Monday, June 11, 2007

The Sleeping Dragon

Interest rates are starting to creep up. With all of this money sloshing around on the globe, it seems a little odd, doesn’t it? Remember back to the Savings and Loan debacle? Banks in trouble raised their rates to draw new funds in. After a few bank failures people started to understand why those rates were higher.

Financial institutions raise interest rates for two reasons, to attract capital to cover losses, and to take advantage of business investment opportunities.

So in today’s world, there is no risk (just ask anyone), but there is a rising interest rate. This tends to imply that financial institutions are calling for more cash. Whoever has the highest rate gets the money.

The interest rate on the 10 year T-bond is increasing. In times of stress, people purchase treasuries. So without the perceived risk, the "investor" moves away from Treasury bills to financial instruments paying a higher rate.

Are investors demanding more interest, or is the government asking for more money than what is being offered? Maybe a little bit of both. But one thing is obvious, the dumb money will chase rates.

Rates are rising and it’s not because of housing demand. What could be causing it? Several other large bubbles come to mind, there is the credit card bubble, the China bubble and our stock bubble. There is absolutely no mention of foreign banks having any problems and that sounds peculiar in itself.

The sleeping red dragon is beginning to stir. The concept of risk will soon be rediscovered. How many bubbles are in your portfolio?

No comments: