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Forex Blog - I Meant to Do That December 19, 2008 By John MauldinI Meant to Do That
December 19, 2008
By John Mauldin
|I Meant to Do That|
|The Lights of Myanmar|
|Some Good News for Borrowers|
|Madoff May Give Us a Sell-Off|
|Conversations with John Mauldin|
|New Orleans, La Jolla, and Merry Christmas|
The Fed has taken interest rates to zero. They
have clearly started a program of quantitative easing. What exactly
mean? Are we all now Japanese? Is the Fed pushing on a string, as Japan
has done for almost two decades? The quick answer is no, but the quick
tell us much. We may not be in for a two-decades-long Japanese malaise,
will experience a whole new set of circumstances. In what will
hopefully be a
shorter holiday version of the e-letter, I will tackle these questions
The Lights of Myanmar
Most of us are familiar with the devastating
hurricane that hit Myanmar (Burma) this last year, and the difficulty in
getting aid to those who were suffering. My friends and colleagues at Knightsbridge were able to get in and help where others
Knightsbridge International is a small group of
volunteers who go to places that are definitely not safe but where the need for
help is critical. Like the knights of old, who ran hospitals and relief
efforts, these modern-day knights go to where the need is greatest. They took
food and medicine to northern Afghanistan before the troops went in (very
dangerous!). They went to rebel-held territory in Sri Lanka after the tsunami,
when no one else could get medicine and other aid in. Whether it's driving in
to rescue nuns in Rwanda (fascinating story!) or taking solar power to clinics
in Myanmar, or water purification units and medicine to Darfur, they go where
other groups fear to tread. They have no political or religious agendas, just
the drive to get aid to where it can do the most good.
Last year an award-wining
documentary was made about three of the Knightsbridge men, Ed Artis, Dr. Jim
Laws, and Walt Ratterman. It was shown on PBS and viewed all over the world.
These men are the real deal, heroes who like to do good deeds but get an
adrenaline rush at the same time. Some of the things they do I cannot write
about, as it would put them and others in serious danger. They are a little bit
crazy, but then you'd have to be to accomplish everything they do.
year you generously supported
missions to both Darfur and Myanmar, where a team led by Walt Ratterman
leading expert on solar power) put into place solar power systems that
power clinics. Walt once showed me a photo of a doctor in Myanmar who
had to do an amputation on a child (as a result of a land mine) in the
dark, holding a
flashlight in his teeth. You can bet that doctor was very happy about
For the past few years your generosity has
helped provide solar power for health clinics for refugees in Thailand,
as well as in villages in Myanmar. Walt wrote me about the project he
"The project we
just completed provided solar power for a medical and training facility in
the Karen State that is operated by the Free Burma Rangers (www.freeburmarangers.org)
The project started with a 4-day journey on foot to get into the area.
Equipment for the solar systems had to be carried in by over 100 people prior
to our arrival. After we all got in place, and completed the training for
the solar installers, we installed twelve 2-panel solar systems. These
systems provided electricity for the central communications center, the medical
training center, the human rights training center, and other miscellaneous
buildings. Once the work was done, we had to take the same 4-day hike
back out of the area."
is not an easy hike. It is through very
dense, mountainous jungles, over rivers, and through deep valleys. The
Free Burma Rangers have trained over 110 multi-ethnic
relief teams, and there are 43 full-time teams active in the Karen,
Shan, Arakan, and Lahu areas of Burma. Seven more teams have been
recently in the Chin area on the Indian Border. The teams have
over 350 humanitarian missions of one to two months into the war zones
of Burma. On average, between 1,000 and 2,000 patients are treated per
mission. You can
see more about this last project at www.sunepi.org/SunEPI/Burma_files/PP_FBR.pdf
Partially due to your generosity,
there are literally thousands of people (many of them young children) who are
alive today. This year Walt wants to complete another clinic on the Thai border
and then one on the India border with Myanmar. It will take approximately
$75,000 to do both.
grateful for any donations to this year's project. Donations can be made at the
website, www.sunepi.org or by directly going
to our Funding Burma page, www.sunepi.org/SunEPI/Funding_Burma.html. Checks
can be made out to SunEnergy Power International and sent to 11 Laurel Lane South, Washougal, WA 98671.
said, these guys are the real deal. They are helping people who the world has
mostly forgotten yet who work hard day in and day out to keep their families
alive. I know we are in a recession, but when you compare what is happening
here to the devastation in Myanmar, our plight does not seem so bad. Please
By the way, Walt is in Palestine right now,
installing more solar power for clinics. I can't mention where some of the
other teams are, but a little extra prayer wouldn't hurt. (Did I mention that
none of these guys take any money, and pay their own way? And if you too are a
little crazy and are in decent shape and you want to join in some of the
projects, drop them a line.)
I Meant to Do That
In my house, when someone stumbles or does
something odd, they quickly say, "I meant to do that." It's a running joke, and
we all have fun with it. This week the Fed did something rather interesting.
Quoting from the release after their two-day meeting:
"The Federal Open Market Committee
decided today to establish a target range for the federal funds rate of 0 to
Normally they have a specific rate and not a
range. But for the last few weeks the market has pushed the Fed's fund rate
close to zero, making the Fed look like they were behind the curve at the
then-official rate of 1%.
Now the Fed, with a range rather than a specific
rate, will be able to say, "I meant to do that." They can keep the Fed funds
rate from rising over 0.25%. And if it stays near zero? Well, now they can say
it is within the target.
And with Fed funds at an effective zero, it is
having the effect of bringing down other rates as well. I wrote in 1998, and
have repeatedly made the point over the past five years, that deflation will be
the primary force that must be dealt with, rather than inflation, before we are
done with the current credit cycle. Over the last year, when CPI (Consumer
Price Index) inflation was high and rising, I kept insisting that the problem
would be deflation in 2009. (That brought more than a few letters telling me I
was wrong.) Because of my view about deflation, I have long held that,
ultimately, interest rates on the US 30-year bond would fall below 3%. That was
rather bold in 1998, or even last year.
Now, that prediction seems rather
tame. We went right through 3% this week, and as I write we are at an
astounding 2.54% on the 30-year and 2.1% on the 10-year!
Note that the 3-month is at zero. Indeed, to get
even 1% you have to go all the way out to a 3-year maturity. This is going to
make it very hard on money market funds to offer any type of yield. Indeed,
several large firms have closed their Treasury money market funds, as it costs
more to operate the fund than the interest paid on the bills, notes, and bonds.
And this is precisely what the Fed wants to see.
Investors are going to have to start looking to other avenues to get yield. If
you can't get a return on your money market, why not put it in a bank
certificate of deposit? You can get a federally insured CD for one year at over
3% at many institutions, and 4% if you want to tie your money up for three
years. Making the competition - money market funds -
less profitable is one way to recapitalize banks.
The Federal Reserve, as noted last week, has
significantly increased the monetary base, but the money supply has not risen in
concert. I failed to explain why last week. It is because banks have not taken
those reserves and lent them out. Until that happens, the Fed is not really
"printing money," they are just making it available. At some point, let's hope
the banks decide to use it.
This week's FOMC statement was rather
remarkable, in that it was very clear. Normally, and especially under
Greenspan, you had to take each sentence apart to try and divine the meaning of
the release and what that meant for the future. And the statements are
typically short. Not this one. Let's look at three paragraphs from it (emphasis
"Since the Committee's last
meeting, labor market conditions have deteriorated, and the available data
indicate that consumer spending, business investment, and industrial production
have declined. Financial markets remain quite strained and credit conditions
tight. Overall, the outlook for economic activity has weakened further.
"Meanwhile, inflationary pressures have diminished appreciably.
In light of the declines in the prices of energy and other commodities
and the weaker prospects for economic activity, the
Committee expects inflation to moderate further in coming quarters.
"The Federal Reserve will employ all available tools to promote the resumption of
sustainable economic growth and to preserve price stability. In particular, the
Committee anticipates that weak economic conditions
are likely to warrant exceptionally low levels of the federal funds rate for
The Fed expects inflation to fall well into next
year. They have noted their concern. They have also said they will hold the Fed
funds rate at these low levels for a long period of time. This is to encourage
longer-term lending at low rates.
serious are they? Richard Fisher is the
President of the Federal Reserve Bank in Dallas (just down the road
from my new
office). Over the past few years, he has been the most outspoken "hawk"
inflation of all the Fed governors and presidents. He spoke yesterday
at the Dallas chapter of the World Affairs Council. Let me quote a
"Price pressures now are in the
other direction...[and] we have to do everything we can to lift the economy up
and prevent deflation from taking [hold].... We are well aware that at some
point, God willing, we'll have to tighten and we'll have to act; and I'm here
to tell you that my voice will be very loud at that juncture, but right now
that's not the issue."
That is a rather
remarkable statement for Fisher. I don't ever recall him talking about preventing
deflation. The FOMC meeting this week (where he is currently a voting member)
must have been a real eye-opener for him.
The Fed has already
committed to buying mortgages and consumer loan securities. In Ben Bernanke's
famous "helicopter speech" in November of 2002, he stated that one of the ways
the Fed could fight deflation would be to "move out the yield curve" and set
target rates for longer-dated securities, like 2- or 3-year US notes. In the
FOMC release, the Fed noted that they might indeed use that tool. That is one
of the reasons interest rates are falling, as the market must sense that the
Fed is prepared to do just that. This meeting simply put the market "on notice"
that at some future meeting it is quite possible for them to set a target rate
on longer-dated securities.
Some Good News for Borrowers
Remember that ARMs
(Adjustable Rate Mortgage) reset problem I was writing about late last year?
This includes all the alphabet of ARM mortgages, interest-rate-only mortgages,
pay-option ARMs, etc. Resetting the rates has been a problem up until now, as
the rates which are the usual base for the resetting have been high, forcing
mortgagees to pay a much higher monthly mortgage when the rates reset. However,
given the current environment, that may no longer be a problem in the near
The large majority of
ARMs are linked to either 1-year LIBOR or 1-year Treasuries. We saw above that
1-year Treasuries are 0.39%, and 1-year LIBOR is 2.09. Both were at 4.5% in
2006. Those getting ready to reset in the near future are actually going to
catch a break and see their payments go lower!
Fellow analyst Mish
Shedlock writes that he has an interest-only mortgage tied to 1-month LIBOR,
and his annual rate is going to drop to 1.75%.
can bet that between
the Fed and the incoming administration they are going to pull out all
stops to get 30-year fixed-rate mortgages to drop along with the
10-year US bond, with which mortgages normally move in tandem. The
spread is now as wide as I can
remember, at well over 3%. Not all that long ago it was 1%. It is quite
possible that we will see mortgage rates below 5% and approaching 4% in
next year, at least for conforming mortgages. Since I have two kids
bought homes this year, I hope they will be able to get refinancing at
rates with whatever new program the administration introduces.
Madoff May Give Us a Sell-Off
Much of the selling
pressure that has come in the stock and credit markets has been rightly
attributed to forced selling by hedge funds in an effort to meet redemptions
for January 1. I wrote a few weeks ago that this could be the kicker for a
powerful rally in the first quarter. Most of those redemptions will show up in
the last two weeks of January, with the rest by the middle of February.
Institutions, which are the bulk of redemptions, are going to have to put that
money to work. Do you put it into bonds at 2%? That is not going to get you to
the target returns that you need for the future if you are a pension or
Much of that money is
going to go back into either the stock market or into other hedge funds. This
could be the fuel for a real rally. However, that was before Madoff. I have no
hard evidence, but I know a lot of funds of funds had exposure to Madoff. Those
funds are likely to see further redemption requests and face the need to
further liquidate underlying hedge fund positions. Also, a lot of people who
did have investments with Madoff are now going to need to get their liquidity
has the potential to put more selling pressure into the market. Enough to
overcome the tsunami of money that is coming back into the market? I don't
know, but I think it could put a damper on the rally I was predicting. The
actual redemptions for most funds of funds will be next April 1, as only a few
offer monthly liquidity, but the selling will have to be in the months before.
This will need to be closely watched in March.
Conversations with John Mauldin
some of you
got a special email from me talking about a new subscription service
will be offering beginning next month, called "Conversations with John
Mauldin." One of my "secrets" is that I have a very powerful rolodex
(or, for the younger
crowd, my contacts list). Each month, I will call up one of my special
in the investment and economic world and hold a conversation with them
the important topics of the day - how we
should be investing, what opportunities and pitfalls are out there in
world, etc. Some will be names you recognize, and others you should.
get to listen in, download to your computer, or read a transcript,
Right now, we are
offering a subscription for $99, half off the regular $199 price. This is only
available for the Holiday season. You can click here and subscribe, if
you haven't already. Insert code JM33
for this special offer.
those of you who experienced errors signing up, please email firstname.lastname@example.org and we will let you know whether your subscription and credit card went through.
If you like my regular
e-letter (and it will still come to you each week), then you are really going
to like this new service. This letter will not change at all. This new service
is to let you look over my shoulder as I talk things over with colleagues who
are in the know. I hope you join in and get to hear the January conversation,
where we will discuss the forecast for 2009. You won't want to miss it.
New Orleans, La Jolla, and Merry Christmas
It is time to hit the
send button, as I am off to New Orleans, where I'll spend the next four days
with Tiffani, working on our new book, Eavesdropping on Millionaires. I
really am looking forward to getting out of the office and focusing on the
project. It's a lot of fun to interview millionaires and get their stories.
There are just so many ways to achieve wealth, and so many interesting paths
and personal insights that we have come across.
I will be in La Jolla in mid-January to have our annual planning
with my partners at Altegris Investments. I always look forward to
Jon Sundt and his team, and feel they do an excellent job for our
clients. After that, I have a few trips planned in the US, but no trips
lined up yet outside the country. That means I will have to get my
"kicks" by reading International Living. It is an inexpensive way to
learn about traveling and living outside your home country. For me, it is cheap
fantasy about that beach home in Paradise. You can get your own subscription at
The move into the new
offices has been rather hectic, to say the least. Getting used to a new phone
system, trying to unpack boxes, traveling to Phoenix (where it was rainy and
cold), getting Trey ready for a new school, and more than the usual number of
distractions has all made life more interesting. But then I have so many
blessings that complaining about the small hassles seems out of line this
I am not sure if I
will write another letter between now and January 9, when I will do my annual
forecast issue. Let me take the time to wish you, gentle reader, a heartfelt
Merry Christmas and the best ever New Year. While the economy may be a tad
bumpy, the important things like family, friends, and health are where our real
wealth is. Enjoy this season and all that it means.
Your still having to pack analyst,
Copyright 2008 John Mauldin. All Rights Reserved
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