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Post by jeffolie on Aug 9, 2007 13:39:19 GMT -6
Some housing bubble news from Wall Street and Washington. Bloomberg, “The Federal Reserve added $24 billion in temporary reserves to the banking system amid an increase in demand for cash from banks roiled by U.S. subprime loan losses. BNP Paribas SA halted withdrawals from three investment funds today and Dutch investment bank NIBC Holding NV said it had lost at least 137 million euros on subprime investments.” “‘Demand from European banks is driving Fed funds higher,’ said John Murphy, senior VP at Tullett Prebon Plc, the world’s second-largest inter-dealer broker. ‘European banks have lack of liquidity in the euro- dollar market which spilled over to the Fed fund market.’” “The European Central Bank today loaned 94.8 billion euros ($130.2 billion) to meet banks’ cash needs. The ECB said it will provide unlimited funds today at 4 percent, its current benchmark rate, after demand for cash in the European money markets drove interest rates higher.” “The Bank of Canada today said it will provide liquidity to ’support stability.’” The Associated Press. “‘This is a mini-panic,’ said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co., calling the banks’ injection of money into the system an unprecedented move, and evidence that the problems in subprime lending are, in fact, spilling into the general economy.” “‘All the things that had been denied up until this point are unraveling,’ Battipaglia said. ‘On top of this, retail sales were mediocre, which shows that indeed, the housing collapse is affecting the consumer.’” “BNP Paribas Investment Partners, said it was suspending three funds together worth about $3.79 billion and wouldn’t make investor redemptions until it could determine a net asset value for the fund. ‘The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,’ BNP Paribas said in a statement.” From Reuters. “The BNP problems sent judders through European markets already rife with rumors of worsening troubles in Germany. The Bundesbank hosted a meeting with banks involved in the rescue of Europe’s highest profile subprime victim yet, lender IKB (IKBG.DE), to arrange details of its 3.5 billion euro bailout.” “‘Nobody wants to lend any money. It’s safety first.’ said Karen Birzler, a money market trader at HVB in Munich.” “The cash markets were seizing up, several dealers said. ‘There appears to be a dash for cash both in dollars and in euros,’ said Nick Parsons, head of market strategy at nabCapital in London.” “The cost for banks to borrow money overnight in the world’s second largest economic region shot up to 4.62 percent, the highest level since October 2001 and way above the ECB’s 4 percent target. Only when the ECB offered banks extra cash to assure orderly conditions did rates return to normal levels.” “A Zurich-based money market trader called market conditions ‘crazy’ since Fed Chairman Ben Bernanke has given no signal of concern that credit markets could unpick the real economy. ‘The market is acting like a yo-yo. It’s all very psychological. The possibility of a credit crunch returning is starting to spook everyone,’ he said.” “A separate European fund valued at 750 million euros was frozen too, and a Dutch bank pulled its planned new listing after suffering subprime losses.” thehousingbubbleblog.com/?p=3233
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Post by jeffolie on Aug 9, 2007 13:50:16 GMT -6
Worse than LTCM: Not Just a Liquidity Crisis; Rather a Credit Crisis and Crunch Nouriel Roubini | Aug 09, 2007 The global market turmoil got ugly today forcing the ECB and the Fed to inject liquidity in the financial system as the concerns about subprime, credit and debt turned into a full blown liquidity run and crisis. As in 1998 at the time of the LTCM crisis, Fed and global central banks decided to ease monetary policy in between meeting and injected a large amount of liquidity into the system. Coming two days after the Fed tried to prevent perceptions of a Bernanke put by signaling in its FOMC no Fed easing and no bail out of the financial system, the Fed actions today are certainly ironic if necessary given the massive liquidity seizure in the financial markets. But the current market turmoil is much worse than the liquidity crisis experienced by the US and the global economy in the 1998 LTCM episode. Let me explain why. Economists distinguish between liquidity crises and insolvency/debt crises. An agent (household, firm, financial corporation, country) can experience distress either because it is illiquid or because it is insolvent; of course insolvent agents are – in most case also illiquid, i.e. they cannot roll over their debts. Illiquidity occurs when the agent is solvent – i.e. it could pay its debts over time as long as such debts can be refinanced or rolled over but he/she experiences a sudden liquidity crisis, i.e. its creditors are unwilling to roll over or refinance its claims. An insolvent debtor does not only face a liquidity problem (large amounts of debts coming to maturity, little stock of liquid reserves and no ability to refinance). It is also insolvent as it could not pay its claim over time even if there was no liquidity problem; thus, debt crises are more severe than illiquidity crises as they imply that the debtor is insolvent, i.e. bankrupt, and its debt claims will be defaulted and reduced. In emerging market crises of the last decade, we had liquidity crises (i.e. a solvent but illiquid sovereign) in Mexico, Korea, Brazil, Turkey; we had debt/insolvency crises (a sovereign that was both illiquid and insolvent) in Russia, Ecuador, Argentina. The 1998 LTCM crisis was mostly a liquidity crisis: the US was growing then at 4% plus, the internet bubble had not burst yet, we were in the middle of the New Economy productivity boom, households were not financially stretched and corporations were not financially stretched with debt either. In spite of those sound and solvent fundamentals the collapse of Russia – a country then with the GDP of a country such as the Netherlands – caused a global liquidity seizure and crisis of the type experienced by credit markets in the last few weeks: sudden demand for cash liquidity, sharp increase in the 10 year swap spread, sharp increase in the VIX gauge of investors’ risk aversion, liquidity drought in the interbank and euro-dollar market, deleveraging of highly leveraged positions, reversal of the yen carry trades. With the exception of the credit event in Russia, this was not a credit/insolvency crisis. And since it was a liquidity crisis the Fed easing – 75bps – was successful in restoring in a matter of weeks calm and liquidity in financial markets. Even that liquidity episode had painful credit fallout: it is not remembered by most but the entire subprime mortgage industry went bankrupt in 1999 following the LTCM liquidity crisis. So a liquidity shock even triggered credit events. Today we do not have only a liquidity crisis like in 1998; we also have a insolvency/debt crisis among a variety of borrowers that overborrowed excessively during the boom phase of the latest Minsky credit bubble. You have hundreds of thousands of US households who are insolvents on their mortgages. And this is not just a subprime problem: the same reckless lending practices used in subprime – no downpayment, no verification of income and assets, interest rate only loans, negative amortization, teaser rates – were used for near prime, Alt-A loans, hybrid prime ARMs, home equity loans, piggyback loans. More than 50% of all mortgage originations in 2005 and 2006 had this toxic waste characteristics. That is why you will have hundreds of thousands – perhaps over a million - of subprime, near prime and prime borrowers who will end up in delinquency, default and foreclosure. Lots of insolvent borrowers. You also have lots of insolvent mortgage lenders – not just the 60 plus subprime ones who have already gone out of business – but also plenty of near prime and prime ones. AHM – who went bankrupt last week – was not exposed mostly to subprime; it was exposed to near prime and prime. Countrywide has reported sharp losses not only on subprime lending but also on prime ones. So on top of insolvent households/mortgage borrowers you have plenty of insolvent mortgage lenders, subprime and - soon enough - near prime and prime. You will also have – soon enough – plenty of insolvent home builders. Many small ones have gone out of business; it is likely that some of the larger ones will follow in the next few months. Beazer Homes – a major home builder - last week had to refute rumors of its impending insolvency; but so did AHM a few weeks its insolvency. With orders for home builders falling 30-40% and cancellation rates above 30% a few will become insolvent over the next year or so. We also have insolvent hedge funds and other funds exposed to subprime and other mortgages. A few – at Bear Stearns, in Australia, in Germany, in France – have already gone bankrupt or are near bankrupt. You can be sure that with at least of $100 billion of subprime alone losses – and most losses are still hidden given the reckless practice of mark-to-model rather than mark-to-market - many more will. In the meanwhile the CDO, CLO and LBO market have completed closed down - a “constipated owl” where “absolutely nothing moves” the way Bill Gross of Pimco put it. This is for now a liquidity crisis in these credit markets; but credit events will occur given that the underlying problem was not of of liquidity but rather one of insolvency: if you take a bunch of to be defaulted subprime and near prime mortgages and you repackage them into RMBS and then these RMBS are repackaged into various tranches of CDO, the rating agencies may be using magic voodoo to turn those junk BBB- mortgages into AAA tranches of CDO; but this is only voodoo as the underlying assets are going to be defaulted on. And the recent sharp widening in corporate credit spreads is not just a sign of a liquidity crunch; it is a sign that investors are realizing that there are serious credit/solvency problems in parts of the corporate system. Ed Altman, a colleague of mine at Stern, is recognized as the leading world academic expert on corporate defaults and distress. He has argued that we have observed in the last few years record low default rates for corporations in the U.S. and other advanced economies (1.4% for the G7 countries this year). The historical average default rate for US corporations is 3% per year; and given current economic and corporate fundamentals the default rate should be – in his view - 2.5%. But last year such corporate default rates were only 0.6%, i.e. only one fifth of what they should be given fundamentals. He also noted that recovery rates - given default - have been high relative to historical standards. These low default rates are driven in part by solid corporate profitability and improved balance sheets. In Altman’s view, however, they have also been crucially driven - among other factors - by the unprecedented growth in liquidity from non traditional lenders, such as hedge fund and private equity. Until recently, their demand for corporate bonds kept risk spreads low, reduced the cost of debt financing for corporations and reduced the rate of defaults. Earlier this year Altman argued that this year "hot money" from non traditional lenders could move to other uses for a number of reasons, including a repricing of risk. If that were to occur, he argued that the historical patterns of default rates - based on firms’ fundamentals - would reassert itself. I.e. we are not in a new brave world of permanently low default rates. He said: "If we observe disappointing returns to highly leveraged and rescue financing packages, some of the hedge funds may find it difficult to cover their own loan requirements as well as the likely fund withdrawals. And broker-dealers who are not only providing the leverage to the hedge funds but whom are also investing in similar strategy deals will recede from these activities." The same could be said of the consequences of the unraveling of some leveraged buyouts. Altman suggested that triggers of the repricing of credit risk could also be "disappointing returns to highly leveraged and rescue financing packages". So he argued that the unraveling of the low spreads in the corporate bond market could occur even in the absence of changes in US and/or global liquidity conditions. Thus, until recently the insolvent agents in the corporate sectors included corporations that could service their debt only by refinancing such debt payments at very low interest rates and financially favorable conditions. Many firms, under normal liquidity conditions, would have been forced into distress and debt default (either of the Chapter 7 liquidation form or Chapter 11 debt restructuring form) but were instead able to obtain out-of-court rescue and refinancing packages because of the most easy credit and liquidity conditions in bubbly markets. Now that we are observing a liquidity and credit crunch and a vast widening of credit spread you will observe a sharp increase in corporate defaults and a further risk in corporate risk spreads. Insolvent and bankrupt households, mortgage lenders, home builders, leveraged hedge funds and asset managers, and non-financial corporations. This is not just a liquidity crisis like in the 1998 LTCM episode. This is rather a liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the US and global economy. Liquidity runs can be resolved by the liquidity injections of a lender of last resort: in the cases of the liquidity crises of Mexico, Korea, Turkey, Brazil that international lender of last resort was the IMF; but in the insolvency crises of Russia, Argentina, and Ecudaor the provision of the liquidity by the lender of last resort – the IMF – only postponed the inevitable default and made the crisis deeper and uglier. And provision of liquidity during an insolvency crisis causes moral hazard as it creates expectations of investors’ bailout. Thus, while the Fed and the ECB had not option today but to provide massive liquidity in the presence of a most severe liquidity crunch and run, they should not delude themselves that this liquidity injections can resolve the deep insolvency problems of many overstretched borrowers: households, financial institutions, corporates. Insolvency/credit crises lead to financial and economic distress – hard landing of economies – and cannot be resolved with liquidity injections by a lender of last resort. And now the vicious circle of a weakening US economy – with a housing recession getting worse and a fatigued consumer being at the tipping point - and a generalized credit crunch sharply increased the probability that the US economy will experience a hard landing. We are indeed at a "Minsky Moment" and this recent financial turmoil is the beginning of a much more serious and protracted US and global credit crunch. The risks of a systemic crisis are rising: liquidity injections and lender of last resort bail out of insolvent borrowers - however necessary and unavoidable during a liquidity panic- will not work; it will only pospone and exacerbate the eventual and unavoidable insolvencies. www.rgemonitor.com/blog/roubini/
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Post by jeffolie on Aug 9, 2007 14:49:33 GMT -6
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Post by unlawflcombatnt on Aug 9, 2007 15:53:17 GMT -6
Roubini makes some excellent points that I will try to paraphrase below. (So that people like myself can understand his message.)
Roubini states that the evolving problem is not just a "liquidity" problem. It's an "insolvency" problem as well. At this moment in time, it's primarily just the "liquidity" shortage that is causing problems. With time, however, it will also become an insolvency problem.
Roubini draws the contrast between the 1998 LTCM crisis and the current crisis. The 1998 problem was exclusively a "liquidity" problem, and was resolved when the Fed increased liquidity. In contrast, today's problem is both a "liquidity" problem, with an underlying "insolvency" problem. As such, a Fed increase in liquidity will help only temporarily (at best). However, it will do nothing to resolve the underlying "insolvency" problem. The addition of the "insolvency" problem to the "liquidity" problem makes today's situation much worse than in 1998.
Corporate default rates are currently low because of the increased ability of insolvent Corporations to refinance historically "un-refinanceable" debt. This increased ability is due to historically low interest rates on high-risk Corporate bonds. As risk is re-priced back in, Corporate defaults will increase as a result of the decreased ability to refinance insolvency.
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Post by jeffolie on Aug 9, 2007 17:01:01 GMT -6
Commercial Paper Yields Soar to Highest Since 2001 (Update2) By Mark Pittman Aug. 9 (Bloomberg) -- Sellers of asset-backed commercial paper are offering yields at six-year highs for overnight borrowing as losses from U.S. subprime mortgages spread. Yields on asset-backed commercial paper rated A1, the second-highest short-term rating by Standard & Poor's, and maturing the next day rose 20 basis points to 5.56 percent, the highest since March 2001, according to data compiled by Bloomberg. The increase is the biggest since September 2005. Investors demanded higher yields on asset-backed securities, some of which contain mortgages, after BNP Paribas SA froze withdrawals from three investment funds that invested in subprime bonds. BNP's decision caused overnight lending rates between banks to soar and prompted the European Central Bank to lend 94.8 billion euros ($130.2 billion). ``There is a short-term liquidity problem in the commercial paper market,'' said Irene Tse, co-head of U.S. interest rates trading at Goldman, Sachs & Co. in New York. ``Both the asset- backed CP market and Tier 2 CP market spreads are continuing to widen and maturities shortening.'' The gap between similarly rated asset-backed and direct- issued paper is the widest since June 2004, according to offers compiled by Bloomberg data. Sellers are offering direct-issued commercial paper at yields of about 5.26, up 1 basis point from yesterday and the highest in a week. `Vicious' The move in asset-backed paper parallels an increase in the cost of borrowing dollars overnight, which also reached the highest level in more than six years. The London interbank offered rate, compiled by the British Bankers Association, climbed to 5.86 percent from 5.35 percent the day before. The rate is set by a survey in which the BBA asks a panel of 16 banks how much they are paying to borrow. Bear Stearns Cos. analysts led by Gyan Sinha estimate that $38 billion to $43 billion of mortgage bonds and collateralized debt obligation tranches may have to be liquidated by asset- backed commercial paper conduits that aren't supported by credit lines. Commercial paper is bought by money market funds, mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables as well as car loans. Some of the programs are backed by subprime loans. Buyers of commercial paper are balking at taking on some debt and demanding higher rates on others because it can be difficult to tell what collateral is backing the debt, said Ann Rutledge, co-author of ``The Analysis of Structured Securities,'' and a former analyst at Moody's Investors Service. `Disarray' ``Markets do what markets do: They set a value and they can be vicious,'' said Rutledge. ``They're a great solution when everything is rosy. This is what happens when the market is in disarray.'' Concerns escalated this week after three commercial paper issuers extended maturities on asset-backed commercial paper this week. The extensions were the first ever, according to New York- based Moody's Investors Service. Units of American Home Mortgage Investment Corp., the residential-mortgage lender that filed for bankruptcy, Luminent Mortgage Capital Inc., facing margin calls from lenders, and Aladdin Capital Management LLC, this week exercised an option allowing them to delay repaying the debt, Moody's said. Extended Maturities The failure of some companies to pay on time has cast a pall over the securities, which are considered to be almost risk free. Extendible notes allow the issuer to delay repayment for as long as 397 days, the maximum U.S. money market funds may hold. Asset-backed commercial paper constitutes about half, or $1.15 trillion, of the $2.16 trillion in commercial paper outstanding, with extendible notes making up about 15 percent of the asset-backed portion, or about $172.5 billion, according to Moody's. One of those asset-backed conduits offering its paper today is Rhineland Funding Capital Corp., a division of German bank IKB Deutsche Industriebank AG, which is facing a bailout because of subprime mortgage losses. IKB had its credit ratings cut for a second time in two weeks by Fitch Ratings yesterday to F from C because the lender would have defaulted without rescue measures from other banks. Rhineland, which invests in and sells short-term debt backed by assets including subprime mortgages, is unable to refinance its commercial paper in the market as it comes due, Fitch's report said yesterday. Germany's state-owned KfW Group and banking associations agreed to cover as much as 3.5 billion euros ($4.8 billion) of potential subprime-mortgage losses at IKB. Rhineland is offering rates of 5.531 percent for $1.18 million of its paper maturing tomorrow, according to Bloomberg data. ``Rhineland will continue to draw down the liquidity provided by the banks, half of which is coming from KfW,'' said Simon Adamson, a London-based analyst at independent ratings firm CreditSights Inc. ``It does kind of develop a frightening momentum.'' www.bloomberg.com/apps/news?pid=newsarchive&sid=amnaMTq9t2xY
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Post by unlawflcombatnt on Aug 9, 2007 17:35:48 GMT -6
Jeff,
Does this mean that common money market funds (like the "safe" ones in pension plans) are at risk?
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Post by jeffolie on Aug 9, 2007 18:24:08 GMT -6
Yes. I can not tell what degree of exposure, but certainly there is some:
"Commercial paper is bought by money market funds, mutual funds that invest in short-term debt securities. In asset-backed commercial paper, the cash is used to buy mortgages, bonds, credit card and trade receivables as well as car loans. Some of the programs are backed by subprime loans."
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Post by naderzenith on Aug 9, 2007 18:53:33 GMT -6
Nouriel Roubini wrote "it will only postpone and exacerbate the eventual and unavoidable insolvencies". I see how it only postpones but do you unlawfl or jeff understand how it will actually exacerbate insolvencies? We are witness to something unprecedented I believe.
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Post by beachbumbob on Aug 9, 2007 20:18:13 GMT -6
derivative collapse next.... ? as liquidation occurrs??
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Post by psychecc on Aug 10, 2007 0:05:34 GMT -6
Question for Unlawfl, Jeff, or anyone with knowledge:
After recent market scares, I moved my retirement into a money market fund, which is invested in the following areas:
Commercial Paper 13.2% Corporate Bonds 0.0% Medium Term Notes 62.6% Funding Agreements 0.0% Other Short Term Funds 0.0% Repurchase Agreements 16.0% Asset Backed Securities 0.0% Mortgage Backed Securities 0.0% Certificates and Time Deposits 5.5% Agencies 2.2% Other 0.5% Total 100.0%
Average Quality (Rating) A1/P1 Yield 5.4% Average Maturity (# of days) 37
Since I can no longer assume that money markets are safe, I've tried to find out more about Medium Term Notes. It sounds to me from my online research like they have the above mentioned "extendable maturities" of up to 397 days despite their claim that the average maturity is only 37 days.
I also note that the fund claims to have no asset or mortgage backed securities, but they do have 13% Commercial Paper. So I assume that is "direct-issued."
This is in a state retirement fund, but it's managed by Barclays Global Investors. I doubt Barclays will give me specific details, and I don't know whether to roll it all over into a new IRA and have it put into Treasuries or just figure it's safe enough where it is. I'd rather not move it for a number of reasons, but I can't get Treasuries anywhere in this state fund, and this market has me a bit spooked. Ideally, I'd rather just leave it in this fund for the immediate future--if it's safe.
So, does anyone know about the potential risk of a Medium Term Note? A1/P1 is supposed to be low risk. Should that be enough to reassure me? I'd appreciate any information I can get.
Thanks
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Post by unlawflcombatnt on Aug 11, 2007 5:33:19 GMT -6
Psychecc, I don't think I can fully answer your question, but here's a quote from a post from Jeffolie, taken from another site, titled Fried Friday. Hopefully this is helpful. " And now the real shitstorm is starting to fly as this morning we found out that an AXA money market fund actually bought CDOs! Well, guess what - they're not worth DICK and suddenly that so-called "safe" money market fund is anything but - and has magically lost 26% of its value! A money market fund! Do you know what's in yours? How'd you like to lose twenty six percent in a money market fund?
That damn well better get your attention right damn now and if you have a money market you had best get on the phone to whoever you have it with and find out exactly what sort of paper it holds. If the answer is anything other than US Treasuries and perhaps Munis you now know that it is unsafe.
GET OUT NOW." This writer's opinion is that you should "get out now", if none of your money market funds are in U.S. Treasuries. From what I know, and what I've seen over the last several weeks, that sounds like pretty good advice.
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Post by jeffolie on Aug 11, 2007 10:29:08 GMT -6
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Post by psychecc on Aug 13, 2007 15:01:26 GMT -6
Unlawfl and Jeff, Thanks for the information. No one expects losses in a money market fund, and if I hadn't been reading your posts here, I might have lost a bundle.
I'd like to take a few days and make my move wisely, but I wonder about this August 15th deadline for investors to notify hedge funds of redemptions. Any idea how this might affect the broader markets? Either way, I'm moving out of this money market.
Thanks!
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Post by unlawflcombatnt on Aug 13, 2007 18:33:21 GMT -6
Psychecc, Here's an excerpt from Jeffollie's post earlier today on the forum that might be informative: Financial System in Jeopardy! by Martin Weiss "First, if you haven't done so already, get rid of your most vulnerable assets — investment real estate, mortgages, mortgage-backed securities, mortgage company stocks, bank stocks, brokerage firm stocks, and insurance company stocks. But if you did not act on our earlier warnings, don't look back. Just focus on what you have to do now: SELL on rallies! Second, take profits and raise cash, even on some of your best stocks. This crisis is no longer limited to the investments we don't like. It's also bound to have an effect on areas we like, including some of our favorite foreign markets.... So no matter what other investments you own — low-rated or high-rated, domestic or international — consider taking a chunk of your profits off the table. Then stash most of the proceeds in short-term U.S. Treasury bills. Even if interest rates are low, even if the dollar is declining, short-term T-bills are still the ultimate place for safety and liquidity. The most convenient vehicles: Treasury-only money market funds like American Century's Capital Preservation Fund, U.S. Global's U.S. Treasury Securities Cash Fund, or our affiliate's Weiss Treasury Only Money Market Fund. Third, consider a stake in the strongest foreign currencies. Remember: The epicenter of the mortgage meltdown is in the United States. So the biggest negative impact is going to be on the dollar and dollar-denominated investments, as foreign currencies rise....." community.aarp.org/n/pfx/forum.aspx?nav=messages&webtag=rp-moneyworkTo me, Treasuries sound like the best idea.
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