line of credit balance for a fee. Check to see if you have that option and if so, take advantage of it. The same would go for any business loans you may have outstanding.

By taking all of these steps — with your...personal finances — you will be prepared for the world that’s coming. A world where cheap, easy money is a thing of the past. A world dominated by The Great Interest Rate Explosion of 2010-2011."

If you have money in bonds, bond funds, or bond ETFs, now would be a good time to get out, or short them (through inverse bond ETFs, inverse bond funds, or just an old-fashioned short). Bonds aren't going to be worth the paper they're printed on! As far as stocks, look outside the U.S., particularly to the Pacific countries: Japan, China, Taiwan, Phillipines, Vietnam, Australia (especially Australia--they got an early jump out of the recession), and any other Pacific country you can think of, because they lost less, and will gain more.

If you want to ride the tide UPWARD during this coming storm, go to commodities, energy, natural resources, and metals. If you merely want to defend yourself against loss, go to the pantry (to fill it for the next year or so), the mortgage, the credit card, and any other expense that charges interest, and DUMP THEM--GET THEM PAID OFF! Then start working on your expenses that DON'T charge interest, and cut them back too.

Start a garden, learn about other sources of protein besides meat, cut the cable/satellite, cut a car if possible (at least cut the payment), put a halt to any more pets and kids (if you haven't already), stock up on thrift-store clothing buys for future needs (for yourself and kids), and get your house weatherized--we're in for some VERY hot and cold times ahead (mostly from skyrocketing energy prices). Now is NOT the time to hit the mall and buy "things", even though (foolish) others around you are--it's time to coast uphill with what you have, because we don't know how long this interest rate explosion will last. The last one ran through at least 2 presidents--that's 8 years!

It's going to be a tough climb, but we'll see each other at the top. We may be a little worse for wear, but we'll still be upright, breathing, and have our dignity. By then, more people will be back at work, and the tax burden will have lessened somewhat. Incomes will rise, and prices will also moderate to something closer to affordable. Time to save, not spend.

You will think the coast is clear, but just wait--the next downhill slide is not too far away, and you want to be prepared (with cash on hand) to buy low again.


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