Getting Ready for a Sea of Liquidity

As we say goodbye to August (and for most of us the best days of summer) it’s time to look ahead for the remainder of the year to see where we are headed economically. As I see it, the days ahead will be full of lower interest rates and an ever expanding money supply… what I call a sea of liquidity.

The giant bond market is rallying. That means the bond market sees lower interest rates ahead. With U.S. housing in the dumps, with consumer confidence turning negative fast, the Fed has finished raising interest rates. At the next official Fed meeting, rates will likely remain unchanged.

By the end of this year, possibly early 2007, I personally see interest rates falling as the Fed turns from a tightening cycle to an expanding cycle. After raising interest rates so aggressively to cool the housing market, the Fed will have to do an about face and drop rates so it perfects the soft landing in the housing market that it, and all Americans, so desire.

Over the next few months we’ll be getting weaker and weaker reports on the economy. The Fed will realize it raised rates too high, too fast, and down will come rates. As I’ve written before, the Federal Reserve always goes too far when lowering interest rates to stimulate the economy and raising interest rates too much when attempting to cool the economy. This time will be no different.

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So what do you do as an investor and consumer? Tailor your plans around lower interest rates ahead. Yes, the stock market loves lower rates and that could be a big plus. Renewing, thinking of a new mortgage, or needing to borrow, next year may be a better time so you can take advantage of the lower rates that lie ahead.

To all my beloved readers, have a safe and happy Labor Day (“Labour” Day in Canada) weekend!

NEWSFLASH–Yesterday Toronto’s National Post newspaper ran this headline across its front page: “U.S. Recession Fear Grows… Housing Data Have Analysts Fretting.” Can a recession happen in the U.S. Yes, in fact I’m predicting we’ll be in an officially recognized recession in 2007, no later than 2008. Interest rates will likely fall sharply to fend off the recession… the sea of liquidity I talked about above.