Tuesday, March 18, 2008

Bear Stearns, Carlyle Capital And The Fed

For those who haven’t already seen the headlines in the local paper, Bear Stearns agreed this weekend to be acquired by JP Morgan for $236 million or about $2 a share, a sharp contrast to its 52 week high of $159. In addition, on Sunday the mortgage-bond fund Carlyle Capital decided to close up shop. Many people believe that this is only the beginning of the financial melt down. How will the Fed respond to these recent events at their meeting today?

The Fed will likely lower the key interest rates yet again, anywhere between .5 to a full point. Most traders will welcome as large a rate drop as Bernanke will give after the hammering the markets took this past week, but people who have their savings held in dollars might have other thoughts.

I know that I’ve been pounding this point home a lot lately, but the Fed is destroying the value of the dollar. I can’t imagine that it will be much longer before any foreign countries buying up U.S. treasuries start to think twice. What will happen then? The U.S. is funding its enormous debt by issuing more debt, and if that option gets reduced or eliminated there will be serious consequences. The options come down to printing more money (and further deflating the dollar) or default, and neither scenario would end well.

I’ve said it over and over again, but if you aren’t already diversifying out of the dollar, do it now. It is ok to keep some savings in dollars, but people really need to start looking at a basket of currencies. EverBank offers a product called a foreign currency CD which will pay interest on your money and also allow you to easily diversify into other currencies. They even offer various baskets of currencies to aid with diversification. EverBank also offers silver and gold CD’s, which is a simple way to diversify into the precious metals market.


shartig said...

Seems like it might be a little late to diversify out of the dollar. Might miss some of the ride back up, no? The time to do that was about 3 years ago. Certainly putting some money in a basket will be good, but your money just took the dive, might as well have a significant amount in dollars when it begins its ascent.

Eric Ames said...

Your absolutely correct in that people really should have been diversifying a long time ago, however, I disagree with the philosophy that you might as well leave your money in dollars now. The problem with that is you are assuming that the worst has already passed, my point is that it is just the beginning. I think things are poised to get much worse. There will always be ups and downs in the market, however, over the long run I just don’t see how the U.S. can keep going at its’ present rate. We can’t keep financing our debt with more debt forever.

Take a look at Bear Sterns and Carlyle Capital for a peek at how bad things can get. All the way till the end there were investors saying that the company had hit bottom and that the only way to go was up…things didn’t turn out so well for them. Obviously the U.S. government is a little different than these companies, however, the principle is the same. The ugly fact is that most Americans have all of their money (investment and otherwise) kept in dollar assets. I’m not saying that people should abandon the dollar completely, but to keep everything in dollars (considering all the problems facing the U.S.) seems a little foolish to me.