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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Tuesday, November 20, 2007

Short Term Rates & US Dollar

Short Rates

My 3 mo. T-bill yield indicator spans more than 90 years
of data. It is a diagnostic tool and not a forecasting
model. Based on recent inflation readings, the T-bill
should be trading in a range of 5.10 - 5.50%. The bill
is now around 3.50%. Part of the discount to the model's
value reflects the recent 75 bp. of cuts to the FFR%, but
most of it reflects investor flight to quality. Some
players are anticipating further FFR% rate cuts as the
economy slows, and some have moved into bills and notes
hurriedly as they dump or reduce positions in higher
risk assets.

A 3.50% T-bill yield is not attractive at all to the
average investor and saver. With inflation at 3.5% on a
yr/yr basis, the after tax return is negative and savings
are being confiscated. For higher net worth savers, 6
month CDs at 5.10% are even a bit below breakeven.

Holding taxes aside, the real or inflation adjusted rate
on the bill has fallen from a cyclical high of 3.8% down
to zero since late 2005. Retirement funds have been put
under increasing pressure to increase risk levels to
maintain beneficiary purchasing power.

My longer run measure of inflation has been running about
3.1% this year. On this measure, short rates and shorter
duration T-notes are just too low and unless inflation
pressures ease, savers are going to continue to take it
on the chin. With the economy slowing, consumers may
be pushed to increase savings anyway, especially with a
soft housing market.

US Dollar

The rapid decline in the real rate of interest since late
2005 has greatly reduced the appeal of holding dollars for
US householders and businesses. That alone is a good
reason for foreigners to avoid dollars in preference for
stronger currencies. The cost of doing business in and
with the US for Asian mercantilists like China is rising
sharply as US rates and the dollar decline. The weak dollar
is sharply increasing US competitiveness abroad and is
producing large currency translation gains for US multi-
nationals. Even smaller US companies are getting into the

I genuinely like the fact that US exporters are doing very
well, and if it takes a low dollar for a goodly time to
put our exports out there successfully, fine. However,
The Fed owes savers as well and must move as quickly as is
prudent to restore short rate equilibrium for savers.

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