August 18, 2008 11:54AM

Cody’s No Brainer Trades: Part 1 of 4

By Cody Willard

Here is the first of my Four No Brainer Trades for the end of the first decade of the 21st century.

1.  Bet on higher rates.

We’ve gone from a glut of capital and liquidity to a shortage.  What happens when supply dries up and demand continues?  Prices rise.

The supply of capital has clearly dried up in this country, but people and companies still very much need short-term and long-term capital.  So the price of capital will rise.  That means higher rates.  People and companies have been willing to lend money at almost no interest…that’s over.

Remember when a struggling GM could tap the money markets for tens of billions in very low-rate short-term financing a couple years ago?  Capital is now so scarce that GM (as well as Ford, Chrysler, and so on) won’t even offer leases to their customers anymore.  The repackaging of securitization of all these mortgages, leases, credit cards, etc are rippling around the globe and making people and companies realize that their assets weren’t worth as much as they thought they were since the risk on not being paid back is actually much more severe than they realized.

I’m often asked how a stronger or weaker dollar would affect this analysis for higher rates — the short answer is that it won’t.  The globalization that we’ve just gone through has interconnected all of our central banks and our currencies to the point that we now, at least for the time being, have a de facto one world fiat currency.  That means higher rates the world over — not just in the US.  The glut of capital that just dried up and turned to shortage is a global phenomenon.   Certainly the relative value of the dollar vs. the Euro and/or the Yen will impact how high rates in this country go — the magnitude of the move, not the move itself.  Higher rates await the US and the world over the next couple years.

Come back tomorrow for part 2.

PS.  The August edition of The Cody Report will be published Wednesday.  Sign up now to receive to get my latest and greatest stock picks.