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Subject:  Hussman on Interest-rates Date:  4/20/2011  11:20 PM
Author:  charliebonds Number:  32702 of 36525

If you want to read something really tough to understand, try John Hussman’s article on Charles Plosser and the 50% Contraction in the Fed’s Balance Sheet that John Maudlin features as this week’s “Outside the Box” article. One section did catch my interest, “Looking Ahead”.

There are a few possible outcomes as we move forward. One is that the economy weakens, and the Fed decides to leave interest rates unchanged, or even to initiate an additional round of quantitative easing.

A second possibility is that we observe any sort of external pressure on short-term interest rates, independent of Fed policy.

A third possibility is that the Fed intentionally reduces the monetary base, gradually moving interest rates higher as Plosser suggests.

As I read I the article, two out of three scenarios have interest-rates staying where they are or going lower. That isn’t going to make the CD crowd happy, but that forecast would confirm why the big bond funds are positioning themselves as they have been, by shorting Treasuries, taking on additional credit-risk, and extending durations.

How us little guys should respond to such macro-economic guessing is a whole 'nother problem. My suggestion would be to stick with your present investing plan until the facts really do dictate otherwise. That means that if CDs are your preferred investment vehicle, you'd better be prepared for another year or two of bleak returns. Eventually, interest-rates will rise again. So, keep the faith. One day, someday, you'll be vindicated. Meanwhile, those who take a more balanced approaches to bond-investing should continue to do well, not the 25%-35% we made in 2009, but maybe a repeat of the 15%-20% we made in 2010, which wouldn't be all bad.

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