Eric Roseman's Eruptions: Stocks, Global Markets and Commodities BLOG

History Suggests More Pain Lies Ahead for Investors

Is it time to start buying stocks again?

According to Ned Davis Research, the average bear market since 1960 has lasted about 14 months resulting in an average 31% decline for U.S. stocks before a bottom finally formed. The mildest bear market saw the Dow decline 21% in 1990 and the worst bear market resulted in a 45% plunge from 1973 to 1974.

This bear market, unlike the last one from 2000 to 2002, was triggered by the sub-prime credit crisis, a bust in real estate and compounded by soaring energy and food prices. The last bear, a first-class tech-wreck, which ended in October 2002, saw the S&P 500 Index crash a cumulative 41% and the Dow a dizzy 38%.

The good news is that bull markets or big rallies follow bear markets resulting in significant double-digit gains for investors. But the key is to avoid losing money, or least getting smashed amid a bear market so that an investor can recover quickly and begin compounding again once the primary trend changes.

In 2008, only commodities, some foreign currencies and Treasury bills have worked to protect portfolio while stocks, including emerging markets and most fixed-income securities have declined.

Ned Davis Research points to an average 31.8% gain for U.S. stocks 12 months following the conclusion of a bear market dating back to 1960. And before peaking last fall, the S&P 500 Index gained a cumulative 105% from its bear market low in the fall of 2002.

From its peak last October, the Dow and the S&P 500 Index have now declined a cumulative 19% heading into Monday’s trading. If history is correct, this suggests that stocks still have another 12% or so of losses ahead before forming a bottom. That means more pain lies ahead for investors in stocks.

But there is light at the end of this dark tunnel. I’m finding a plethora of bargains worldwide right now – including big dividend-paying stocks like General Electric (NYSE-GE) that now yield 4.7% and trade at a multi-year low. Many other large-caps trade at similar levels. Though stocks might have been fairly valued heading into this crisis last summer, the damage thus far has taken every sector of the global market – except basic materials and energy – to very attractive levels.

This bear market will end – eventually. The first step to the next bull market is sharply lower oil prices. Until energy prices retreat, stocks will continue to suffer losses.

Are we in a Secular Bear Market?

With global stock markets now down about 20% from their highs last October, it’s time to debate whether we’re in a secular or cyclical bear market.

Is this the 1970s all over again? Are we heading into a protracted period of economic misery driven by rising inflation and skyrocketing commodities prices? If so, aren’t stock prices still vulnerable to further declines?

This is not stagflation – at least not exactly.

Over the last several months I’ve borrowed the term “inverse stagflation” to best describe the current global macroeconomic environment. Since no two economic cycles repeat themselves identically, I can’t label this environment as strictly stagflation; rather, it’s a bizarre and lethal cocktail of skyrocketing commodity prices mixed with deflation in housing and bank credit. This is “inverse stagflation” as coined by commodity hedge fund manager, Rene Haugerud in New York.

In the 1970s, housing values didn’t collapse. Neither did bank credit. What distinguishes the 2000s from the 1970s is the credit crunch combined with a bear market in housing – two formidable forces working to depress economic growth and cool rising inflation.

What most analysts fail to realize is that we can’t be in stagflation. That would imply inflation across all tangible assets, including real estate. But that’s not the case over the last 24 months as housing values suffer their worst percentage decline since the 1930s. Housing values are also declining in Ireland, England and Spain and will probably spread to other European countries before the year is over.

Also, with lending terms much harder to secure for even the most credit-worthy borrowers, the contraction of bank credit is another highly deflationary variable that is pulling the economy into the gutter.

Banks simply don’t have the excess capital they did 12 months ago prior to the credit crisis; the entire American -- and to a lesser extent, European banking systems are still trying to recapitalize devastated balance sheets. This whole process is certainly not coincident of stagflation.

The odds are that investors face a prolonged period of stock market weakness. Inflation is not bullish for earnings unless companies can make higher prices stick. More companies are raising prices, especially the commodity producers. This whole process is now moving up the consumption chain and will result in higher prices for just about everything – mainly, but not exclusively, due to soaring oil. Not every industry will successfully raise prices and that alone implies the broader market will continue to suffer or at best, go nowhere.

Combined with the prospects of Obama winning the elections this fall and higher corporate and individual tax rates in 2009 or 2010, stocks are going to have a very hard time making any serious progress. Rescinding the Bush tax cuts would be devastating for the United States and therefore the global economy because it would be deflationary, draining business investment, consumer spending and depress global demand for goods and services.

If the next government is stupid enough to hike taxes in the midst of a recession, the stock market will suffer incalculable declines. Adding more insult to injury, the Bernanke Fed might be compelled (or forced) to raise lending rates as inflation continues to accelerate threatening commodity inflation.

None of this suggests we’re in a cyclical bear market. Rather, this is a secular bear market or possibly a prolonged period of stagnation. Investors should focus on alternative sectors of the market with low-to-negative correlations to common stocks over the next several years. This includes commodities, mostly gold, foreign currencies in Asia, alternative energy, distressed global blue-chips that pay dividends and hedge funds and managed futures managers that can profit in this mess. Also, structured products that offer a capital guarantee also look interesting in this environment, including one tied to financial services and other distressed areas of the market.

Have a good weekend. See you on Monday.

Big Bad Bear is Still Here in 2008

The stock market futures for this morning’s opening in New York look pretty dismal. In Europe, markets are down over 1% with more bad news hitting the financial services sector as Fortis scraps a $2 billion dollar dividend payment to shareholders.

Thus far, June is the worst month for global investors since January, with the S&P 500 Index plunging 6.6% and the MSCI World Index down 7%.

From a technical standpoint, the Dow Jones Industrials and the S&P 500 Index are now just whiskers away from breaching their March lows. This is bad news for investors since a violation of these support levels implies a serious freefall lies ahead in the absence of lower interest rates, lower commodities prices (namely oil) and weak corporate earnings. This remains a bear market. The post-Bear Stearns rally since the Fed’s rescue in mid-March is over.

The above chart isn’t pretty. The Dow now trades below its 50-day and 200-day moving average while market breadth continues to disintegrate. Many stocks are getting trashed in New York and overseas. In fact, stocks in Europe, and many emerging markets in Asia are down more than 20% and in some cases, off more than 30%. Chinese equities are down 43% and in India equities are down a dizzying 30%. Only Brazil, Mexico and a handful of other bourses are up a few percent in 2008.

Meanwhile, I’ve had my doubts all along about the big advance for the Dow Jones Transportation Average earlier this spring. Without a confirmation from the Dow Industrials, that rally is a farce. How was the market supposed to make a serious advance with skyrocketing energy prices, plunging real estate values and consumer confidence at a 16-year low?

Also, the credit markets, which had been improving since late March, are now seizing up again in late June. Credit spreads are narrowing across the board, junk bond defaults are rising, auction rate securities are still clogged and LIBOR rates are rising relative to T-bills, also known as the TED spread.

This bear market, which began last August, isn’t over. I imagine this will remain a very tough summer until elections in November. Seasonal strength should arrive later this fall as the big sellers continue to unwind their leveraged bets and stage a final act of capitulation over the next few months.

Stocks worldwide, especially in the United States and Europe, are cheap. Compared to bonds and other assets -- common stocks now pay attractive dividends on both sides of the Atlantic and for overseas investors the United States is ‘On Sale’ with a dirt-cheap currency. U.S. assets are cheap.

But for stocks to muster a sustainable rally or even embark on a new bull market, the Fed and other central banks have to contain inflation, namely soaring energy and food prices. That won’t happen until the economy slows further and demand destruction drives oil prices sharply lower. Fasten your seatbelts.

The Next Big Trade as Oil Prices Eventually Decline

Skyrocketing energy prices are making the headlines almost daily since last spring. Over the last 12 months, crude oil prices have more than doubled and gas prices are heading to $5 per gallon. Investors are blindly buying energy stocks and commodity funds are lunging after crude oil and natural gas futures. A full-blown mania now surrounds the energy pits.

In just about every facet of global business and consumer livelihood, high energy prices are wreaking havoc. Prices are rising, if not soaring, for most goods across the world as oil’s ubiquitous role is forcing consumers and companies alike to boost spending, reducing discretionary income and slicing corporate profits.

But surging oil is yesterday’s news. Demand destruction is underway. There will be a point when high prices compel consumers to use less oil, gasoline and other distillate fuels. This trend is already occurring since April as Americans consume less gasoline.

Since March 31st, crude oil prices have soared more than 35% -- an astonishing rally in a short period of time. At some point, a correction looms – and that’s when some sectors suffering under the weight of expensive oil will post some spectacular gains.

The Worst Business in the World

The airline industry is admittedly the worst business in the world. Soaring jet fuel prices, expensive labor costs and rising airport user fees are forcing carriers worldwide to cut routes, reduce capacity and shed labor. Many analysts forecast several big carriers, mostly in the United States, will probably collapse this year if jet fuel prices remain at these elevated levels.

Airline stocks are probably a one-way ticket to the poorhouse. That’s certainly been the case over the last 18 months as input costs have surged, mainly because of a 100%-plus rally for jet fuel. Airline stocks also earn the dubious ranking as the worst performing sector of the market over the last 12 months – even worse than the financials!

Since June 2007, the AMEX XAL Airline Index of global carriers has collapsed a formidable 62%. Over the same period, jet fuel prices have doubled, airlines have cut capacity and executives in the business are warning of the worst economic climate for the industry since 9/11. In short, these are dark times for airline executives, employees and passengers.

Turning Bullish on the Best Carriers

I’ve turned bullish on the airlines for the time in my investment career. Historically, I’ve avoided the sector like the plague; but at these bombed-out levels, ultra-low valuations and a major catalyst for rapid price appreciation on the heels of a decline in oil prices, the airlines are just too contrarian to ignore.

I’m now buying one of the best-managed airlines in the world. This blue-chip company just raised its dividend again recently – now paying an effective 8% per annum in one of the world’s strongest currencies. That yield is almost twice the rate paid by 10-year bonds in the United States and Europe. This stock is also trading at a 52-week low, still earning profits and has most of its jet fuel hedged at about $75 per barrel. How many airlines do you know that are still making money, yet alone raising dividend payments?

The way I see it, if oil prices suffer a 20% correction or more, which is highly likely after a nonstop blistering rally since last summer, industries leveraged to the price of oil or in this case, jet fuel, will rocket higher. Since the advent of the subprime debacle in July 2007, every segment of the commodity bull market has suffered a correction – except the energy complex. The rally has literally been unstoppable.

Huge Upside Leverage

As oil prices ultimately post a savage correction that is typically associated with secular bull markets, industries handcuffed by high oil prices will post major reversals.

No bull market heads straight to the Moon. Corrections do occur, and they tend to be brutal. Plus, with global governments now throwing everything they can at high oil prices, including the Saudis, the odds of a brief respite are growing more likely by the day. This is a great time to speculate on the best-managed airlines.

If oil prices decline, as I expect them to, then input costs for all carriers will decline markedly, if even for just several months. There is certainly enough room to juice this speculation for at least a quick 35% to 50% profit, possibly more. Plus, add some dividends into the picture, profitable earnings and a big bear market rally and investors should hit a home-run before December.

In the August issue of The Sovereign Individual (TSI) I’ll be recommending one of the world’s best-managed and most profitable carriers. This contrarian gem is ripe for an investment ahead of a big correction in oil prices.

Sometimes, it pays to look the other way behind the trail of a blazing bull market in energy prices. In this case, some airlines will reward investors with big profits over the next 6-12 months. I’m betting on it.

Party is Over for Emerging Market Bonds

The world’s best performing fixed-income index since 1992 is now stuck in a rut. And as stagflation concerns continue to mount in the emerging markets, returns are likely to turn negative for the first time since 1998.

The J.P. Morgan Emerging Markets Bond Index has outpaced the returns generated by all other debt markets over the last 15 years, including strips and junk bonds. Emerging market debt has also outpaced the S&P 500 Index since 1993 and many other industrialized economy stock markets.

Marked by a boom in emerging markets growth since 1998, including soaring foreign exchange reserves, a host of credit upgrades and shrinking trade deficits now well into surplus this decade, emerging market bonds have generated double-digit gains. Earlier this spring, Brazil, one of the largest constituents of the emerging markets bond index, was boosted to investment-grade status by the credit rating agencies. Brazilian debt maturing in 2015 now yields just 1.16% more than comparable Treasury bonds – an incredibly low yield premium compared to just five years ago.

But with growing inflation concerns, especially in Asia, investors are redeeming mutual funds dedicated to this sector.

According to Emerging Portfolio Fund Research, the appetite for global bond funds continues to fall off a cliff with year-to-date outflows now exceeding $15 billion dollars. For the week ending June 20, emerging market bond funds suffered from growing jitters about rising inflation in Turkey, Russia, China and Argentina. In Asia, consumer prices are now in excess of 7.5% -- their highest rate in 9 ½ years. Also, many emerging market economies are now overheating as central banks combat rising inflation with rate hikes. Rising interest rates, combined with growing inflation, depresses bond prices.

Over the last several years, amid a massive bull market for raw materials, emerging market countries have benefited from shrinking credit spreads, or interest rate differentials between emerging market bonds and risk-free Treasury bonds. The largest emerging markets, like Russia and Brazil, benefit enormously from rising commodities prices. Others, including China and India, have also been the recipients of an export boom driven by low wages.

Despite the increasing redemptions in 2008 from individual investors, credit spreads remain historically low with the benchmark J.P. Morgan Emerging Markets Bond Index yielding just 2.88% more than ten-year Treasury bonds. Over the last 12 months, emerging market debt has gained 5.9% compared to 12.6% for ten-year T-bonds. But this year, the asset class is down 1.6% as inflation and rising rates knock prices lower.

With the exception of high-grade corporate debt in the United States and in Europe, the majority of fixed-income markets should be avoided in a growing environment of toxic inflation in food and energy prices. Many emerging market central banks will be forced to raise rates even higher this year and that will be bad news for stocks and bonds.

For now at least, it looks like the big post-2002 bull market for emerging market assets is finally over. It won’t resume until governments lick inflation.

Another Reason Investors should be Patient with Japan

Over the last several years, investing in Japan has been a difficult exercise in patience.

Despite offering some of the best stock market values in the world accompanied by a cheap currency, Japanese stocks have posted some of the worst returns. But at some point, I think patient investors will make a small fortune in this country, especially speculating on volatile small-cap stocks. Historically, big bear markets for Japanese smaller companies have eventually rewarded contrarians with big triple digit gains of 100% or more once the selling ended. I’m expecting this to happen over the next 12-24 months.

Japan is not the most shareholder friendly country in the world. Many companies are reluctant to submit to foreign investor pressures like increasing buybacks or issuing special cash dividends. It’s still a clubby environment. Yet many Japanese companies are cash rich today and harbor some incredible values; small-caps continue to trade below book-value and for the first time in a decade, large-cap stocks traded on the Nikkei sell at a discount to their American counterparts as measured by the S&P 500 Index. Many large-caps and even small-caps in Tokyo pay dividends in excess of 3% -- unheard of 15 or 20 years ago.

Another reason to be patient with Japan is the country’s growing role as a distressed investor.

Japan, like most Asian countries, did not suffer significant subprime losses. Japanese banks have largely been conservative players on the world stage since the onset of crippling deflation in the early 1990s wiped-out a good chunk of shareholders’ equity. Many banks have emerged largely unscathed from the ongoing global credit crunch and banks are armed with pools of cash collected from Japanese savers.

On Friday, Sumitomo Mitsui Financial Group (SMFJY) agreed to inject $925 million dollars into distressed British bank, Barclays plc (NYSE-BCS). Though the amount is small relative to Sovereign Wealth Funds, it’s still part of a growing trend in Japan as banks expand their roles and accumulate distressed assets in Europe and the United States. This marks a significant contrast to the 1980s when Japanese institutions loaded-up on expensive California and New York real estate only to get burned when that “bubble” ended in 1989-1990.

Japan is one big contrarian value play. The market is extremely attractive from almost every valuations matrix and, at some point, will lead major economy markets again in stock market performance. I just can’t say when this will occur.

I’m making yet another trip to Tokyo later in September to learn more about this great country and the huge values in equity markets. Stay tuned!

Safest Currency Bet with Low Risk Remains the Yuan

China’s currency is probably the best risk-adjusted play for low risk currency investors over the next ten years and beyond. Its gradual appreciation since July 2005 when the central bank raised its trading band has delivered consistent returns for investors. Over the last three years, the yuan has risen a cumulative 16.9% against the dollar.

Under immense foreign policy pressure from its largest trading partners in the European Union (EU) and the United States to revalue its yuan, China’s currency is probably one of the most undervalued in the world. The country sports a bulging $1.5 trillion dollar war chest in the form of foreign-exchange reserves, massive trade surpluses with its largest trading partners and a high savings rate among the Chinese. In fact, the People’s Bank of China, loaded with dollars, can easily absorb several sub-prime shocks with ease with its vast surpluses, unlike the United States.

Although the Chinese yuan and its sister, the remninbi, are not convertible, many banks have started offering synthetic products tied to the notional value of these units wrapped into derivative-based offerings. One of the first banks to offer a Chinese currency is St Louis-based Everbank (www.everbank.com). Requiring a $20,000 minimum investment, this account provides low cost access to the Chinese yuan along with FDIC deposit protection insurance up to $100,000.

Another avenue available to buy the Chinese unit is through the recently listed Market Vectors Remninbi ETF or CNY.

One of the easiest ways to buy an undervalued Asian basket of currencies is the Sovereign Society’s Asian Currency Portfolio. This product, which includes the yuan, Singapore dollar and several other units offered at Everbank, has risen 10% since last August.

Offshore, I can’t find one bank that offers an equivalent product – at least not yet. Dutch bank, ABN Amro, however, offers a Chinese yuan certificate to offshore investors but its correlation with the underlying currency is poor. I’d avoid that product.

China, however, will suffer the consequences of high inflation and a real estate bubble in most cities at some point. This is consistent with soaring inflation across the region – now at a 9 ½ year high accompanied by rising wages. The dual currency system will also have to merge eventually and become fully convertible. But despite these travails and short-term market shocks, the Chinese economy remains on the road to greatness, similar to the United States over 150 years ago and the United Kingdom in the 18th century. In my book, the Chinese yuan and remninbi are a long-term “buy” for all investors.

Have a nice weekend.

The FDIC's Suspicious Marketing Campaign

To mark its infamous 75th anniversary this year, the Federal Deposit Insurance Corporation (FDIC) has recently launched a series of full-page advertisements in U.S. newspapers. The latest such campaign, published in Monday’s Wall Street Journal, celebrates the institutions’ long-term safety net of public funds up to $100,000 and serves to remind depositors that the FDIC is there to protect cash deposits and CDs.

A full-page FDIC advertisement in the midst of the country’s worst financial crisis since 1990 seems just a bit suspicious. I’ve got to wonder if the FDIC is firing a warning salvo ahead of a rash of small bank failures in 2008 and possibly, in 2009. Are more banks likely to fail? Maybe the FDIC wants to remind depositors that cash deposits and CDs up to $100,000 are still guaranteed by the government.

The FDIC was created during the Great Depression as businesses collapsed and bank failures riddled the economy. From 1920 to 1934, a total of 9,812 banks were suspended, closed, failed or merged, according to Colonial Statistics. From March 6 to March 13, 1933, President Roosevelt declared a banking holiday – no financial institutions were open and depositors could not access their funds. During the Great Depression, the Roosevelt administration also confiscated gold ownership.

The number of U.S. bank failures since the onset of the credit crisis last July is still under 100. But from 1988 to 1990, over 1,000 American banks failed, mostly because of the Savings & Loans crisis. Considering the depth and longevity of this crisis, it’s probably fair to assume many more banks will succumb to failure or suspension, especially smaller banks. In fact, a few months ago, Fed Chairman, Ben Bernanke, warned that he expects a rash of smaller banks to fail because of weak capital ratios and bruised balance sheets.

Bernanke, of course, won’t bail-out a small bank in Arkansas or other Mom and Pop banks in Middle America; but the Fed did bail-out Bear Stearns in a forced merger with J.P. Morgan Chase in March and will rescue other large U.S. banks if they pose systemic risk to the financial system. These include J.P. Morgan Chase, Citigroup and Bank of America.

The Fed is desperately trying to help FDIC member banks to rebuild their capital ratios by cutting interest rates to 2% recently.

Low interest rates help boost lending margins for banks as spreads widen between short-term and long-term lending rates. The problem, however, is that with the exception of their largest clients, most banks have pulled back from lending since the onset of the sub-prime debacle last summer. Mortgage lending has collapsed. Consumer credit is especially difficult to secure, especially amid balance sheet erosion, massive write-downs and plunging capital ratios.

Indeed, 2008 marks the 75th anniversary of the FDIC. Yet, I doubt this is a celebratory environment for an institution that serves to protect depositors. I’ve got a feeling the FDIC will be quite active over the next 12 months as smaller banks, including possibly some regional banks, head into bankruptcy.

The government’s safety net might offer peace of mind to some individuals, but for most depositors it’s a stop-gap none of us want to secure. As a precaution, park your cash and short-term emergency liquidity needs at J.P. Morgan Chase, Citigroup, Bank of America or 90-day Treasury bills. I’d avoid small institutions and the regional banks.

The Dollar Won't Bottom until Housing Stabilizes

Over the last seven years, the U.S. dollar has attempted to muster several rallies only to succumb to newer lows as measured by the U.S. Dollar Index. The last calendar year gain for the buck was in 2005 when it rose 12.7% versus the euro.

The big picture, contrary to market consensus, is not whether the Fed raises rates later this year; I think the odds of a rate hike this year are near zero. Until the housing market and credit indices finally form a secular bottom, the dollar will remain hostage to rising inflation, weak financial markets and low interest rate yields relative to other global currencies.

The dollar is now testing important support levels as measured by the U.S. Dollar Index as it trades just above its key 50-day moving average. The odds, however, favor a new low for the American currency before the end of the summer. Yes, despite Big Ben's strong dollar mantra earlier this month, the dollar is about to bust through important support levels.

At some point, of course, the U.S. dollar will form a bottom. That inflection point will coincide with a bottoming in the housing market and eventually, rising interest rates as the Fed starts draining liquidity from the financial system to cool inflation. If it could, the Fed would probably hike lending rates now as commodity prices continue to skyrocket; but no central bank worth its salt will raise interest rates amid a severe deflation in housing and consumer credit and a deteriorating labor market. The Fed has no choice but to keep rates right where they are for the moment and let inflation continue to erode the purchasing power of Americans and all dollar-based investors.

America is on Sale. No doubt about it. U.S. assets are extremely attractive to European, Latin and most Asian investors. The dollar has plunged since 2002 making stocks, bonds, real estate, art and just about any other dollar-denominated asset a big bargain. It’s not time to buy dollars just yet. But 12 months from now, assuming housing bottoms, the dollar will rank as the one of the greatest investments of the decade – at least until the next bear market.

Fed Actions Speak Louder than Words

Actions speak louder than words. That famous adage is especially true when it concerns the United States Treasury and the Federal Reserve. I remain highly suspicious of this U.S. dollar rally – if you can call it a rally – as signs increasingly point to more trouble ahead for the American economy this year.

Despite harping about a “strong dollar” policy for the last several years, the U.S. actually invites a weak currency for numerous reasons it will never publicly admit. A weak currency boosts exports, curbs the demand for foreign goods (thereby reducing the trade deficit) and encourages investment and ultimately, speculation. Low rates also help to create “bubbles” in financial markets; the latest one in real estate, still deflating, was Greenspan’s creation.

Earlier this month, FOMC Chairman Ben Bernanke made an unorthodox statement concerning the dollar. Historically, any verbal support of the dollar has been the Treasury’s job, not the Fed’s. The fact that the Fed is now verbally “talking up” the buck shows how desperate the government has grown over the dollar’s decline and its resultant inflationary trail since 2007.

Commodity inflation is now center-stage everywhere as dollar-priced raw materials continue to surge in value creating all sorts of headaches for consumers, businesses and governments. Bernanke must be scratching his head because this marks the first time in the post-WW II period that the United States, probably in a recession in Q2, is also witnessing an explosion in commodity prices as the world’s largest economy stumbles. Blame it on the emerging markets, namely China, which now consumes virtually every conceivable raw material.

The Federal Fund futures now shows a high likelihood the Fed will start raising interest rates later this fall. Will the Fed start hiking rates while labor, real estate and bank credit markets are still contracting? I’d say the real odds are 10-1 against a rate hike now.

The Fed will not raise interest rates until next year -- at the earliest. The dollar remains cheap and heavily oversold compared to every currency in the world, except maybe the Zimbabwean dollar. But cheap can get cheaper…The dollar is tied to housing. Until the real estate market finds a bottom, the dollar will remain under pressure and probably test new lows against most foreign currencies. I don’t see the dollar tumbling from these levels, but I also can’t see the currency mustering a significant rally in the absence of higher interest rates.

Since its creation in 1913, the Fed has never hiked lending rates while the unemployment rate is rising. It won’t hike now. Also, 2008 is an election year -- another reason why the Fed won't tighten. It remains imperative for U.S. policy-makers to appear highly concerned about the dollar’s decline; the Fed’s admission that the dollar is a concern shows how the government wishes to place a floor on speculators betting against the currency and hopefully, arrest the huge gains in oil and other commodities in the process.