The financial crisis has presented investors with opportunities never seen before in history.  It has brought some unprecedented market events allowing for profits for those on the right side.  At the same time, the majority of the heard lost a large portion of their wealth, as it was transferred elsewhere.  The coming wealth transfer will likely involve a combination of the collapsing value of fiat currencies, severe inflation and rising interest rates. The next exceptional profit opportunities may be on the short side of the interest rate markets, as yields increase.

The U.S. stock market has had a decent rally after the international bankers injected trillions of dollars into the financial system. The pundits on mainstream media refer to this current rising market as “green shoots,” but don’t be fooled, because these “green shoots” are nothing more than a false rally. History shows us that a bear market rally can last as long as 18 months giving traders a nice opportunity to take advantage of the mainstream hype. However, if you are investing in the long side of the equity market, you must use caution.

Unemployment rates continue to rise and real estate continues to get worse. Price earnings ratios show that most companies are excessively valued. There are many more insurance companies and other financial institutions that are nearly insolvent. The entire commercial real estate sector is believed by some experts to be severely undercapitalized.

Investors must realize that the current system and the current economic policies are unsustainable. Government deficits this year will exceed $2 trillion even by the most conservative assumptions. The already unsustainable debt is only going to get larger. In the government’s efforts to prevent the economy from sliding further downhill, they have now spent nearly 15 trillion dollars in bailouts and other irresponsible measures. The currency simply cannot maintain its value and dollar investors are already beginning to demand higher rates of interest, if they are going to continue buying debt in the face of the potential for severe currency devaluation.   

Bill Gross, the chief investment officer of bond management firm Pimco, makes the case in a letter to investors that the U.S. national debt could easily reach 100% of GDP, perhaps as quickly as in five years. His calculations are that the Treasury would have to pay 5% or 6% on the national debt to attract enough investors to fund it. The “bond vigilantes” are coming back into the market as the massive oversupply of Treasuries meets falling demand. The threats once made by China and Russia to dump U.S. Treasuries are becoming realty.   The reality is that if inflation goes into the double digits within the next 3 years, interest rates may skyrocket.

This will certainly put a damper on the already distressed financial institutions, consumers, and real estate sector.  The Federal Reserve is stuck in a situation where if they allow the money supply to contract it will collapse the U.S. economy. Given recent actions of the Federal Reserve, it seems as if they are willing to do anything …even suffer severe inflation to prevent this. 

The mainstream media and the U.S. government continue to say that the worst is over and that there is nothing to worry about. Should you believe them; or should you be asking yourself “how can I protect myself or my company from the likely threat of rising interest rates?”

Institutions and investors that are at risk of rising yields must act soon if they are going to protect themselves.  If you would like more information on how you can manage the risks or potentially reap profits from rising interest rates you can reach me at 1-312-479-2077 or email me at jared.irsh@archerfinancials.com.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.