A Bourse Diary

Thoughts on stocks, speculation and ... life

Sunday, January 15, 2006

Interest rates, interest rates, interest rates

George Soros: U.S. recession may occur in '07

If George Soros warns, one should listen at least. The danger comes from a too restrictive monetary policy in the USA. He sees a Fed discount rate rising to 4,75% this year, which could then strangle the economic situation in 2007.

The fact that the interest rates can have a significant negative effect on the stock markets and the economic situation was already written about. Therefore my earlier position was, despite of my principally optimistic view, nevertheless somewhat cautious considering the still ongoing cycle of interest rates increases. Until the Fed does not stop with tightening, one should act more carefully.

However, the long-term interest remains low. This provides favorable financing and re-financing possibilities and favourable valuation basis to the stock markets.

The other major economies and currencies such as Euro and Pound contribute to the global liquidity situation through relatively expansive (Euro) and probably neutral (Pound) policy. The both important Central Banks - ECB and The Bank of England - have made no restrictive move. Especially in Europe, a discount rate of 2.25% is very stimulative - if not for the economy directly (due to structural and mental (yes, mental) difficulties to grow faster) then for the financial markets.

Does the Yield Curve Matter?

Still, as far as I can see, the yield curve is not inverse. Development under observation. About the forecast quality of the yield curve, here an article of Business Week Online. Hopefully, Alan Greenspan is nevertheless right , with its reassuring words that the observations from the past are less reliable nowadays because of the globalization of the financial markets ...

All in all, the way of the stock markets an the economy will highly depend on the development on the bond markets. In the last sessions bond prices jumped up somewhat and that makes me somewhat more confident - I would fear high interests (long and short) more than cooling off of corporate earnings growth or of GDP.


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Disclaimer: All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and are in no way intended to serve as personal investing advice and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Readers should not make any investment decision without first conducting their own thorough due diligence. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed.