The only open question, as far as the financial markets were concerned, in yesterday’s 12:30 ET announcement from the Federal Reserve was whether or not the Federal Reserve’s Open Market committee would change what’s known as the “extended period” language.

The committee said it would keep interest rates at their current extraordinarily low levels for an extended period—keeping the language the same and promising markets that they can count on the Fed to keep its benchmark short-term rates at 0% to 0.25% at least until the fall and probably until the end of 2011 or into 2012.

With that guarantee, traders were off to the races. The dollar, which held initially after the Fed’s press release, resumed its slide. Gold and silver both closed up in New York on the day. And continuing a very profitable strategy called the currency carry trade got the green light across Wall Street.

In this strategy traders borrow in countries with low interest rates and then use that money to buy in markets with higher yields. The trade is dangerous only if there’s a chance that the country where traders have borrowed will do something—like raise interest rates—that will raise the value of the currencies that they have borrowed. That would increase the amount that they have to repay on their loans.

Right now the carry trade has two very safe, very low yield currencies to borrow in—the Japanese yen and the U.S. dollar because the central banks in neither country are showing any inclination to raise interest rates any time soon.

The carry trade can be very, very profitable. Read more

Why should Standard & Poor’s have all the fun?

On April 19 S&P shook global financial markets by putting U.S. government debt on negative credit watch. If the United States doesn’t get its budget act together, S&P warned, it would take away the country’s AAA credit rating.

But why stop there? What about Japan? Does a country with a gross public debt of 229% of GDP deserve an AA- rating? The United Kingdom at AAA? Brazil? Colombia? Germany? How do they stack up?

It’s time to become your own credit rating company and to fill in the gaps left by yesterday’s headlines.

Yep, you should make up your own list of good credits and bad credits so that you can figure out how to allocate your portfolio. Downgrades and upgrades are going to come faster than an avalanche moves downhill. And you’d like to be on the right side of those moves.

Seem too hard? Well, it would be a daunting task if your ratings had to include the detail that S&P, or Moody’s or Fitch Ratings do. But for your portfolio purposes, you don’t really care about the differences between AA+ (Belgium according to S&P) and AA (Spain). Actually you don’t are much about this kind of static rating at all. What you want to know if what direction a county’s debt rating is head in—and for that what I call Jim’s Bucket List is a more than good enough place to start.

It’s certainly enough so that you figure out what currencies you’d like to be holding in your stock portfolio 10 years from now. (Think the U.S. dollar is going to hold its value over that period?)

My system requires just four big buckets. Let’s start with the top bucket. Read more

Dollar up, commodities down (and vice-versa)

Just a reminder: When the dollar climbs, commodity prices fall. And when the dollar falls, commodity prices climb.

For example, yesterday (April 18) when the dollar was climbing against the euro earlier in the morning, oil, gold, and silver were all down. At 10:36 in New York when the dollar had erased its early losses, oil had dropped to $106.74 a barrel, gold was selling for $1484.70 an ounce, and silver traded at $42.26 an ounce.

At 11:22 in New York, by which time the dollar was sliding again, oil had moved back up to $107.08 a barrel, gold had rallied to $1495 an ounce, and silver was trading at $42.82.

I think this pattern will dominate the stock market for a while.

A little ol’ downgrade to a negative outlook of the U.S. credit rating from Standard & Poor’s yesterday, April 18, was enough to throw the financial markets into a tizzy.

What happens in June when the U.S. Federal Reserve stops buying $100 billion in U.S. Treasury notes every month as part of the program of quantitative easing know as QE2?

You’ve heard the wails of worry. Which buyers, if any, will pick up the slack when the Fed exits this market? At the least U.S. interest rates will have to rise to attract those additional buyers. At the worst, a lack of buyers will tip over the entire tower of cards that is U.S. government finances.

And I’m starting to hear another still-building cacophony of worry. The Fed’s most recent program of bond buying will have put $600 billion into the U.S. money supply by the time it’s over in June. A significant portion of that hasn’t stayed in the United States. Instead some of that money has gone overseas seeking better returns in Brazil and China and Turkey and Indonesia than it can get in any domestic U.S. market.

What will happen, the emerging worry goes, when this hot money starts to flow out of the financial markets in Brazil and China and Turkey and Indonesia? Won’t the flight of this hot money create another global financial crisis akin to the Asian currency crisis of 1997 that brought the world to the brink of a financial meltdown?

The key thing that both these scenarios have in common is that they envision a big blow up. Things will go wrong quickly and big time.

Actually, I think, the most likely scenarios have less in common with the Hindenburg disaster than with the slow leak from an inflatable plastic model of the globe. In other words, the end of QE2 will bring not a bang disaster but a whimper of pain—but investors still near to pay attention.

Let me look at each of the two big worries to see how much sleep you should be losing.

First, the Who will buy our Treasuries? worry. Read more

China reverses another policy and starts new buying of U.S. Treasuries again

China’s decision to end a strict yuan-dollar peg is getting all the headlines today—even though the likely appreciation of the yuan versus the dollar is in the vicinity of 3% or so in 2010. That’s hardly a game changer.

But the bigger China-U.S. news dates back a few days to June 15: After reducing its holdings of U.S. Treasury debt by 6.5% from November 2009 through February 2010, China reversed policy. In March and April China increased its investment in U.S. government notes and bonds by 2.6% to $900.2 billion.

 Most of China’s buying went into the longer-term end of the Treasury market. In the 12 months that ended in April China’s buying of Treasuries with maturities of two years or more jumped by 46%. These purchases at the longer end of maturities reversed a swing that had seen China putting most of its cash (in 2008, for example) into short-term Treasury bills.

Chinese buying has been one factor pushing yields on 10-year Treasuries, the benchmark for many U.S. mortgages, down to just 3.25% on June 21. On May 25, the yield on 10-year Treasuries dropped to 3.06%. According to Freddie Mac, the rate on a 30-year fixed mortgage is now just 4.75%. That’s near the all time low of 4.71% set in December 2009.

The U.S. housing market isn’t in good shape, but it’s frightening to think how bad it would be if mortgage rates weren’t this low.

I don’t think there’s anything especially altruistic about China’s buying. Read more