The Implications Of Rising Interest Rates
Readers suggested a topic around interest rates. “The biggest topic of the week has to be the massive jump of the yield on the 10-year. The last hope of the housing market was the dream that the Fed still had control of the situation and could lower interest rates. This would set everything right in the minds of fanatics such as David Lereah, Leslie Appleton-Young and Lawrence Yun.”
“A 30-year fixed may soon be at 7%, still historically low but murder for this housing market. Their illusions seem to have disappeared in the haze of the desert.”
“What other implications does the rising of the 10-year hold for the American economy and Americans in general?”
One reader said, “An economy swimming in debt can’t blossom while interest rates are rising.”
Another pointed out, “I think the Plunge Protection boys are out of dough and answers…. this run up all Spring was classic ‘pump and dump.’”
“(I) would want to have money in treasury bonds of most sorts, cash, some gold and silver and oil. Then pray for some deflation…some of these assets may go a bit down but not as much as stocks, housing, land, and will-of-the-wisp junk bonds/derivatives or any other Rube Goldberg, check-kiting finance paper.”
“Raising interest rates will kill whatever is left of sub-prime and Alt-A craptacular real estate lending. Rates go to 7% and bye-bye any real estate recovery at these bubble prices. Prices must and will fall.”
One had this question, “If Treasury bonds in the US go to 6.5% but the dollar drops 30% against the Yen, buyers of T-Bonds are caught holding the bag.”
“From Bill Gross. (last year he felt that 10 year bonds would stay between 4 -5%, this years analysis).”
“‘As a result, we’ve raised our forecast range for global interest rates, moving the range for 10-year U.S. Treasuries to 4.0-6.5% versus last year’s forecast range of 4.0-5.5%, for instance, which is sort of indicative of how we see the bond markets in general.’”
“‘We expect the U.S. dollar to be weak going forward, for a number of reasons. And we think that commodity prices in general, based upon this strong global growth environment and the demand from the BRICs1 and the emerging market countries, will produce favorable results for commodities.’”
“‘Those are our basic conclusions—not necessarily bond friendly but asset friendly in some ways, with the favored assets being emerging market currencies and commodities in terms of some of the more applicable asset categories. We also think that global stocks, especially those outside the United States, will benefit over this period of time….’”
“I’ll fade Mr. Buffett (short term), but not Mr. Gross.”
The Chicago Tribune. “Reflecting a cascade of selling Treasury securities, the yield on 10-year Treasury notes leaped above the psychologically important 5 percent mark, to 5.1 percent, a dramatic half-point increase in just a month. The 10-year Treasury yield climbed to its highest level since July.”
“Until a few days ago, the consensus on Wall Street was that the next move by the Federal Reserve would be to cut U.S. rates. That view has evaporated amid higher global rates and repeated assertions by Fed officials, led by Chairman Ben Bernanke, that their biggest fear is inflation, which the Fed seeks to pre-empt by boosting short-term rates.”
“‘If the Fed isn’t going to ease, then we better start worrying about them tightening,’ said David Oser, senior VP for investments at ShoreBank. ‘That’s what’s at the bottom of this.’”
The Contra Costa Times. “Investors’ expectations of an interest rate cut, and home buyers’ hopes for cheaper mortgages, seem to be disappearing. Some market watchers say the yield is likely to climb higher as bond prices weaken, making it even harder for consumers to finance home purchases and for companies to borrow money.”
“‘It’s the massive correction that we have been waiting for,’ said loan consultant Ed Jeffry of Peregrine Lending Corp. in Walnut Creek. ‘You could even see rates go up another quarter of a percent by the end of summer.’”
“Jack Ablin, chief investment officer at Harris Private Bank, characterized the relatively high prices and low yields in the U.S. Treasury market in the past nine months as a bubble. ‘Rates are too low,’ he said, and he predicted the 10-year yield will lift to 5.75 percent.”
“Not everyone believes yields will rise that high; RBS Greenwich Capital bond strategist David Ader, for one, predicts that the 10-year yield could possibly float to 5.25 percent, but it then would retreat.”
“Still, any big upswings in the interim could squeeze Americans looking to buy a home or refinance.”
“‘Five percent is not in itself a big deal, but a move to 5.25 percent or 5.5 percent could cause some discomfort for people taking out a mortgage,’ Ader said.”
From Reuters. “Consumers are being turned down more often for mortgages as lenders tightened standards due to rising defaults and foreclosures. Now, barring much bigger home price declines, rising mortgage rates could also further crimp affordability.”
“‘It’s clearly not a positive for the housing sector,’ said economist Bill Cheney.”
“Bond guru Bill Gross sees a more dire outcome. The manager of the world’s biggest bond fund told CNBC Television on Friday that an increase in rates will decimate the housing market ‘if they haven’t already.’”
“Bond guru Bill Gross sees a more dire outcome. The manager of the world’s biggest bond fund told CNBC Television on Friday that an increase in rates will decimate the housing market ‘if they haven’t already.’”
——————————————————–
So much for all the hand-wringing about helicopter money drops. Does not bode well for gold and other commodities.
It is trivial for us to post anonymously on the internet what Mr. Gross just stated for the world. He just pissed off a lot of people he does business with (insert Upton Sinclairs quote on understanding and livelyhood…). Buy he might have needed to (to make it clear what trades were to be done by his group).
Interesting times ahead.
Got popcorn?
Neil
Did you go on your honeymoon? How was the wedding!?
Was popcorn thrown???
ROTFL
The honeymoon was in Hawaii. Kauai, “the big island”, and Oahu. All three were great and get my recommendation.
No popcorn was thrown.
Oh, see my blog on my quick impressions of the Hawaiian markets.
Neil
I have seen two distinct trains of thought on precious metals .
1. As the money supply dries up, prices will fall due to falling demand like any comodity.
2. As inflation kicks in, and all other investments dry up, money will flow into precious metals. Keep in mind, newly wealthy Asians like precious metals and the money has to go somewhere.
Think about it. Where can you invest your money today, and not take a wet cold bath? Stocks - seem frothy right now. Real Estate - Say no more. Cash in the bank or bonds - You are being skinned alive by inflation. Precious metals may go down some, may go up some - could go up a lot.
You tell me - Any good solid ideas right now on safe investments with a decent yield?
1. As the money supply dries up, prices will fall due to falling demand like any comodity.
What makes you think money supply will dry up? I guess there is a point where everyone is so overloaded with debt, without lowering interest rates, it’s impossible to grow at the same rate. It sure hasn’t been heading in that direction, though.
Also globally, there are still a lot of savings, which means the global money supply growth could continue for some time and these developing countries take on new debt….
I doesn’t matter if supply dries up if Velocity drops off a cliff. You can print money, lend it, etc., but people if people stop spending it you can see deflation.
I’m no math wizard but according to this, prices are roughly based on money supply multiplied by the velocity of money. So if you’re “printing” money at a 10% growth rate and people stop spending at a 20% rate you get deflation.
Question: Gold and Silver may have their ups and downs, but what about somehting like the prudent bear fund(bearx)? Its designed to make money while the market goed down. Think it will work?
How can money supply go down with M-3 increasing 10-13% per year (estimate by Williams) pray tell. We need a Volkering to get rid of the excess quickly instead of the paper cuts.
Easy, see definition of M3, when credit contracts, money supply contracts.
Canadian Royal Trust Fund - Enerplus (ERF) Yields 9% paid monthly (oil and gas).
Also helps shield your money from the falling dollar. Stock can be volitle as the price of energy fluctuaites.
Also, keep in mind if you’re considering buying gold or sivler, pre-1933 gold and silver coins. I brought a bunch of junk grade (cheapest) in 2005. This is what money used to look like. It’s real money. You can get them on-line or any coin shop.
The pre-1933 is important due to the gold and silver recall in 1933. These coins were exempt. Bullion was not exempt.
Only short term treasuries should be purchased in this enviroment. When they roll over they will follow the interest rate up.
I note gold has plunged recently, now $645 and and… all this talk of printing presses is just silly…those guys constantly harping about fiat currencies on those bogus “financial” (lol) websites should have their collective faces slapped… unfortunately, paranoia sells…
buy assets with EARNINGS by following investors with long term verifiable track records only
‘I note gold has plunged recently, now $645 and and… all this talk of printing presses is just silly…those guys constantly harping about fiat currencies on those bogus “financial” (lol) websites should have their collective faces slapped… unfortunately, paranoia sells…’
You know Brad, I’m in the deflationist camp but have to point out using words like silly, harping, bogus and paranoia sells isn’t constructive. Can’t you make your points with out that kind of stuff?
Sorry Ben, I’ll try to keep the discourse at the higher level your blog deserves. I just get a little excited by rising interest rates.
In my own small mind, the case for deflation is pretty easy to make. The main propellant of spending, all those helocs, refis, and unprecedented house-price appreciation are already factored into current prices. Now all that spending power is vaporizing, and the argument for inflation is usually articulated as “printing presses mounted on helicopters”… Hardly convincing.
As I see it, the big argument against deflation is that it is so contrary to national sentiment, where Debt Is Good, and most could not function without it. The real question is– to what extent will it be taken away? Hell, the housing market is only declining because people can’t get loans (not because of the great wisdom of the masses)! The extent of the credit tightening will contribute greatly to whether we see deflation.
How about a combination of inflation then deflation.
I think we’re seeing some pretty serious price inflation in energy and food right now.
I would agree we’re just starting to see deflation in the real estate markets. I think the price of consumer goods is starting to deflate also. If there are serious job losses, like the early thirties, I agree we will see some serious delfation as the nation grows poorer (money leaving - already started 30 yerars ago; we now have a hollow shell of an economy supported by GOV spending and consumer purchases - all debt!).
This housing bust will affect everybody.
Ben Jones: I’m in the deflationist camp
I’m curious as to why - the governments seem to have convinced themselves that lending more, increasing money supply, is a way to avoid deflation. And we have baby-boomers moving retirement money around looking to get good returns [ taking higher risks ]. All this debt just seems to keep sloshing around. What will the government allow lax lending in next, a military build-up?
No kidding, I also want to know why you would be in the deflationist camp. I am in the inflationist camp. I can see disinflation occurring for the short time, but deflation from where?
I’m curious as well…
I view what’s happening as looking like 1938, from a 20/20 hindsight look.
The difference being, that back then, the armies of the world ramped up for war…
This war will be financial, in nature.
The opening salvo?
The collapse of the Dollar
Highly Inflationary…
Federal Reserve Notes must be backed (by decree from Congress to the FED) either by debt from the Treasury (notes, bills, or bonds) or gold certificates. The FED can legally create more notes by the gov’t going further in debt, or purchasing more gold/gold certificates.
More gov’t debt with no one buying pushed rates up. That further complicates the real estate issue. Actually, it further complicates all kinds of issues since money is created (other than the gold portion) by debt. It makes paying that debt much harder. Yes, those who said deficits don’t matter were either very ignorant of the issues or weren’t truthful. Did you ever hear Greenspan or Bernanke say deficits don’t matter? I’ve only heard them say that Congress needs to get the debt under control, and that it wasn’t the FED’s business to tell them how.
Not really much different than the circumstances in the 1920s. Then it was us helping the Brits with their monetary issues. Now it is China, Mid East, Japan, etc, all debasing their currencies to keep on par with the US. Either way, a massive credit expansion again. History has repeated itself.
Once deflation sets in…
Its hard to exorcise.
People sit on their money.
Others won’t borrow (the “real” interest rates are too high) Without borrowing, job growth is cut in half. Yet due to tighter “purse strings,” jobs disappear. Its just not a pretty economy.
I cannot claim to speak at all for Ben; these are only my opinions.
Got popcorn?
Neil
I agree with Neil but would add that we’re seeing a repeat of the Industrial Revolution due to cheap PCs and the Internet. From the IHT
So you have the end of a massive credit bubble overlapping the rise of massively deflationary technological changes. Both spell deflation. So it’s not surprising that the Fed killed M3 and encourage reckless lending and low regulation. Housing is the helicopter.
Lots of new technological products have been introduced over the last few decades and those prices decline as the technology matures, but have new cars been declining in price? And all the cheap chinese goods - have the massive environmental costs been taken into account? The chinese workers aren’t slaves. They will demand higher wages so they can buy pork - won’t those costs be passed on to the global consumer?
———
Rise in China’s Pork Prices Signals End to Cheap Output
Rise in China’s Pork Prices Signals End to Cheap Output
I’d just like to note to the deflationary/inflationary camps.
There were some M2, M3 and Mprime deviations over the past year. It seems the treasury slowed their printing presses. The rate of currency distribution had gone neutral (replacing old bills).
anyhow, M3 seems to be increasing but the second derivatives from the fed, treasury rates and physical currency creation all slowed.
Like Greenspans lowering of rates; the reaction was quite delayed. So considerable time should elapse before this effects things. The treasury policy is paramount in my consideration since that will drive the fed eventually. So, the treasury is in an inflation/currency protection mode.
Certainly seems like they are hammering the FED to keep rates elevated. I would guess this is a holding pattern to determine how much of a credit mess we are in and minimize the amount of currency creation needed to handle the default mess.
Expect for the Fed to hold steady for the rest of the year and possibly 08 as well. They are shaking things loose from the weak hands.
Not expecting gold to be a great investment but a slight buffer from comming problems.
Wow, a lot of common misconceptions running rampant again.
First, hyperinflation and deflation are not necessarily exclusive outcomes; in fact, one often leads to the other.
Second, in times of economic & political turmoil PM price movements do not correlate with other commodities.
Third, PMs are not strictly a hedge against inflation.
Brad, If you were to have bought $100K 10 Yr US T-Bond 3 weeks ago you would have lost 4% (current price 96K bid), if you had bought 100K in gold 3 weeks ago $665/oz you would have lost 3% (down 2.3% last week, current price 648.50 bid). A lot of the “paranoia sells” bothers me , but the historical economics of gold is fact. Gold is not a hedge against inflation, it is a hedge against commodity appreciation. If you haven’t noticed it the US is the laggard on the world growth scale with world GDP expected to rise 5% and if you take out the US GDP, the world GDP is expected to rise at 6.5%. The commodities are flying to Chindia and Europe, even Kenya is expected to have growth of 6% .
Although I am not much of a precious metals buyer - I buy industrial metals - one company I deal with in South America had demurrage charges of 2.3M earlier this year on its inability to ship in a timely fashion. They tacked the demurrage on to the bill and the buyer was happy just to receive the metal.
If you need the metal, price is immaterial.
It is difficult to get firm prices on any industrial metal today for more than 10 days. Cobalt is $28.30/lb down $1.70 for the last 10 days up $15 since September. Look at these charts for the recent sales of Cobalt on the BHP open sales system - look where the metals are going. And the US was the seller out of its strategic metal reserves at $10 - $15.
http://tinyurl.com/2ud4je
Not only that but look what the LME officials pulled on the Nickel market last week! Free market my ass! The PTB are papering over every damn commodity they can in order to impede prices from rising.
http://news.goldseek.com/GoldIsMoney/1181314860.php
“Brad, If you were to have bought $100K 10 Yr US T-Bond 3 weeks ago you would have lost 4% (current price 96K bid)”
How true is that if you actually keep that $100k ten year note for ten years? The long term inflation rate is 3%. Granted, that is probably at least 30 years on the average. My 10 year note I bought June 15 of 2006 is yielding around 5.125% and I get slightly over $25 every 6 months on that. If the rate went up to 6% after I bought my 5.125% I still get that $25 or so every 6 months. The problem is if I am one of those day traders trying to sell my ten year note as a commodity when the yield changes to 6%. Then I have problems. But I’m only looking for a safe harbor. I figure if I can get $50,000 income on dividend stocks and government securities, I would not fear a great depression. My stock would still yield and my securities would still yield. On top of that, I diversify (magic word). I have my eyes set on growth stocks after I get to my plateau. If I was there right now, I would get into biotechs. There’s a good sized biotech one that is near its two year low that I would like to invest in now.
NOTICE OF CONGRATULATIONS
CONGRATS to bill, for stating that he had planned on buying a 10-year Note on 6/07.
Here on this Blog, the unnamed are better at predicting markets than the so-called ‘experts.’
~Misstrial
That is not taking into account the state and local taxes you get to pay on the interest received.
You are a net loser when taking taxes into account and when adjusting for pre clinton inflation.
That is implicit trust in the US dollar. I do not have that trust in any currency. I hope your investment strategy works, it is to risky for me. I can see three things happening 2 of which are bad. I will not take a position where I have only a 1/3 chance of success.
“Money isn’t everything…gold is. F**k T-bills! F**k blue-chip stocks! F**k junk bonds! We’ve got the real deal! Money will always be paper, but gold will always by gold!”
Darwin Mayflower
If you like raw materials, then buy BHP or RIO or both.
all this talk of printing presses is just silly…
Clearly you haven’t seen the M3 numbers lately? All the debt taken out lately doesn’t count?
I note gold has plunged recently, now $645 and and…
You mean prices fluctuate? You can pick any recent top to make any investment look bad (stocks in 2000). This isn’t an intellectually honest argument against gold
Right, rates are headed up at least in part because of inflation.
I think that’s the ONLY reason they’re heading up. There’s a lot of verbage out there about how rates are headed higher because the economy is looking stronger - WHERE? What part of the economy looks strong? Maybe Wall Street, but even there, I bet a lot of fat cats are getting sweaty these days as credit volitality starts creeping up
Someone indicated the other day that I’m out of my mind by starting to buy 10 year notes now when the rates will probably go up later. Key word - “probably.” I have an investment process where I gradually invest more in long term treasuries and less in short term treasuries as the rates rise. I also am holding to the term. Call me dumb. But I get income.
“I think that’s the ONLY reason they’re heading up.”
The Treasury, which issues treasury bonds, and the Fed, which purchase them, can potentially influence T-bond yields.
Maybe the Chinese will quit buying so many Treasuries? I don’t believe they will be very happy when they learn their US mortgage securities are not really AAA but repacked junk passed off as AAA. It looks like they want to buy US equities now anyway? Spend the accumulated US trade deficeit dollars while they are still worth something. Forget loaning money to the US, buy something useful like an oil company. Do it through a US company front like Blackstone.
Brad, I won’t bother delving into the old inflation vs. deflation debate because the conclusion is unknowable (imo). However you seem to be unable to acknowledge the possibility of runaway inflation and continually berate those who do. Perhaps you haven’t been to the grocery store or gas station lately? Regardless, having a strong confirmation bias will not serve your portfolio well in the future and you should make an effort to consider issues from the standpoint of the other 6 billion or so inhabitants of this earth with whom we do business and with whom the success or failure of the dollar resides (reference foreign debt holdings). They seem to like gold just fine and in fact several billion of them prefer it as they have already had an intimate relationship with a gov’t that printed it’s currency to abandon. I don’t think they (collectively) really give a rat’s patootie what your belief system is or whether you choose to hold a piece of paper (that they have all too many of) instead of something limited by nature, relatively scarce, accepted as money for centuries and unencumbered.
In an attempt to offer you a more balanced view of potential outcomes within the context of our present monetary system, I will offer an excerpt from a relatively obscure speach by then Chairman Greenspan circa Jan.97
“When there is confidence in the integrity of government, monetary authorities — the central bank and the finance ministry — can issue unlimited claims denominated in their own currencies and can guarantee or stand ready to guarantee the obligations of private issuers as they see fit. This power has profound implications for both good and ill for our economies.
Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.
That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”
Note the liberal use of the terms “without limit” and “unlimited” in the above. Note, also, the qualification: “When there is confidence in the integrity of government”. Once confidence collapses it becomes counter-productive for the central bank or the government to issue more “claims” (money and money substitutes). When that point is reached you don’t get deflation; you get a total collapse and a new monetary system. Food for thought.
Seems like you may have a case of confirmation bias? Anyway, here is a different take on the matter.
http://www.safehaven.com/article-7729.htm
With money supply drastically growing worldwide, if the market does not think the going interest rates are enough, you could easily see a run on commodities. See the 1970s. Commodities did pretty well in a period of rising interest rates.
Short term, you are correct - commodities will have it rough.
I fully expect the value of my gold to drop, but its presence makes me sleep a little better for some reason. Now all I need is a shed, some guns and canned food
Bought my gold summer of 2005, so I’m happy. It seems to me that when the dollar drops against the average of other currencies, then the price of gold rises almost proportionally and for no other reason. Could be wrong, but that has always appeared to me to be true.
THESE ANALYSTS ARE CRETINS. People could afford much higher interest rates if the home prices were rational.
30 yr Mortage rate increased by 10 basis points today, highest one day jump in recent years. Yahoo finance shows it went from 6.19 to 6.29. Bankrate will update this information on Monday.
As stated a year ago, the entire decline since 1981 in interest rates in the 10 year bond has a tops line of 25 years. This line stopped the rise in interest rates last June at 5.25%. It appears that we have broken this declining tops line. Next resistance is around 6 1/2%.
We have broken a trend of 25 years that coincided with a period of few recessions, a huge move up in stocks and realestate . I am not sure what reason will become known over the next few months for the move up in interest rates. My best guess is a Chinese market crash and then the Chinese dump our debt too raise cash.
Why did it come back down after reaching 5.245 in June 2006? Was it the low readings on core inflation data?
While I have an MBA I am a technician when it comes to markets. I do not really need to know why something happends. Prediction of future trends must come before the reason or news is out. By the time you know the medias stated reason for an event or the “why” it is almost too late. Experienced traders on this blog know what I mean.
With the above in mind, I will answer your question. The tops line stopped the 1987 interest rate spike, the 1990 spike, the 2001 spike and hit 5.25% at the June 2006 spike. I mentioned this before it happend on this blog last June. The rates then fell into 2007 but unlike prior reactions to the tops line, the rates did not go to new lows. We have since moved up through the line. Unless the 10 year bond falls back under 5% next week, I expect a spike up in interest rates with the first area of resistance at 6 1/2%.
Those of you that understand wave theory may recognize this pattern as a third wave or the C of an ABC wave.
I read somewhere that gold is up because a lot of Chinese have been buying gold to make lucky trinkets because it is golden year of the pig. But the year changes every year … makes me nervous about buying gold.
If it makes you feel a little better, Asians value gold as a store of wealth in a way unfamiliar to most Americans. Southeast Asia and the Philippines has heavy buyers among even the poor population. It seems likely, then, that as the Chinese and the Indians become more prosperous, individual demand for gold, almost always in the form of 22+ karat jewelry, will continue to increase and if mining and central bank selling doesn’t satisfy the demand, the price will rise.
A little view on the US from Sweden’s Central Bank
from Riksbank’s May 3, 2007 minutes (released last week)
“…Developments in the United States deviate from the international pattern, with growth continuing to slow down. Following a period of strong growth, rapidly rising property prices and moderate inflation, they now have the reverse situation, with low growth, a weak property market and overly high inflation. This presents a considerable challenge for monetary policy. The member claimed that the United States is ahead of Europe and Sweden in the economic cycle and that it is important to avoid Sweden ending up in the same situation as the United States.
The new information received since the monetary policy meeting in February indicates that total international growth is developing well in line with the forecasts in February, continued to the member. Developments are slightly weaker than expected in the United States and slightly stronger than expected in Europe.”
(so “a weak property market and overly high inflation…weaker than expected in the United States” I think most of us realize this)
http://tinyurl.com/2p54xe
from Riksbank March 17, 2007
Credit derivatives - risks and opportunities
…3. LIQUIDITY RISKS
Thirdly, there is reason to be aware of possible liquidity risks. Problems may arise if the market actors rely on the market always being liquid and assume this when making their deals. What would happen, for instance, if several credit events were to occur simultaneously? Perhaps there would suddenly be only sellers and no buyers in the market. Then prices will plummet. This was the case during the Russian debt crisis in 1998, for instance, when the LTCM hedge fund suffered problems….
4. RISK OF MISPRICING
Finally, I would like to bring up the risk of mispricing, a risk that in many respects is closely related to the liquidity risk…. The interest rate differences between high-risk and low-risk bonds have therefore declined, that is, credit spreads have shrunk. The price of credit derivatives has fallen correspondingly. The compensation for risk has thus reached a level far below the historical average.
The question is what will happen when economic activity shows a downswing and the number of bankruptcies begins to increase again. If investors have in general underestimated the credit risk, we may see a substantial adjustment in risk premiums. This will also lead to a fall in prices of corporate bonds and credit derivatives. In this situation, individual actors with large net exposures in credit risks may be affected by significant losses….”
(Liquidity and underpricing risks, not to worry)
http://tinyurl.com/2p54xe
and from Riksbank’s
5/30/2007
Deputy Governor Lars Nyberg
Developments in the property market
“In the United States the subprime mortgage market has also increased rapidly in recent years. This group includes in principle all mortgage customers who cannot show that they have a credit history sufficient to be granted a normal mortgage. These can be households with records of non-payment of debts, low or undocumented incomes….I do not see any risk at present that we will experience this type of development in the Swedish mortgage market. In Sweden, loans to the subprime sector comprise an extremely small percentage of the total number of mortgages, no more than 0.5 per cent. The percentage is much lower in Sweden than in the United States. This is largely because our mortgage market and the US mortgage market are very different. In Sweden, lenders focus primarily on the borrower’s ability to repay….
…The rapid price increase has gone hand in hand with a substantial increase in household debts. At present I am not particularly concerned that these prices will lead to problems for financial stability. But this is a development that is not sustainable in the long term. House prices and household indebtedness cannot increase faster than household incomes in the long run. Otherwise there is a risk of imbalances building up, which may be costly for the economy. We at the Riksbank will therefore be closely watching future developments.”
http://tinyurl.com/33ayan
(Darn it Sweden expects me to repay my loan? I guess I’ll have to buy in the US.)
Hoz,
Thank you for posting these comments from the Riksbank officials.
There is the inflationist camp and the deflationist camp. Gold and silver would obviously do well in a inflationary environment. That is not necessarily the case in a deflationary environment although gold in particular might do well here. Since the Federal Reserve and U.S.Treasury control the printing press, the question then in whether the government prefers deflation or inflation. In the 1930’s when the U.S. was the largest creditor nation and Japan in the 1990’s, governments have preferred deflation. We are now the largest debtor nation and so it is more probable that the government will follow the inflationary course like Argentina. At some point the U.S. will have to do this since we certainly will not have the ability to pay our huge foreign debts after deflation.
I do think that this is somewhat of an oversimplification since we could have initial strong deflation (asset market collapses) and then the government’s response might be hyperinflationary. My “guess” is that we will see a collapse in stocks, housing, commodities and perhaps the precious metals and it will reach some stage where the government steps in and starts monetizing debt (aka printing money). What to invest in right now? Good question. I think some FDIC insured cash, gold and silver (either the metal or mining stocks.) The cash is for the deflation, the gold and silver for the inflation.
I agree with your reasoning. In a true free market, or with sound currency, we would definitely see deflation. I expect inflation or else it’s the bankruptcy of the US.
Bankruptcy and potential social disorder. America was a very different place the last time there was widespread economic hardship. Not to mention the volatile geopolitical situation with certain enemies hiding out in Afghanistan who are waiting for the right moment to inject more stress in the great satan’s way of life.
Ben and company,
We may just end up with the topsy-turvy world of inflation (as I note every time I go to the grocery store as of late) in food, fuel, metals, education, taxes and some labor services at the same time deflation in prices of housing, land, real estate, some consumer goods such as electronics.
The worst of all worlds…massive rising prices of these things that are needed to sustain life and hearth and the possible assets to keeps such life going down quickly because most everyone in the Western World, mostly America, is up to their eyes in debt, and cannot spend anymore. He no longer has any equity to pull out of a house and just may stop spending. I can see it in places big grocery stores and they are emptier than usual while the discounters like Aldi’s is doing much better. It is anecdotal but it seems there is less people in Target, Kmart, Walmart, etc. Garage sales and second hand goods stores are doing quite well. People are looking for bargains because most do not have the folding cash anymore.
Hope you have a lot of can goods, potatoes and tuna put away…..hehehe…
That reminds me of a post first made by someone here long ago and repeatedly occasionally since (paraphrased): The prices of what you want will fall while the prices of what you need will rise. Which sucks.
I think we are already seeing “The prices of what you want will fall while the prices of what you need will rise” in a very big way. Gasoline, Health Care, Energy, Housing, Food Products all up. Big Screen Plasma TV’s etc. Down.
In part, this is because products which can be manufactured in China are dirt cheap. Heck, I probably have 5 full time Chinese people working for me full time for me making my clothing, and other products I buy, but products like health care that I need. There it is different for sure.
My long term problem as a software engineer, is that my job is easy to offshore to cheap places like India, and for the most part is in the want rather than need camp. This worries me somewhat.
Remember the idiot riding around on his lawn mower saying, ‘ Some one please help me,I’m up to my eyeballs in debt’?Or words to that effect. We need a little Volkering IMHO and I’m not very humble! hehehehehehe
I remeber when AAUK paid 3% w a low P/e
tisk-tisk
hubrispie, I think you brought me to your camp. In time, everyone will end up thinking that inflation is the lesser of two evils. I find this discussion fascinating though, thanks to all for your insights. Some days, reading this blog feels like being in an old-fashioned socratic debate. Ben, you are a genius.
You can be in the deflationist camp and be bullish on gold. Gold is a non-expiring call option on inflation and calamity. Deflation over some finite term may well have future inflationary implications. Also, the key with the interest rates is not their level but the “real” component (nominal interest rate minus inflation expectation). Rising real interest rates do cause the value of gold to go down (other things being equal) because of the greater discounting of the value of the future.
But I think this little up move in rates and down move in gold is a buying opportunity in gold.
Gold is a non-expiring call option on inflation and calamity
Please don’t use words you don’t understand. Gold is not a call option. You can buy calls on gold if you want, but it’s a commodity, not an option.
gorobei, I’m afraid it is you who doesn’t understand. Paul in Jax is basically correct from an economic point of view: gold provides its holder with protection against inflation and calamity, and never expires. Thus, it behaves, economically speaking, as a non-expiring option that pays off in those circumstances. Whether it is a call or a put, however, is subject to question.
I think I understand what an option is. It gives you ‘optionality,’ i.e. a choice. Gold does not - it goes up and down and you take your profit or pain accordingly.
Maybe I’m wrong, I’ve only traded a few hundred million options in my life.
Here’s a word you apparently do not understand:
Main Entry: met·a·phor
Pronunciation: ‘me-t&-”for also -f&r
Function: noun
Etymology: Middle English methaphor, from Middle French or Latin; Middle French metaphore, from Latin metaphora, from Greek, from metapherein to transfer, from meta- + pherein to bear — more at BEAR
1 : a figure of speech in which a word or phrase literally denoting one kind of object or idea is used in place of another to suggest a likeness or analogy between them (as in drowning in money); broadly : figurative language — compare SIMILE
He didn’t mean it in the literal sense, dumb ass. Put down the dictionary.
Rising interest rates do not drive down the price of gold.
Gold price tends to lead interest rates.
http://www.safehaven.com/article-7728.htm
My take
1. There will be continued inflation in terms of energy and food prices due to world demand. Thus some of my money is in oil, and most of all money markets.
2. There will almost certainly be deflation in terms of housing. This is why I’m not to worried about inflation. I plan on purchasing a house with cash in a few years. Even if theres inflation in other areas realestate is going to fall.
No matter how gov plays it. If they fight inflation by raising rates prices fall.
If they lower rates by lowering intererst rates the dollar crashes and inflation spikes offsetting any benefit to realestate. If they continue to print money the same thing happens. I have a modest investment in foreign bonds just in case they cut interest rates.
My guess is they will prefer to print money rather than lower rates. Printing money gives them control over who gets it (ie Halliburton or defense contractor vsto average US citizen) as opposed to lowering rates. They will raise interest rates to slow the dollars slide, but in the end the dollar will continue to fall.
PS check out todays NYT for good articles, and Buisnessweek for a laugh out loud article on how realestate is bouncing back.
Is Gold an Inflation Hedge?
I would encourage you to read the book The Golden Constant by Roy W Jastram - it makes the unintuitive case (with a look over the historical data from 1560-1976) that gold performs better (in appreciation terms) under deflationary regimes rather than inflationary ones, thus throwing a significant wrench into the idea that gold protects under inflationary regimes (dollar down, gold up).
OT, my child and I saw the movie, “Are We Done Yet”. Movie about a family buying a fixer in the country. Copycat basically of ‘The Money Pit’ from the 80’s (Tom Hanks, Shelly Long). All flippers should watch how the house falls apart, destruction (I mean construction crew), lying realtor, phony inspections, etc. Silly, but so true.
Are you serious? You think its a copycat of an 80s movie? The 80s movie was a copycat of a 50s movie staring Cary Grant “Mr. Blandings Builds His Dream House” (I’m sure the better of the three)!!
Can someone give me bonds-101.
Government issues bonds which is basically a promissory note, right? And then investors ( which mostly are foreigners) buy the bonds and get interest on it.
Why and how interest on bonds changes? What is the mechanics here? How the demand for bonds influences the interst rate? Thanks.
Bond price goes up, yield goes down.
Bond price goes down, yield goes up.
Demand and supply, and expectations of future inflation are the key issues for price movements.
Loafer
(Buyers are not necessarily mostly foreigners. I’d have to look that up.) Yes, a bond is a promissory note. Government bonds typically pay interest semi-annually, and then return the original principal at the end of the term, which might be 30 years, 10 years, 5 years, or shorter.
The interest rate on securities of more than a few months’ duration is set by the broad market — i.e., by the “invisible hand” of supply and demand — and is related to expectations of inflation etc. For example, if a rapid run-up in the price of commodities were expected, you would not buy a bond yielding a mere 5%, because you would expect that commodity and/or labor prices were going to rise more rapidly than that.
Therefore, if you buy a 4% bond at a time when inflation expectations are low, but inflation expectations then increase, any attempt you might make to sell that 4% bond in the open market would get you a customer — but the bond PRICE would be something LOWER than the amount you originally paid for the bond. Apart from the fluctuation of prevailing interest rates, which affect all bonds, there are fluctuations in the perception of the creditworthiness of particular bond issuers. For example, I bought some Brazilian govt bonds last fall when, for historical reasons, Brazil still had kind of a “bad” credit reputation. The bonds, then selling at their par (i.e., redemption) value, subsequently rose in price to 120% of their par value, because Brazil began to look like a more credible issuer. I haven’t checked, but I have no doubt that price dropped this week as long-term interest rates around the world rose.
Strong demand for bonds of a given maturity will of course raise the price, i.e., lower the effective interest rate. Despite the risks associated with long holding periods, 30-year bonds often are more expensive (i.e., lower interest rate) than 25-year bonds, because some states and municipalities make a practice of buying 30-year federal govt bonds to back up their ability to repay municipal debt.
A question in Ben’s post above asks about someone buying US Treasury bonds that might (soon) yield 6.5%, but having the dollar drop 30% against the yen. Well, that’s why some of us do not put all our bond money into US dollar-denominated bonds. Many foreign govts issue bonds with basically no risk of “default,” but there is always a risk associated with the currency. At this time, the Australian dollar has been very strong against USD, and I have been lucky to have been buying a lot of AUD bonds for the past six months. If I thought the USD would strengthen against AUD, I would dump some of the Australian bonds. However, I am really holding a diversified basket of bonds — US, Iceland, Australia, Brazil, and New Zealand — since I can’t know which currency will suffer the most. I do know one can’t buy any decent yield in either Euros or yen, so to heck with them. Brazil and Iceland yield more than NZ and Australia, which yield more than US at this time. The Chinese have spoken openly about reducing their purchases of US bonds, so I think one would have to be nuts to keep all one’s eggs in the US dollar basket.
OK, rant off.
IIRC, foreigners are by far the largest holders of UST and USD (both digital and printed).
Simple explanation:
1. You buy a bond note for $100, gov’t agrees to pay 5% annually.
2. If you want to turn around and sell the note immediately, somebody will pay you $100 to get that 5% stream of revenue. $5/yr.
3. If the Fed raises rates to 10% right after you buy the bond, then you need to offer a discount in order to sell the bond. A buyer will be willing to give you $50 to get his 10%.
So as rates go up, the instantaneous value of the bond goes down.
Make sense?
Yes it does.
Can’t we just start another War, say with Iran, start a military draft, and pump up the economy for a few more years.
I agree with your sarcasm and would like to believe another war is highly unlikely, but then again desperate times call for desperate measures. So I wouldn’t rule anything out.
Its more likely that other countries will go to war with each other and then they’ll all dump their own currencies and come running to the dollar. Potential Wars: India vs Pakistan, Iran vs Sunni Arab Countries, Turkey vs Kurdistan, Taiwan vs China, N. Korea vs neighbors, China vs Phillipines and Vietnam (disputed Spratly Islands) Russia - internal breakup, Spain vs Morocco (Spanish enclaves Cueta and ?), Brits vs Argentina (Falklands) etc. etc.
So in a RELATIVE sense, the dollar may still be perceived as a safe haven for a long time to come despite the reckless credit expansion. The Euro zone could be plagued by insecurity caused by massive waves of unassimilated migrants from unstable, war-prone regions, so it might not be as stable and strong as it appears now.
And what about the missile defense shield in Eastern Europe? What’s that all about? I’m old enough to remember getting under my desk, in Orlando, for missile-attack drills at the time of the Cuban missile crisis, because the Russians did to us a different but equally worrying version of what we appear to be planning to do to the Russians.
no more buyers at these stupid prices.
IMF sounds alarm over debt-fuelled mergers
One side effect of the increase in rates has been mentioned as side issue, but this may be the most important one.
From a speech yesterday in Heilgendamm
“IMF chief Rodrigo Rato said on Friday he feared corporate marriages built on big debts in a recent merger frenzy could end in tears. Rising interest rates could spell trouble for more highly leveraged mergers and acquisitions, he said.
“This merger mania…could be a show of complacency,” Rato told reporters at the G8 summit of industrialised nations.
His comments coincided with a tumble in the bond and share markets as investors took fright on Friday over the risk of interest rates rising more than they have been expecting.
Rato said higher interest rates had already caused problems in some areas of the mortgage industry. That was a reference to recent repayment defaults and company collapses in the higher-risk end of the US mortgage market.
“We could see more of that in the mortgage market and other financial areas as monetary conditions tighten around the world,” Rato said.
He said he was not condemning mergers and acquisitions but that the danger lay in the extent to which some of the big ones were built on debt financing, which costs more to carry when interest rates rise.
“Some big mergers pose risks,” he said. “This is not to say mergers are not good. But I think regulators should be careful”.
Business Day
http://tinyurl.com/39u6bn
‘“IMF chief Rodrigo Rato said on Friday he feared corporate marriages built on big debts in a recent merger frenzy could end in tears. Rising interest rates could spell trouble for more highly leveraged mergers and acquisitions, he said.’
Or it could end in a spectacular crash on Wall Street. I took my first ‘real job’ on March 1, 1987, on the effective date of a merger between two incompatible companies. Later that year we merged again — a marriage made in hell. But I had a ringside seat on Black Monday, October 19, 1987. The chance to see a bunch of money grubbers turn white while the value of their stock investments drop 20% was truly priceless.
This really all sets up perfectly.
1. Load people up on ARMS
2. Change the BK laws
3. Shoot up interest rates
They don’t call this country the fleecing machine for nothing.
Right. The bottom line after 5 years of these policies is a massive migration of wealth away from the bottom of the population up towards the top.
The folks on Wall Street are smarter, greeder, and crookeder than most other Americans. They also work harder (80-hr weeks?). So any transaction they are involved in ends up benefiting them far more than the other party.
The uber-rich have a great money pump, don’t they?
Like the old adage goes, “the rich get richer and the poor have children”.
Treasuries or precious metals? If we, on HBB, are able to laugh at people who put most of their investment in real estate, we better have a look at ourselves too: Those of us who put more than 80% in precious metals or treasuries may be just as bad as the FBs/flippers/specuvetors in RE, and that’s just an idiot’s (mine) opinion, I guess. but I do get sleep at night.
Every investment has its risks. I think that the goal of every investment is to assess the reward versus the risk and one’s own personal needs and comfort level.
When gold was at $270 per ounce in 2000 and the central banks were auctioning off their gold, pundits were saying that gold was extremely risky and was headed to $70 per ounce. That almost sounds ridiculous now but I had invested in gold a little after the Bank of England had announced their forward gold sales (June 1999 I believe), and that is what the “experts” told me and what I read in the financial journals. Obviously, they were dead wrong. That was the time to buy (actually about one year later). It was the reverse of “buy now or be priced out forever.” The corrollary would be “hold gold and it will become worthless.”
Obviously, if the central banks had dumped all of their gold at once in 2000, it probably would have reached $70 per ounce but it would have risen back up over the long term because it costs a lot more than that to bring it out of the ground. When gold was at $270 my perception was that it would not deflate much if at all in a asset collapse. However, now at $650 or so, I think that it may take a short term plunge (six months to 2 years) and then recover and appreciate rapidly. I believe that is what happened to the Gold mining stocks in the crash of 1929 until the government depreciated the dollar. Therefore, for me, cash for the short term, gold and silver for the long term and “NO DEBT”.
The wall of worry continues for gold and miners. This chart from Gold-Eagle puts things into perspective. Big moves happen when they are least expected.
http://stockcharts.com/h-sc/ui?s=GDX&p=W&yr=7&mn=0&dy=0&id=p38874231546&a=108857968&listNum=1
I’m always impressed that so many of you folks can read and make good sense out of charts like that, and I’m not being sarcastic. I don’t mean the long-term straight-line trend, but all the tops and dips and ovals and parallel lines that are Greek to me.
“Big moves happen when they are least expected.”
—————————————–
that will comfort the gold FBs waiting for gold GFs.
I talked to a RE agent the other day, she said the decline will bottom out in the 3rd quarter this year and the price increases would resume in the 4th quarter.
I think gold and RE have (since 2000) and will move in tandem, opposite of interest rates.
Correlation does not imply causation, but go ahead and short gold if you have the stones. Me, I’ve been long since May 2000 and everything thats gone down since just makes the case stronger so I add on the dips and take a bit off the table after a good run up. I’m surprised that punk GetStucco isnt yapping about the horrors of gold investing. I think all the clowns that trash gold here eventually get converted and buy a little because the case is too strong and backed by history. Add it up:
massive dept at govt, corporate and individual levels + hollowed out job market + boomers with no savings retiring en masse + expensive war going nowhere + misallocation of capital into housing bubble and stocks in crappy companies instead of needed infrastructure + inflation in the things you need, deflation in the things you want (yes I said it years ago) = Pain!
And WTF, isn’t anybody shorting homebuilders and REITs? That is THE layup investment I think people here can agree on based on tons of supply and zero demand. Just use a little of your money, because shorting can be a bitch.
This guy has an intersting point.
“I was saying yesterday that the rapid increase in home mortgages outstanding may be responsible for the sharp rise in long interest rates, caused by a rush to hedge all the CMO/CDO bonds created by their securitization. Such loans more than doubled from $4.8 trillion at the end of 2000 to $9.7 trillion at the end of 2006, a compound annual growth rate of 12.5%.”
http://suddendebt.blogspot.com/2007/06/rise-in-long-interest-rates-another.html
“A 30-year fixed may soon be at 7%, still historically low but murder for this housing market. Their illusions seem to have disappeared in the haze of the desert.”
Exactly why would a 30-year fixed rate of 7% kill the market, when almost nobody buys with a 30-year fixed these days? Who can afford to, when new ’starter homes’ start out at $600K (at least in San Diego)?
Nonetheless, it is worth noting that a 1% increase in rates takes a $6000 bite out of the I/O borrower family’s net worth every year, before considering other components of PITI, not to mention the falling knife effect of owning a home while prices are falling.
(My scenario assumes a sale price of $600,000…)
Stucco — I wondered the same thing, figuring a rise from 6.5% to 7.0% knocks off 5% of the value of a $400K, 100%-loan property. 5% is progress, true, but not murder. Going fairly rapidly to 9% or 10% would be murder, IMHO. Fortunately, we don’t need murder — we have ARMs.
ARM = Automatic Rate-induced Mayhem
“Until a few days ago, the consensus on Wall Street was that the next move by the Federal Reserve would be to cut U.S. rates. That view has evaporated amid higher global rates and repeated assertions by Fed officials, led by Chairman Ben Bernanke, that their biggest fear is inflation, which the Fed seeks to pre-empt by boosting short-term rates.”
Suddenly the schizophrenic bond market is taking the Fed’s saber rattling at face value, despite the lack of follow through in the form rate hikes.
Since we are on an AZ thread, I am wondering if anyone can help me. I am interested in considering a move from Palm Desert, CA to Scottsdale, AZ. Hoping to buy in 2008 there. Does anyone know the area and have any advice what areas for a middle income type family?
I don’t know anything about the area, but suggest you re-post your question in either an Arizona thread as soon as it appears, or in the Bits Bucket early in the morning. These threads can go stale pretty quickly, as when a new one appears, and many regular readers who can tell you what you want to know may not come back to this thread at all, it being so late in the day.
If Leslie Applteton-young were a weather forecaster she would be forecasting sunny days even as a category 5 hurricane was due to hit in less than 3 hours.
bawk..bawk..bawwwk
Nor high finance/RE expert here bit I can see the chickens are coming home to roost and banging on the henhouse door crying “There’s a lot of HUNGRY Critters out HERE”:)
bawk..bawk…BAWWWARK