Depending on what part of the country you live in, foreclosures are a sign of the times. Homeowners aren’t the only ones going down the tubes. Big projects, especially condos are also circling the drain in many markets. People are trying to sell these homes for half a million dollars for a 40 year old building and its just not going to happen. Many hedge funds and other major investors are trying to capitalize on the crisis. It’s called vulture investing.

The hedge funds and the investment asset crews that have hundreds of millions of dollars are ready to pounce on these distressed property opportunities. They sense the blood in the water and its coming. So the big money, the real estate vultures, are ready to profit. But what about small investors. Could they make money by buying low now and selling high later?

Theres going to be some tremendous opportunities, not just as an investor, but also as a home owner to pick up a property that maybe you wouldn’t have been able to touch a couple of years ago. You may still want to wait however, the bottom of the real estate market hasn’t hit yet and maybe still a year or two away. Vulture investing doesn’t have to pad the pockets of just the big money as long as you can watch and time the market right.

Small movements in interest rates can have dramatic effects on the economy. just a small change in interest rates can dramatically increase the costs for individuals to own a home or borrow money to purchase goods. They can also have a dramatic affect on the costs of doing business. For this reason, that when interest rates rise making borrowed money more costly, that people will also be less likely to start or expand a business.

This not only has an effect on the business person themselves, but filters through out the entire economy as less businesses being started and expanding. As a result, there are less jobs, which means there are less people getting pay checks and people are spending less money.

The reverse of this is also true. When interest rates fall, business take advantage of access to cheaper and borrowed money, the stock market reacts accordingly.

In addition to interest rates affecting the stock market, interest rates also have a direct affect on the bond, foreign exchange and futures markets. For example, when interest rates rise when looking at the bond market, the value of existing bonds fall as investors can now purchase the same bond with a higher interest rate. In the foreign exchange market, when interest rates rise, it becomes more attractive from a yields standpoint to own the dollar against other currencies or to invest in interest bearing dollar-based assets. This normally creates a demand for dollars which many times cause the dollar to strengthen. The reverse is also true when interest rates fall.

In the commodities market, when economies grow at a greater rate as a result of lower interest rates, this normally means greater demand for commodities, so their value will tend to go up.

Now that we understand the importance of interest rates to economic growth and therefore the markets in our own trading, the next thing to understand is how this relates to the government role in the economy. The government has two options when trying to influence the business cycle to keep prices stable and work towards full employment. The first is fiscal policy or exerting control over government spending and taxation to try and influence the business cycle. The second and perhaps the most important to us as traders is monetary policy which is exerting control over the money supply which has a direct relationship with interest rates also with the goal of influencing the business cycle.

With this in mind, the federal reserve is the institution responsible for administering monetary policy and therefore can increase or decrease the money supply with the goal of trying to affect the level of interest rates.

As the level of the interest rates has such a large effect on everything in the economy from unemployment to inflation, this makes the fed one of or the most power institution in the U.S. Why is this important to know as traders?

Because the Federal Reserve can enact monetary policy without government approval. This gives the fed much more control over the economy, at least in the short term and is the reason some people consider the chairman over the federal reserve to be more powerful than the president. The primary components which move markets are the board of governors and the Federal Open Market Committee. Theres no greater mover in markets than changes in peoples anticipation of interest rates.