‘Further Policy Firming May Be Needed’: FOMC
“The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent. In a related action, the Board of Governors approved a 25-basis-point increase in the discount rate to 5-3/4 percent.”"The slowing of the growth of real GDP in the fourth quarter of 2005 seems largely to have reflected temporary or special factors. Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace.”
“The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.”
“The Federal Reserve is indicating at least one more rate hike, according to analyst Peter Cardillo. ‘There is very little change in the statement and the fact that they didn’t elaborate on the slowing housing market means that they remain focused on the possibility of higher intermediate good prices.’”
“The Fed’s move gives the U.S. the highest central bank rate among the Group of Seven industrial countries, surpassing the Bank of England’s 4.5 percent benchmark. The Fed’s rate is 2.25 percentage points above the European Central Bank’s refinancing rate and 1 percentage point higher than the Bank of Canada’s overnight rate. The Bank of Japan’s rate is close to zero.”
“The Fed’s cycle of increases has lasted longer than most forecasters expected: A year ago, economists predicted the rate would be 4 percent this month. The central bank’s next two interest-rate meetings are scheduled for May 10 and June 28-29.”
“The Fed’s goal has been to reach a neutral level for the funds rate, the point where interest rates are neither stimulating nor depressing economic growth. Many analysts believe the Fed is very close to that level but may feel the need to push the funds rate up one more time to 5 percent from moving to the sidelines for the rest of the year.”
“However, other analysts who are more worried about inflation pressures said the Fed may feel the need to boost rates not only at the next meeting on May 10 but also at perhaps two more meetings after that, leaving the funds rate at 5.5 percent. Analysts who believe the Fed will push rates higher are more worried that the surge in gasoline prices and tight labor markets will soon start showing up in increased inflation pressures.”
“‘The real question is not what he does, but what he says,’ said David Wyss, chief economist at Standard & Poor’s. Lyle Gramley, a former Fed board member said he believes the central bank will keep lifting rates until there are definite signs the economy is slowing. ‘A combination of a downturn in housing and a slowdown of consumer spending should do the trick, but the Fed does not know for sure right now whether that will occur,’ Gramley said.”
“European Central Bank president Jean-Claude Trichet said the ECB favours a ‘gradual and measured’ response to inflation shocks. He said the ECB will continue to carefully monitor all risks to price stability. ‘Clearly we have a number of indications that require careful monitoring and, among these, the ones pertaining to housing market developments,’ he said.”
“‘The buoyant loan and house price developments at the euro area level warrant close and continued monitoring, not least as they could imply a risk of price misalignments,’ he said. The ECB started raising rates in December and economists expect further rate increases over the course of this year. ”
“The ECB therefore does not react to the immediate or first round effects of such shocks, but concentrates on preventing the transmission of these effects to other sectors of the economy, he said.”
“The Committee judges that some further policy firming may be needed … ”
Looks like Mr. Bernanke will keep on tightening!
If Bernanke wants to keep his job he’d better model himself after Paul Volcker. That is the only way he’ll build his credibility.
Not happening. High interest rates coupled with other underlying economic problems will cause the economy to fall into a deep recession.
David
Bubble Meter Blog
But BB cannot preemptively stop raising rates without more convincing evidence (besides self-propagated rumor) that a recession is in the works. On the other hand, if he mentions the ‘R’ word, he risks catching “kill the messenger” blame for causing it. It is definitely a good time for the Fed to walk the tightrope on their tiptoes…
5.5% Max
David
Bubble Mter Blog
Agreed. I think 5.25-5.5% is where they pause. I should have clarified that he needs to be more like Volcker in a sense that he can’t be “soft” like the guy he quickly replaced. I can’t remember his name and I think he passed away recently.
Arthur Miller
Doh! William Miller. He died about two weeks ago.
i think we have played that game before. I fear when fed rate is 5.5, conditions would still be bubbly.
The lag exists and the higher prices of commodities/oil have yet to work their way and be passed onto the consumers by the producers
The ECB says three more rate increases. That means we are in for at least two after today. We have to stay on top of the ECB in order to sell our debt to other countries.
but the ECB ‘rate increases’ are a scam …
mortgage rates and interest rates in the Netherlands have not moved at all in the last months despite 0.5% ECB rate increase; they are still the lowest in 400 years. A few banks raised mortgage rates by 0.1% after the second ECB rate increase, that’s all.
If this pattern continues, even a 10% ECB rate (that would be around 2012 with the current policy) will not kill the EU housing bubble.
I love this one:
Merrill Lynch economist David Rosenberg said Friday’s figures, which showed that sales of newly built US houses dived 10.5 percent in February to the lowest level since May 2003, were ominous.
“Let’s just say that over the past three decades, there were eight episodes where new home sales decelerated into an environment of double-digit decline — and in seven of the eight, the economy slowed sharply in the ensuing four quarters,” he said.
Announcement’s out:
http://www.federalreserve.gov/BoardDocs/press/monetary/2006/20060328/default.htm
Yikes for those with ARM resets. Newer ones still have catching up to do but older ARMS and HELOCs… FBs are in a world of hurt!!!!
THE FED’S PLAN TO LET HOUSING CRASH AND SAVE THE DOLLAR
They will deflate by having the overseas investors taken down while sparing the T-bill market with the “NewBank”. In a flight to safety investors will jump on treasuries strengthen the dollar and crashing gold. Searching NewBank, check out
http://www.dailyreckoning.com/Writers/Mogambo/DREssays/MG030706.html
Very funny.
The first US bank to go down will be JP Morgan. Over 800 US banks hold derivatives. Check out: http://www.occ.treas.gov/ftp/deriv/dq305.pdf You’ll see that the amount of derivatives in “insured” commercial bank portfolios increased by $2.6 trillion in the third quarter of 2005, to a whopping $98.8 trillion. 98% of these are concentrated in 5 banks. Total assets of these top 5 banks is $3.3 trillion if I am reading the chart correctly. Just look at the charts like the year ends 91-2004 chart (Graph 3) and you’ll see a chart shooting straight to the moon. Maybe these bankers are smarter then me, but this is a house of cards in my book.
Most of the $570 trillion in derivatives are held by overseas investors. These will collapse from the housing bust causing defaults. The default follow like dominos to mortgage backed securities, then collaterized debt obligations and lastly to derivatives.
Controlled deflation will be the Fed’s goal so that the dollar will rise. This will help the US government as investor, institutions and countries buy Treasuries as a safe haven. US Treasuries held as reserves will not be sold off (by China and Japan) avoiding a dollar devaluation. Win -Win for the Feds. Lose-lose for derivatives, MBS (which are explicitly not backed by the US).
Controlled deflation is the Fed best choice among bad choices.
I doubt the deflation can be controlled by lowering Fed rates to zero, but the Fed will try to “mop up”.
Thanks for this. That article on Daily Reckoning was great!
So the Reserve will attempt to crash gold but it won’t crash??? –but the dollar will? Just wondering….
If you like The Mogambo Guru, his articles show up on Kitco the Wednesday (usually) before they hit The Daily Reckoning.
Sure enough, the latest Mogambo is out this morning:
http://www.kitco.com/ind/Daughty/mar292006.html
Bond and Stocks now selling off. More rate hikes ahead announced.
OK class, for a good little article on the definition of Deflation and causes check out:
http://inflationdata.com/Inflation/Articles/Deflation.asp
So, in other words, we shouldn’t think of deflation as an inherently bad thing. However, Japan experienced deflation and everybody has felt very sorry for them in recent years. (I’m sorry if I read the article too fast.)
Think of deflation as the involuntary and unforseen component of the US government’s affordable housing policy.
Deflation (CPI / PPI) would be a nightmare. Housing prices, fine. But, if it boils over into other areas of the economy - no matter the “cause” - stuff starts to shut down. No one BUYS today if the price is likely to go down next month (that’s why my computer is still a 1.6GHz). Might as well wait. No one BORROWS if the real value of your debt is increasing via the double-whammy of interest and increasingly powerful dollars. I’m no pro, but I know this much. I think.
That extra quarter-point — not just on ARMS but also on credit cards — will be the tipping point for a lot of FBs. Even the dimmest of the dim will soon catch on that the credit and debt-fueled “economic expansion” and RE bubble have peaked, and it’s an accelerating, cascading ride down from here.
What is the financial effect of a 1/4 point hike in your ARM rate if you happen to be the proud low-income owner of an $800K San Diego home whose value is stuck in neutral and about to go into reverse?
Answer: If the value of the home does not go up or down, that 1/4 point will cost you an extra $2000/year in interest, assuming you were in the 0% tax bracket. Unfortunately, the likelihood the price of the home will drop also increases with the rate hike.
P.S. I have nothing against low-income homeowners, but I believe there is a looming problem when 103% financed loan deals create a disconnect between affordability and monthly-payment-based underwriting standards.
We wouldn’t want to see things like higher inflation signals that would suggest the Fed’s going to be going to 5.5, 5.75 on the funds rate any time soon.
I remember just 2 months ago that this type of discussion of even 5.5 was soundly renounced as impossible or even heresy. Not so impossible anymore, eh? Inflation is everywhere; only a matter of time before it creeps into CPI. Bernanke has a stated goal of 1-2%; 4 or 5% inflation will drive rates to 6% or more.
Right, the economic indicators in the last two months have quietly put the Fed in the position of having to prepare the markets for higher rates via statements by various Fed presidents.
Social Security’s cost of living adjustment was 4.1% last Fall. They take the average CPI from third quarter of 2004 and compare it with the average summer months of 2005. Jan 2005 to Jan 2006 was 3.9somethingorother, I believe.
Amen, Brother. Look at the soaring prices of commodities, especially base metals like copper, zinc, nickel, etc. All of those rising costs — which far exceed the “official” (read: cooked) inflation rate, are eventually going to be passed on to consumers. If the Fed is going to have any credibility at all, it will have to raise interest rates quite a bit further to bolster the sagging dollar (esp. once China starts to “diversify” its huge foreign exchange holdings) and make the cost of borrowing high enough to deter the prolifigate debt accumulation and negative real savings rates we’ve seen in recent years.
Oops, for my previous post I meant to add a chart from Kitco showing the 88% year-over-year increase in the price of copper. With similar increases in other base metals costs (which, incidently, are used in large quantities for new residential home construction), how much longer can we realistically expect “official” interest rates of around 5%? I see double-digit “stagflation” and economic malaise of the sort we last saw during the ill-fated regime of former (thank God!) President Jimmy Carter.
http://www.kitcometals.com/charts/copper_historical_large.html#1year
OK, here’s that long-promised copper chart….
Oil closed over $66 today and the driving season is just getting started. Get ready for $3+ per gallon and the inflation that goes along with it. Time to buy that Prius or diesel..
Pricing for the Camry hydrid, supposed to out in May, is ~$25K. Should be very competitive.
Oh, and in San Diego, we’re already hitting $3/gallon. LATimes says that it’s due to ethanol switching for MTBE, but who knows?
$2.59 in Upstate NY and more the further west you drive. But with Nigeria, Iran and Venezuela all looking like supply loss potential, I think our importers are hedging against a major supply loss.
A 3 year oil chart shows a strong, solid uptrend. Yes, trends end somewhere, but one lesson I’ve learned in life is that I tend to bee too bearish and can’t believe prices will go higher.
It’s in an uptrend. Until we see evidence to the contrary, we should expect more price rises. $75/bbl this summer would be quite possible within the “noise” of up-and-down.
New Speak - if the sheeple believe that the government CPI is the real number of inflation then shame on them. Go to wwwshadowstats.com for the real number. Actually about 8%.
same in Europe, many signs point to a real inflation rate in euro-land of 8-11% over the last 5 years.
So, we currently have a 4.75% FF and a 4.77% TEN YEAR treasury rate? Something has to give, any guesses which? LOL
I am not so sure. If you look at the recent range on the TEN YEAR yield rate, you get the impression that it is managed nearly as tightly as the FF rate these days…
Sort of OT, sort of related, this article about a new measuring system that shows that American’s are “fair” savers:
Of course, that is only when things like home equity is rolled into the equation. How sad is this going to be when this modified NewSpeak statistic bombs just as bad as the truth?
-L
Should be “things…are rolled in…”
Sorry for the grammar hiccup.
Four causes of deflation, relative to housing:
Decreasing Money Supply = Tightening credit and underwriting standards and increasing interest rates.
Increasing Supply of Goods = record levels of inventory in both new and used home stock.
Decreasing Demand for Goods = Greater fools are the only buyers at this time. Record low affordability.
Increasing Demand for Money = Mortage applications down, borrowing costs up.
Excellent summary, that last point especially. Thanks.
Dive, dive at 2 pm… that’s what the hb stocks did
After being up 1-22% on the Lennar numbers at the open, the homebuilders are now down 1-2%. About damn time; still it ain’t nearly enough of an acknowledgement that they’re out of gas.
Looks like a lot of stock-buyback money is being put to use right now (2:15-3:00 EST).
Oops that should be “up 1-2%” of course.
Can somebody translate “resource utilization” for me???
Thanks
——————————————————————————
The FOMC said high levels of “resource utilization” and high energy commodity prices could fuel inflation, even if the economy moderates to a more sustainable growth pace later this year as expected.
Plants and equipment utilization levels
It’s Fedspeak for inflation. It refers to supply and demand. Think of it this way: As demand for widgets rises, the local widget factory must produce more widgets to meet demand. As the factory approaches full capacity to produce widgets (full resource utilization), it can no longer produce enough widgets to meet the growing demand. As a result, according to the laws of supply and demand, widget prices go up.
Home construction equipment and labor utilization levels…
I think labor is utilization is reflected in unemployment and productivity numbers
From an economist’s perspective, labor and capital are both productive resources. But I admit my ignorance to the possibly more narrow definitions the government may have assigned to the word ‘resource.’
LOTS OF BUZZ on CNBC and other FINANCIAL RELATED TV SHOWS…
now that Mr. B had his first day on directing Rate Hikes (more to come, he suggests)
Housing Bubble mentioned multiple times.
IT’S HITTING THE BIG TIME- and once it hits these mainstream news sources… the bubble burst is going to ramp up FAST!
looks like 5.5% is on the target. Housing is pronounced dead. What about stocks? What about gold?
The market can’t figure it out right now, but risks are mounting.
We are fast approaching the ‘hurdle’ rate for equities. CD’s and other short term riskless investments are going to become very attractive. Given the old adage of an assumed 7-10% appreciation for equities, ( of which 2% is dividends), riskless investments are going to gain in attraction. I predict 5% will be the watershed number.
BigDaddy, equities are still the best game in town but obviously a lot better last year and better yet two years ago.
Earnings growth remains in place, valuations are ok (not great) and corporate bond yields remain unfazed.
The biggest risk is continued rate hikes far beyond 5.25%.
“BigDaddy, equities are still the best game in town but obviously a lot better last year and better yet two years ago.”
If you say that often enough, then maybe your wish will come true…
“A dream is a wish your heart makes
When you’re fast asleep
In dreams you lose your heartaches
Whatever you wish for, you keep
Have faith in your dreams and someday
Your rainbow will come smiling thru
No matter how your heart is grieving
If you keep on believing
the dream that you wish will come true”
I disagree. Perhaps small caps that are not as interest rate sensitive and have greater flexibility, but rising interest rates contract PE multiples. Given the fact the S&P 500is trading at a trailing 31 times earnings and 3 times book , the Dow 30 is at 22 x earnings and 3.54 times book, I find little value there.
The Russel 2000 or Wilshire 5000 may offer a better opportunity, but I would me placing my equity money in overseas funds, not domestic. History tells us that 80% of the time after the Fed stops raising rates the markets fall an average of 20 % in the following 18 months.
Speaking of overseas, can any of the stock market experts in the crowd suggest how to invest in these Middle East stocks? Because I believe that we are on the brink of running out of oil (Peak Oil is history, you know), and these countrys’ stock prices will go through the roof again some time soon…
http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=78816&version=1&template_id=48&parent_id=28
The Middle-East markets are down hugely in the past year or so, like 25% pretty much all around.
Don’t worry about those Middle-East markets, which crashed hard last week. Since the Russian debt default of 1998 and near catastrophic collapse of LTCM, the first-world’s economic leaders have built a ring of levees around the developed country stock markets to protect against any problems in emerging markets.
More on that Middle-East stock market crash in progress below. My questions first:
1) Is Peak Oil plunging into Trough Oil?
2) Is the levee system around the developed economy stock markets sufficient to withstand a Category 5 Arabian sandstorm?
3) Will the oil bubble die in the sands of the Middle Eastern desert concurrently with the death of the housing bubble in the
Southwestern US desert?
——————————————————————-
Arab stockmarkets
Down in the dunes
Mar 16th 2006 | CAIRO
From The Economist print edition
http://tinyurl.com/hphpx
NO ONE has jumped out of a window, yet. But that may only be because windows have yet to be installed in the dozens of skyscrapers sprouting in the Arab Gulf, home to 22 of the world’s 50 tallest buildings under construction, 16 of those in Dubai alone. Share prices are a less visible—but equally good—index of a regional boom built on high oil prices. In the past five years, they have been heading the same way as the skyscrapers, rising ninefold. But now they are pointing in the opposite direction.
What started last month as a correction of inflated equity prices is looking more and more like an outright crash. Since the start of the year, Gulf stockmarkets have shed one-quarter of their value. The worst hit, the Dubai Financial Market, is down by half from last year’s high. And the bearish mood has spilled beyond the Gulf to Egypt, Jordan and Tunisia. Combined losses in Arab equity markets so far amount to some $250 billion, not much less than last year’s bumper revenues from oil exports. This week, as markets suffered record daily tumbles, some exchanges briefly halted trading amid panicked calls for government intervention.
The crunch was long predicted. Price-earnings (p/e) ratios zoomed last year to celestial heights on some exchanges. The Saudi Arabian market’s p/e ratio, for example, had reached more than triple the emerging-market average of around 13 before the fall began at the end of February. So hot was the market that an estimated 3m people, perhaps half the kingdom’s adult citizenry, had leapt in. Their interest was sparked not merely by a liquidity surge generated by windfall oil revenues, but also by liberalising economic policies, strong corporate performances, a gush of public share offerings and a general wariness of investing abroad in what is perceived to be a potentially hostile West.
to GetStucco:
investing in Middle-East stock? why not invest in the Dubai real estate market as many Europeans (and folk from Down Under) with an oversupply of funny money are doing? People who purchased homes on Palm Island etc. from the plans are sitting un huge gains.
You never know how much upside there is if Arabs are pulling their money out of the stockmarket - it has to go somewhere
It’s about time. Savers have been penalized for far too long.
Thoroughly agree. Debt has been rewarded tremendously over the past 5 years. It’s savings turn.
Go Bernanke, Go!
agree too. In Europe it is just as bad (or maybe even worse).
The interest rate you get on the best savings accounts is below the official ECB rate, and below official inflation.
Taking real inflation (8-11% into account), saving comes down to loosing 6-9% of your capital each year; no wonder the average citizen has leveraged up in debt to the max.
The Fed is doing the right thing…pass-through inflation risks remain high particularly with this unrelentless move in commodity prices.
The worst thing in the world would to get behind the curve here. The Fed can always take back rate hikes, but once you get behind the inflation curve (like the deflation curve), it is that much harder to contain the genie.
Party on.
Personally I think he’s already behind it. The real credit market is finally realizing how much garbage we’ve monetized in the past five years, and rates are going up (and lending standards tightening) with or without him. He’s pretending he’s in control while trying desperately to stay ahead of the runaway train.
Expect further debauchery of economic indicators in the months ahead in an attempt to justify his “tightening”.
We are fast approaching the ‘hurdle’ rate for equities. CD’s and other short term riskless investments are going to become very attractive.
We’re also fast approaching the “hurl” rate for all those FBs who are going to simultaneously realise: 1) Real estate DOESN’T always appreciate in value; and 2) They are paying hundreds of (unbudgeted) dollars more a month for that MacMansion over their drowning-in-debt heads. That’s enough to make anyone hurl…except, of course, those of us waiting in the wings to swoop down on some prime real estate deals after the bubble implodes.
Just caught this on the online WSJ this afternoon: High End Consumers Cutting Back.
“Recent earnings reports suggest high-end consumers may be closing their cash vaults. Tiffany reported a 35% decline in fourth-quarter earnings and said first-quarter profit may miss expectations. Last week, cruise operator Carnival lowered its projection for 2006 earnings based amid a decline in cruise bookings and pricing. Two weeks ago, Winnebago Industries reported earnings hurt by weak sales of its premium recreational vehicles. At the time, Robert W. Baird analyst Craig Kennison attributed the shortfall in part to softening demand for higher-priced RVs, which surprised company officials. Steve Neimeth, portfolio manager at AIG SunAmerica Asset Management, said that while the three retailers all serve different industries, there is the trend of a slowdown in spending among the wealthy. “You’re seeing it in what people thought was an immune subsector,” he said. “It could be an indicator that a diverse group of the high-end consumers are weak.”
next thing you know they’ll stop buying McMansions!
Those high-end cash vaults slammed shut back in the 1930s as well…
Maybe all those high end waiters and hairdressers with all that HELOC money are the reason it is now weak since the well has now run dry.
This reminds me - that an acquaintance told me at a party at the holidays that all her “big spender regulars” didn’t come in this year to buy diamonds from her for their ladies.
ALL of her best 6-8 or so customers, who were before coming in every holiday season (and they all didn’t get divorced or not find mistresses this year… )
I asked: “what do they do?”
“Different things - biotech, a venture guy, a REAL ESTATE DEVELOPER, banking, consulting… ”
Hmmm…
Okay, since it mentioned a recession, I thought it a good way to bring up an O/T topic which Melody brought up yesterday. She posted a link to an article about the more sadistic horror movies coming out lately, and how the public’s mood shifts — and becomes darker — before a recession/depression.
I’ve been thinking about this lately myself, but from another angle. It seems that, after years of an improvement in gang crimes, these gangs are starting to become more active again. I’m seeing city councils bringing back ideas which were implemented during the depths of the last RE recession. Cities want to hire more police, etc.
Additionally, we are seeing civil unrest all around the world: Israel/Palestine (ongoing), Iraq, various African nations, Latin American countries, France, and the Mexicans in the U.S. All these movements/riots seem to have different causes and some have been going on for a long time; however, the real reason for the unrest seems to be the same: class warfare. There are a good number of people, worldwide, who live deep in poverty, and I believe they are the ones who feel recessions sooner and more acutely than those who have more resources.
Anyhow, just an observation. Personally, I think we will have a global recession beginning fall 2006. Depression by late 2007. I sure hope not, but the signs (too much debt, a satiated consummer market in the U.S., growing disparity between rich/poor on a national and global level, etc.) seem unmistakable. IMHO.
Oh, want to add the price movement of precious metals and other commodities, which I think signal a fear of what lies ahead in the financial world.
A little woo-woo, but perhaps of interest in this context:
http://urbansurvival.com/week.htm
Good insights, CA Renter. I always appreciate your posts, and am grateful this board has attracted commentators of your caliber. Keep up the good work.
Sammy
Thank you! I also appreciate your comments as well. Seems many of us see similar things coming down the road.
Yes, this blog is awesome because of all the great minds that post here. Lots to learn. It’s far better than my college education, IMO.
Yikes! Just realized that sounded like I was saying, “Yes, my mind is sooo great.” SORRY! I was referring to all the people OTHER THAN myself on this blog. Please forgive.
hey cal - i’d like you even if you weren’t a sharp cookie!
No, most of that “unrest” you mention has nothing to do with “class warfare” but is a direct result of activity from the “Religion of Peace.”
In Latam, it is definitively a very viscious kind of class warfare.
Last night on Lou Dobbs, the news showed all the protests going on about the immigration issue. It saddened me that they were holding up the Mexico flag since they’re here in the US. It also saddened me that there was such a great turnout. Why can’t we protest our economic failures, our health issues, freedom issues or corporate fraud issues?
I want to stand up on a mountain top and yell - WAKE UP AMERICA!!!!
Theodore Roosevelt said in 1907
“In the first place we should insist that if the immigrant who comes here in good faith becomes an American and assimilates himself to us, he shall be treated on an exact equality with everyone else, for it is an outrage to discriminate against any such man because of creed, or birthplace, or origin. But this is predicated upon the man’s becoming in very fact an American, and nothing but an American…There can be no divided allegiance here. Any man who says he is an American, but something else also, isn’t an American at all. We have room for but one flag, the American flag, and this excludes the red flag, which symbolizes all wars against liberty and civilization, just as much as it excludes any foreign flag of a nation to which we are hostile…We have room for but one language here, and that is the English language…and we have room for but one sole loyalty and that is a loyalty to the American people.”
“The one absolutely certain way of bringing this nation to ruin, or preventing all possibility of its continuing as a nation at all, would be to permit it to become a tangle of squabbling nationalities.”
My family has had nothing but trouble with immigrants ever since we came to this country.
Melody,
Couldn’t agree more. Sometimes I feel as though everyone around me is brain-dead, they are so apathetic. If you try to talk to them about many of the issues discussed here, their eyes glaze over and they recite the mantra they hear on TV, “The economy is strong. There is no housing bubble. Job outsourcing is a GOOD thing. Fewer benefits, lower wages and no pensions are a GOOD thing. War is good…” You get the idea.
I believe Americans are so apathetic because they are accustomed to unusually good times and great national wealth. Things change. Sadly, most Americans think the good times are a permanent state, and that they don’t need to be always vigilant, questioning authority and asking, “Why? Why am I told to believe such-and-such? Does anyone have anything to gain (and will I lose) if I go along with ‘the program’?”
We are conditioned to believe the PTB will watch out for our best interests, as long as we don’t get in the way. So sad.
So how do we wake up America?
Melody,
Hi! If you are still awake!
Well, this blog is at least a start. Some (okay, a lot) of it is preaching to the choir, but I can’t help but think some people come here only looking for info on the housing bubble, and start to see that there is much, much more.
Other than that, I’ve thought of TV commercials (I don’t watch much TV, but I think it’s why so many people are so naive about what’s going on around them).
Otherwise, I just talk to people — and hope I don’t pi$$ them off before they start to think about things. I’ve been frustrated with this lack of thinking for years and years.
That’s why I love this blog so much. It’s full of THINKING people. Maybe this is how we can get the message out. Slowly, one by one, people will come here and start thinking.
Any other ideas, and I’d be happy to join in!!
>It also saddened me that there was such a great turnout.
This is one of the reasons why there was such a great turnout:
Spanish Language Media!
How DJs Put 500,000 Marchers in Motion
http://tinyurl.com/m22dd
Spanish-Language Media Rally Immigrants
http://tinyurl.com/gb4ps
So even though it may SEEM that the rallies were spontanious…
It was interesting that consumer confidence was up so much today, so the awareness of an impending depression, as expressed by the horror movies, must be completely unconscious.
Ironically enough, the slimy group that coined the phrase “class warfare” is the same one engaged in it. Neo-cons view the middleclass with utter contempt and hatred.
What would folks say to the following argument: “It’s the same thing when home prices are high, as when mortgage rates are high, so it doesn’t make a difference if you buy now at market peak.”
This argument only makes sense if all you consider is the monthly payments. It falls apart if you consider your total cost.
Eventually you can also negotiate a lower interest rate. You never can negotiate a smaller owed amount. It is dumb to buy overpriced assets with low interest rates.
Pinch -
Hope you don’t mind - I’ve been quoting your last sentence above over at Marin Real Estate Bubble.
I recently modified it a bit because a homeowner (who, interestingly enough, recently bragged he’s up ~40% according to Zillow in three years of homeownership in Marin) pointed out that “homes are not assets.”
So, to wit, for the sheer simplicity of the statement/argument:
“It is dumb to buy overpriced homes with low interest rates.”
No problem! The more people know the better!!!!
Cash knows no interest rate…
not quite true, because you have to keep in mind what the yield on the cash is (e.g. rates on savings accounts vs. mortgage rates).
Still the outcome is usually the same, it is best to buy homes (with a big downpayment) when interest rates are high, because that usually means prices are low. The ‘monthly payment’ may not differ much, but there is far more chance for appreciation of the home and lower mortgage rates in the future.
from what I’ve learned here —
assuming 30-yr fixed mortgage:
high rate lower price = 30 years of potential refinancing at lower rate, 30 years of opportunity to prepay
high price lower rate = 30 years of absolutely no opportunity to renegotiate principal, and (in some places) a permanently higher built-in tax base
worth doing the actual math with a mortgage calculator (better yet a full-on rent vs. buy calculator) in any case.
Folks, any argument that says buying higher is better than buying lower gets the dumb-ass award. And don’t think for one minute that prices will fall, nice and neatly, in relation to monthly mortgage payments. That is pollyanna stupidity.
Low rates will follow the looming crash, giving anyone who waits until then the chance to enjoy the low purchase price / low interest rate scenario.
Good prediction, GetStucco.
Trends in housing markets are down and the yield curve is inverted, which is forecasting recession. I can tell you know how to calculate probabilites and make the appropriate bet.
Those who have cash (and good credit) at the bottom of the housing cycle will buy bargains at low interest rates.
Free market capitalism offers great opportunites for those individuals who have forward vision.
Robert; you assume that the RE market will have a bottom in your life time ,and that it will be a great bargin.
Neither assumption may come to pass.
Well, lineup… your predition may come true if Robert, God forbid, were to die in a car crash tomorrow.
But, given good health, and all thing being equal with regard to his personal future - I wouldn’t be against a bottom nor against bargains in his lifetime.
Especially in San Diego where GetStucco lives.
“bet against”
Anyone who believes in that will be financially dead pretty soon. They will have a lot of time thinking about this argument while sleeping on the street.
“The ECB therefore does not react to the immediate or first round effects of such shocks, but concentrates on preventing the transmission of these effects to other sectors of the economy, he said.”
That’s why interest rates will go to 5% or 5.25%. The Feds will watch the housing to see any spillover downward effects into other sectors of the economy. If you believe that the top 20% of this country are in great financial health then there will be little effect outside of the RE industry. Jobs losses here can be balanced against newly created jobs and the mortgage industry losses can be hidden behind smoke and mirrors for at least 9 months. I think the key is to watch the 10yr note. If it gets close to five (i.e starts a slow climb) you’ll know that the Fed’s have dealt the death blow to the housing market. Hell, they don’t need the housing industry now, and they can’t keep things where they are (housing prices). Social Security recipient compensation can’t be raised and if housing stayed where it is wages (now under control) would rise, which in turn would create the need for a higher minimum wage that would then be in excess of most social security recipient’s compensation. Meanwhile what would be happening to nursing home costs and costs for elder care? There is one and only one way out of this fiasco and that is a return to housing valuations pre-1999.
From the update:
‘The Federal Reserve is indicating at least one more rate hike, according to analyst Peter Cardillo. ‘There is very little change in the statement and the fact that they didn’t elaborate on the slowing housing market means that they remain focused on the possibility of higher intermediate good prices.’
‘The statement accompanying the Fed’s rate hike was largely unchanged from the word in the statement accompanyings its January rate increase. The Fed said ’some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.’ Cardillo added that he was ’surprised that the Fed did not elaborate on the weakening housing market.’
‘The Fed’s move gives the U.S. the highest central bank rate among the Group of Seven industrial countries, surpassing the Bank of England’s 4.5 percent benchmark. The Fed’s rate is 2.25 percentage points above the European Central Bank’s refinancing rate and 1 percentage point higher than the Bank of Canada’s overnight rate. The Bank of Japan’s rate is close to zero.’
‘The Fed’s cycle of increases has lasted longer than most forecasters expected: A year ago, economists predicted the rate would be 4 percent this month. The central bank’s next two interest-rate meetings are scheduled for May 10 and June 28-29.’
I want the dollar to strengthen vs the pound so that my annual golf trip to Scotland will not be so dear. Best time I ever had was when the $ was 1.05 to the pound in the eary 80’s after Voelker raised rates. The franc was 10 to the $ as well, for those of you who like champagne and peugeots. Keep those rate hikes coming, and by the way kick out the illegal aliens. NO AMNESTY. Screw McCain and Kennedy.Specter should be recalled.
>NO AMNESTY
Hahaha, as I think you said to me in a previous post, “these are not your father’s Republicans”…
Those drunken sailors (both D’s and R’s) also happen to be vote ho’s…and they will slyly sell out the American people if they think they can get away with it. (Also, the R’s tend to like the thought of cheap labor, especially if it means that I have to pay for the cheap labor’s health care and schooling).
OT, I know, but it gets my dander up.
“‘Declines in the real estate activity will probably spill over into consumer confidence and eventually lead to slower spending,’ said (economist) Brian Fabbri. The U.S. Treasury yield curve is now inverted at most maturities, a trend that has often preceded a recession.”
I am relieved to see I am not the only one who sees the storm clouds of recession gathering on the horizon…
I have stated 2007 will be a recession many times on here and I still hold to that. The MEW (mtg equity withdrawl) effects from the consumer on the economy will slow to a trickle and the corporate side will not be able to make up the difference.
Yes, yes, yes!
I concur too.
Me Too!
Why don’t they ask me about consumer confidence? Who do they ask?
but there is still a lot of room left for the spillover…
In some EU countries, consumer confidence came in at a 15-year high last month. Small investors in the EU stockmarkets are more enthousiastic than ever. If I remember correctly, consumer confidence in the US is also pretty high. So the average consumer here definitely does not see any stormclouds, on the contrary. But maybe we need to see those statistics as contrarian indicators …
I am personally moving cash out of USD…investing in RE in India (There’s actually a demographic reason to buy there plus all the new wealth generated there makes it a good investment), wait for three years, let other currencies appreciate against USD and then buy here. With the Feds printing more and more USD, I can’t imagine the USD not declining significantly. I read somewhere that the Australian Dollar might be a good currency to park some cash in, since Australia has a lot of gold, and somehow that would protect the currency. I guess at this point, almost any other currency looks more promising than USD.
Agree with moving out of the dollar, but I would be very cautious about buying RE anywhere right now. I believe they have their own RE bubble in India.
If we have a recession/depression, it will likely be global, IMHO. It’s possible all asset classes will suffer. Not a bad idea to diversify into different currencies, though (try a few currencies, just in case). I believe this is why precious metals are behaving the way they are. No place to run. Money is trying to find the safest place, and nobody really knows where that is, it seems.
“Money is trying to find the safest place, and nobody really knows where that is, it seems.”
I’m starting to think as cash in my matress in my CA rented house.
Thanks for all the econ lessons, btw–really helpful info all!
You have nailed the reason that I have said, and still maintain, that “We are all gamblers now.”
“We are all gamblers now.”
Absolutely true, GS.
That is a good plan, as long as the backlash does not hit india right in the chin. Just look at recent legislation barring any kind of outsourcing for federal contracts to india, and at the dismal ratings that the Dell people have had with their call centers in India. If your end users (customers) spend 2.5 hours on the phone trying to place an order, and are unable to do so because of the language barrier, look at your customers buying other brands, or nothing at all.
I used to wait 2.5 hours after 10 menu options for an American Dell representative.
At least Dell is providing poor service cheaper!
P.S. Dell sucks!
Nope. Now you have to scream the same 10 options because the tech support menu is voice driven, and then have someone pick up the phone and mutter something…
mmmm…a fellow mac guy?
Dell does suck…I just heard they’re buying alienware (great machine). Damn corporations!!! Dell started as a good company. Now they’re slimeballs.
If Dell’s getting poor ratings for the Indian call centers it’s not stopping them from expanding there, as I believe they are currently…
( but they’re not the only ones, certainly…I got Bangalore calling Compaq as well…)
Shel: My company has just decided that they will not buy any more dell computers. They have had it with the poor service, and 2.5 hour wait to purchase a PC. We are not big enough to warrant the US call centers, so we generally get stuck in Bangalore. It is harrowing. People are very nice, but you do not get anything done!.
We are switching to localy made (I will buy compnents, and assemble the PC’s) and stock some spares. About the same price, with less hassle…
Think of Indian RE as a small skiff in the water nearby the Titanic at the time it was sinking. Would you have preferred to be on the skiff or on shore at the time?
P.S. If you are an Indian RE investor who is looking for fools to sell to, then your post makes more sense…
not looking for fools to sell to….I guess at some level I hate missing the RE boat here back in 2001, and don’t want to miss out on a similar boat elsewhere today.
The problem you face is the large positive beta for Indian RE prices relative to US prices…
you are late.
Can’t imagine Dubya or the Republicans are very happy about the Fed’s decision or the remarks. Looks to me like the Fed is protecting the dollar and ignoring the housing sector (maybe not ignoring and attacking).
Big trouble for the economy, the Repubicans this Fall and the housing sector…
All this focus on housing… I hadn’t thought about its affect on politics. I think you’re absolutely right… the economy will be gasping for air come fall. Bernanke is going to give the Democrats alot of ammunition
Bigdaddy, I don’t know where you got any of your stats from.
Please take a look again, the current year is 2006, not 2000.
P/E is closer to 16x and P/B is maybe 2.5x.
The market could always fall 20%, but it won’t be because of overvaluation (rather, sentiment) and it’s certainly a better buy than bubbleicious housing.
Stocks usually fall as the economy enters a recession, but maybe thanks to the vast power of hedge funds to manipulate prices, this time will be “different.”
You’re not going to get a recession 4 years after the last trough. Mid-cycle slowdown, yes, but not recession.
Really?
Between January 1980 and December 1982 we had two recessions. Two.
Obviously, the latter followed an earlier trough rather closely.
There exist other examples in this century where two recessions occurred within a four year period.
In the last century.
Not this century.
It’s hard for me to see a declining housing market without a recession. Too many construction jobs, realtors, mortgage brokers, appliance companies, etc., are going to be thrown out of work. Household budgets will tighten as home-equity drains away.
Even if the blood-bath is localized to the West Coast, Florida and the North-East, it’ll still put a psychological damper on consumer confidence across the nation.
Turnover at the top of the Fed sometimes has a tendency to create its own waves, especially at the end of a financial mania (refer to Volcker’s tenure at the Fed, which began in 1979 and was followed by double-dip recessions in 1980 and 1982). Also, this time is “different”, because the unraveling of the dot-com hangover was suspended in mid-air by the inflation of the housing bubble.
The market since 2000 has simply been a big dead cat bounce.
Yes.
GS -
I’m kinda surprised at your remarks.
Maybe I’m “learning” from you. I thought you’d say that “this time is different” because the PPT would be left to do manipulation while the FED inflates their way out of this by printing money in the dark of night (no M3 any longer).
I don’t know where you got your data, but here is mine
http://www.stockselector.com/dow.asp
http://www.stockselector.com/sp500.asp
Insults are not necessary. BTW, exactly what hedge fund do you work for? Someone with so little knowledge of basic market theory should not be an “analyst.” What designations do you hold?
Please grace me with your source of this
Regardless, you are in control of your money, and I am in control of mine. I am thankful for that.
Your seeing the forest but not the trees. Some sectors have extremely low P/Es that are masking all the other sectors high P/Es. Stockbrokers will be jumping out of windows within the next 12 to 18 months.
All this hand-wringing over interest rates? What were all the HELOC & ARM idiots thinking? Long rates were at historic lows and boneheads expecting to stay in their homes or purchased long term investments on ARM $$$$$. Kinda hard to predict the future profitability of investment propertyies on ARM rates, doncha-think? What the hell WERE they thinking… or were they even thinking?
The truth is, rates are still VERY LOW! I remember buying a home at 12% and reates kept running.
I guess people are bigger/dumber gamblers than ever before. Sorry to say, but many gamblers lose…
Housing, housing, housing, housing. Everyone talks in this country about nothing but… (My husband and I hear it everywhere–Starbucks, Nordstrom, etc. Yesterday, a little girl of 8 in Trader Joe’s says to me, in explaining why she has such lovely flowers, “My father is a landlord, so we have lots of land from which I can pick flowers.” ) Even here, which represents the ‘anti-christ’ real estate talk, it’s still motivated by the desire to get real estate.
There are other things going on, and they also will impact the economy, such as global warming. In the UK papers, they talk much more about global warming on a regular basis–and are soundly ignored by the US and our press.
Check this out in today’s Independent.
http://comment.independent.co.uk/commentators/article354051.ece
Carbon rationing and the end of economic growth so that we won’t all die miserably, maybe.
Ok, wait, let me check. Oh yea, this is THE HOUSING BUBBLE BLOG. Now I get it. If you are sick of real estate talk, why are you reading THE HOUSING BUBBLE BLOG? Just thought I’d ask.
Sharecropper I agree
I have many times discussed the impact of global warming on the US and world economies- not much feedback or interest.
Time Magazine this issue has much about it- truth is it is happening much faster then anyone ever expected-scary. It might be more important then housing or the bubble. Good observation. A few years teaching a science class I harped on this issue- I now smile and wonder if some of my old students remember.
A British paper thinks that BB will do his damnedest to shed the “Helicopter Ben” label:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/03/23/ccfed23.xml&menuId=242&sSheet=/money/2006/03/23/ixcoms.html
If you are looking somewhere to invest your money, look for energy stocks. These stocks will surface this fall in the wake of hurricane season..enjoy your 3.00 a gallon of unleaded.
Already 30% of my trading account. At 30% cash now. Loading up heavily on any pullback…
Safety, liquidly and yield
The Fed since the appointment of Greenspan has always been behind the curve. Greenspan caused the crash of 87, the recession of 90, the stock market correction of 94, the crash of 2000 and now the current Real Estate Bubble.
Anyone that took Economics 101 knows that there is a lag time between the last few rate increases or decreases and the effect it has on the economy, thus the Fed has always overshot.
Helicopter Ben is cut from the same cloth as Greenspan. He will overshoot to the upside to prove to the markets he is “tough” on inflation. I would not be surprised at a 5.5% to 6% FF rate.
and by the time Ben raises to 6% (which I don’t expect) even official inflation will probably be higher than 6%. The slow rate increases make sure that they stay behind the curve and that the easy money keeps flowing.
I’ll add this to the list of my favorite quotes from economists:
“In this economy, we don’t have inflation as long as you don’t want to eat, don’t want to drive or move around,” said Gregory Miller, chief economist at SunTrust Banks in Atlanta.