Inflation A Risk If Housing Remains Solid: Feds’ Moskow
A Federal Reserve president spoke today. “The United States faces a risk that Asian central banks which are still hungry for U.S. assets will one day reach their limit and reinvest at home, Chicago Federal Reserve President Michael Moskow said Thursday. For now, the U.S. economic outlook looks good, although inflation expectations bear watching, Moskow said.”
“Moskow’s comments on inflation and the dangers of the big U.S. current account deficit roiled stock markets and triggered selling in U.S. Treasury debt markets.”
“Eventually countries investing in the United States, such as China, Japan, developing East Asian nations and major oil exporters, ‘will reach their desired allocations of U.S. assets,’ he said. ‘They’re going to want to bring back and invest in their own countries,’ Moskow said, adding that the timing and pace of such a trend was hard to estimate.”
“Traders, who periodically fret about a messy unraveling of the current account gap that might send long-term U.S. interest rates soaring and trigger a steep fall in the dollar, keyed off this remark. ‘He said at some point Asians will bring funds home, which wasn’t very helpful. One response may be the Fed having to raise interest rates to keep the dollar from collapsing as a result,’ said Michael Panzne.”
“Moskow said a probable slowdown in U.S. housing markets ’should be an important factor in bringing growth back to potential’ as the Fed has forecast for 2006 and 2007. But if housing remained solid ‘this would heighten the risk of above-trend GDP growth’ and could be inflationary, he said.”
“Rates on 30-year mortgages rose this week to the highest level in 2 1/2 years as financial markets began to worry more about inflation. Frank Nothaft, chief economist at Freddie Mac said the economy may continue growing at a faster pace this year and if that occurs, the Fed could boost interest rates more than financial markets are currently expecting, meaning further increases in mortgage rates.”
Thanks to the reader who sent in this tip. It sounds like the Fed is planning on protecting the dollar and has discovered through-the-roof home prices are inflationary. Check out the 10-year bond.
There was a retail report out today.
‘U.S. retailers Thursday blamed an Easter holiday shift for much weaker-than-expected sales at their stores last month. But some analysts say the softness, particularly among teen sellers, may be the first serious sign that consumer spending is slowing down.’
‘Retailers could now be experiencing the lag effect of the Fed rate hikes. There could be one or two more to come. I think the effect of the rate hikes is floating into the housing market and consumers have less money to pull from their home equity and put into stores,’ retail analyst Ken Perkins said. And the less confident parents feel about their economy, the less likely they are to happily handover that weekly allowance to their teenage kids.’
Good article…also not a bad idea to keep in mind “global liquidity” now at record highs.
Check out the minutes from the past years G-7 and BIS meetings. The major central banks are out to ‘mop up’ that liquidity.
I don’t believe that for a minute.
The ECB has just said that they don’t plan to raise rates this or next month and that they may stop ‘tightening’ very soon. Now that economic growth is increasing they don’t want to look at inflation (note: euro and dollar gold price at a 25-year high!) and will refrain from further rate increases.
That was enough to stop the small appreciation of the euro vs. the US dollar from the last few days. It also explains why mortgage and interest rates in the Netherlands have not moved up in the last half year: the banks KNOW that the ECB is not really going to tighten and they knew this from the start.
There will be another speech from Trichet this afternoon, but for those who follow what is being said it should be clear: all roads lead to Weimar now.
A little TA on the 10yr yield…previous high close (over this past four year upward trend) was 48.70 on 6/14/04. Previous intra-day high was 49.04, which occurred a few days earlier.
The action of the past few days shows that this resistance, which has held ever since, is FINALLY giving way. Watching the “action” on bond yields is like watching a snail race, but there is movement.
Today’s close at 48.93 goes along with the close a few days ago of 48.74 as setting two new high closes. To top it off, today’s intra-day high of 49.07 beats the previous one I mentioned at 49.04.
If the momentum continues (strong tailwinds from gold/silver, the dollar starting to crack again, etc.) we should be printing a 5% 10yr yield in a week or so. With that psychological barrier broken, and the Fed bumping its rate to 5.00 or 5.25, the 10yr should start a bit of a surge.
30yr mortgages easily in the mid to high 7’s by September…part of the perfect storm for the all hell breaks loose in six months scenario so deliciously served up at this little cafe every day.
10/30 yr mortgages in the EU zone are still the lowest in a century (and in Netherlands lowest in nearly 400 years). After the recent ECB talk it seems likely that mortgage rates will start declining again.
I don’t think US rates will go much higher if rates stay at historically low values in the EU (and Japan).
The Easter holiday shift explains the weaker-than-expected sales, as the Easter bunny has had an especially long hibernation period this year due to the abnormally late arrival of his favorite holiday. The breakdown of the housing ATM machine had absolutely nothing to do with the softness in consumer spending.
GS, That was Realtoresque!
The Easter holiday and school vacation week probably reduced purchase mortgage applications also. Therefore the tic up in applicatations was measured against a relative short/weak period. We” see next week if there is another drop off.
But will he be bringing rocky road easter eggs? did I mention I like those?
;-D
Actually, both the cnn article and the NY Times cited the slowdown in equity withdrawals.
Oh sure, let’s just blame it on the Easter Bunny. In another month we can blame moms for the slow down due to mother’s day and then the Fourth of July will surely be blamed for slow sales in July.
If Fed officials start regularly dropping hints that ever-upwardly-spiraling housing (= 27%+ of consumption spending) might be inflationary, I am sure the bond market will not take long to nod in consensus…
This hot-and-cold Fed commentary (by those both inside and outside the Fed) should be taken with a grain of salt (remember Dick “eighth inning” Fisher?) although the markets hang on every word. We’ll know the Fed’s done when they’re done.
You are right — seems like they are talking out both sides of their mouths in the hopes of ending the conundrum through bringing back the risk premium which reflects greater uncertainty about the Fed’s plans. Of course, higher risk premiums will drive up long-term Treasury yields, with persistently overvalued housing and stock prices a likely casualty.
Seems that Moskow is being fairly straight forward - break the back of the housing bubble or risk an inflationary spike.
Right on.
We certainly don’t want any to see any “inflationary spikes.”
That’s how I read it too… I wonder how David Lehreah read it…?
just an aside, but not really o.t…
there a slight increase in homebuyers now, a small surge, in my neck of the woods…why? They tell me, “I gotta lock in my rate before it goes up again”. Historically, this always happens when public sentiment turns bearish…get in before it gets too expensive, loan-wise…although the wisdom at buying at these prices to save 1/4 pt. is beyond me.
dead.
cat.
bounce.
As I told a lonely real estate agent at a recent open house, this spring market *is* the market for this year. Yes, there will be some buyers. But there are not many, and even those will again evaporate by June. Like Carlsbad Jim pointed out from a chart at one of his posts, each year for the last five years, the spring season has been getting shorter and shorter.
Folks and real estate agents have erroneously been claiming that rates going up will make housing even more expensive. I can’t imagine how that works . . .
Sure, ’cause the only people buying will be the ones who don’t need financing.
Right.
Exactly…people are STILL getting crazy loans to buy “cause I gotta lock my rate”. Cash, my a**!
Don’t you love them realtors?
Rates are going down - prices will go up!
Rates are going up - prices will go up!
New Paradigm — rates go down, home prices go up; rates go up, home prices go up. Get with the program man!
Catherine,
Yesterday I posted about Brookfield homes sales being off over 50%. Guess where they are building in N AZ? It’s called Verde Santa Fe near Cornville and Cottonwood. Another 3,000 homes were recently approved across the highway. The papers are full of ‘brand new’ homes for sale and rent and I hear there are many signs. I am going to get some pictures this week and tech will be posting new entries this weekend.
I like that area a lot. Close to Jerome and Sedona. Quiet. Clean air. But no jobs.
Why not live in Jerome or Sedona? Rents the same, so is the job picture; bleak.
Ben, you know and I know it’s going to be train wreck up here like none other…how about an average of 75-80 new residential listings per day for the last several (over 100 on Tuesday)….????
Cornville? Good Lord.
Catherine; “Where is”.. “your neck” ??
Prescott, AZ
Catherine …. I use to have a place in Haisley homestead . Do you know where that is ? Use to walk my dog alot around the down town courthouse . I actually really liked it in Prescott. I saw that Prescott skyrocketed last year .Well wish you luck with your market anyways.
Yes, I know that area, of course! If you’ve been away for more than 5 years, you would not believe the traffic, the mall, the Wal-Marts (#3 going up in Prescott Valley), the meth problem, the myriad assortment of sub-divisions, the 1200+ Realtors, the $1M+ homes (there are 62 on the market right now over $1M), the leased Hummers, the big ranches being carved up into “mini” ranches, etc. There is even talk of moving the county offices/courts out of the Courthouse and converting it to shops/restaurants!
wow ….thats not the Prescott that I use to know .
“Moskow said a probable slowdown in U.S. housing markets ’should be an important factor in bringing growth back to potential’ as the Fed has forecast for 2006 and 2007. But if housing remained solid ‘this would heighten the risk of above-trend GDP growth’ and could be inflationary, he said.”
Here is yet another face of the conundrum:
- If housing remains solid, it will be inflationary, requiring further Fed tightening and higher bond yields & mortgage rates;
- If housing does not remain solid, then presumably housing price appreciation will stall or decline in most parts of the US, drastically shutting down the housing ATM which provided the cashola to buy monumental amounts of Asian manufactures, which in turn drove down our long term interest rates when the big pile of $US was reinvested in our l-t bonds (Treasuries / MBS / etc.)
In either case, it sounds like the handwriting is on the wall for the symbiosis to end soon. Here’s to all success in ending the conundrum with a minimum of pain.
GT,
I had a feeling that their utlimate/ulterior motive was to pop the housing bubble, even when they started in 2004. Notice how they keep harping on inflation, even though CPI is not that bad. They wanted people to get out of risky mortgages into safer one while there was time.
Who knows “who” the actual loser in these transaction is going to be eventually, but trying to pop the weakest link is the way to go.
Keep rates low, you get a lot of debt in US & lots of jobs/assets in asia eventually, via the housing ATM/asian central bank buying.
Pop it, you have all these MBS investors wanting bailout. Would be interesting to see how it turns out, cant wait for 6 months to pass. Hopefully, we would not be at war with china by then
“‘U.S. retailers Thursday blamed an Easter holiday shift for much weaker-than-expected sales at their stores last month. But some analysts say the softness, particularly among teen sellers, may be the first serious sign that consumer spending is slowing down.”
Has nothing to do with Easter. Easter changes every year and sales at some point will always come in. It would have made more sense to have blamed it on the weather. Late Easter does have an effect though. Clothes purchased through March are not the same one’s (style wise) going into the summer season. These clothes not purchased through March will have to go on sale to make room for the summer clothes. Time for the women to hit the stores for some good buys.
OT, I realize, but if retailers really want to sell some clothes they ought not to clear all the sleeved garments out of their stores in early february in the bloody midwest…I couldn’t see anything but tank tops, skorts, gauchos and espadrilles after groundhogs day and there’s at least another 2 months or more of frost and mud hereabouts….jute wedges topped with canvas are not a wise buy!
and given how obese most american women are, it doesn’t serve anyone well when the fashions are so busy with glittery layered detail, bare-armed and bare-ankled. I’d be ocassionally tempted to support the economy and buy some new clothes if they weren’t so hideous lately and I’m not too chubby lol!
also OT but perhaps more relevant, the Detroit News had a cover piece on how GM will be announcing their next round of engineer-staff lay-offs at the end of the month.. they will be designing much of the next truck line apparently with the cheaper (and probably a good number of them educated right here in ann arbor at the UM school of engineering!) staff they’ve hired in Brazil.
I love Brazil, and good for them, but another reason the house-prices hereabouts don’t reflect the realities…
Ouch! If you thought that GM had problems with the engineering of their products, it will be nothing like what they will have when you have a metric based engineering staff designing SAE. By far the worse car I have ever had was a brazilian designed VW based on an audi 100 platform. It was so bad, that it rattled out of the dealership, and had a different color hood! That is what awaits GM!
Loved the debate on Kudlow, “Condo gusher on the way”…..final word…get out of the way and wait…..there’s more on the way (SD) …..anyone heard of a proposed millionaire tax for CA?
yeah, one of Meathead’s current highlights. Put a 1% surcharge on CA state taxes for millionaires to pay for ‘Pre-school for All’. The pre-school concept is fine, but the tax scheme is a replay of the disaster that occurred following the dot com crash. Then the state became dependent on the huge tax income from the wealthy to fund the goodies, and when it all blew up the cupboard was bare. Should this repeat, the proposed legislation has this great rider that mandates the money will be spent ‘for the kiddies’ out of general tax funds.
Meathead is out.
“The pre-school concept is fine, but the tax scheme is a replay of the disaster that occurred following the dot com crash.”
You’re correct. In addition, Don Perata of Oakland, an inside out Oreo, was upset that ALL children would have universal access to this preschool program. He wants only the poor, who have moms at home already, to be supported by middle income families who have both parents working. These workers are the folks who really need the preschool programs since they’re without support at home. This is one of the reasons that California is losing middle class families to other states.
crossburner!
“‘Condo gusher on the way’…..final word…get out of the way and wait…..there’s more on the way (SD).”
Eggs-act-lee! The ship is turning, ever so slowly.
I say: “San Diego condos for everyone!”
Someday!
GetStucco, you made a good point yesterday that mortgage rates are probably going up regardless of what the FRB does. Can you elaborate? I assume that it has to do with the current account deficit and the weakening of the dollar. Thanks.
A higher Fed Funds rate is how the Fed slows down the economy when it perceives that inflationary pressures are getting too strong to maintain price stability. Miller failed to tighten enough in 1979, which led to a widespread perception that it was a good time to buy extra houses and liquidate the family’s gold jewelry in order to capture the spot market value of pure gold at $800+/oz. If inflationary fears are again rekindled due to rampaging prices of real assets (gold, silver, oil, housing, etc) with a perception that the Fed is not resolved to stop this, then long-term bond yields need to increase to compensate investors for the loss of future real $ value due to higher anticipated inflation (as happened in 1979-1980).
When you think about these things rationally (as I at least try to), you recognize that a l-t treasury bond is nothing more than a promise from Uncle Sam to make a fixed series of future $US payments; to the extent these are anticipated to decrease in value due to inflation, yields need to go up as compensation. The only way that yields can get higher on an existing bond is for the valuation to fall, as the payments are fixed.
Since treasury bonds have lower payment risk than, say, MBS, a decrease in treasury valuations (reflected in higher yields) results in an reallocation of investor money away from risky bonds which provide loanable funds to the housing market (Fannie / Freddie MBS, etc. ) into less risky treasuries. This reallocation translates into higher mortgage rates, as loanable funds for the housing market have been sucked away into treasuries (lower supply => higher price = mortgage interest rate).
So in short, I would guess the bubble is toast whether or not the Fed fulfills its price stability mandate.
So, the bottom line for me to get out of gold and into 10 year treasuries might be as low as 10% to as high of 15%. My point, I would not lump gold, silver, oil and other commodities with housing. I understand your previous posts as to equity/asset and commodity bubbles. I bet we could have some spirited discussion on this topic, but don’t want to use a bunch of Ben’s server space. Either way, we both agree housing is toast, stock market soon to be toast.
“My point, I would not lump gold, silver, oil and other commodities with housing.”
I only did so because they all went through the roof in the late 1970s, and appear to have done the same again in recent times. I know that a sample of size 2 is not much to hang your hat on, statistically speaking, but it seems noteworthy that all these real assets were going up in value (both times) relative to the value of the $US in which they are denominated…
OK, for fun, lets make a list of things that were different then vs. now, even if it’s only a sample of 2 time periods. My memory in the late 70’s is somewhat vague as I was attending college in California. I’ve got three:
1. Commodity price inflation was driven by increasing wages (too many dollars), now it’s driven purely global demand, US consumerism (borrowed dollars and housing ATM) and global liquidity (exported US dollars in return for imported foreign trinkets).
2. Real estate inflation (appreciation) was driven by higher wages and the desire of high income taxpayers to shelter ordinary income (pre 1986 Tax Reform Act) from high tax rates (20-35% higher than today’s top rates). The rent to value ratio had to make some sense. Short term speculators/flippers weren’t as common then. Today, RE prices have been driven by record low interest rates, easy qualifying and credit terms and record breaking speculation. Much of the run-up was a result of drastic measures taken by the Fed to keep the economy from collapsing after 9/11.
3. In 1982, gold shot to $850 toward the tail-end of that mania, and was driven by geo-political concerns, as well as fear/heard mentality as a result of inflation, and scarcity. Gold investors had to either take possession or trust an unlicensed broker for storage. I recall some brokers had some issues with accounting. Today, gold is driven by uncertainty regarding the true value of national currencies and the US dollar in particular, a US/Global debt bubble as a result of record low interest rates, and finally, maybe most important, an easy way to buy via the ETF’s. Gold is still “off the radar” for most investors and speculators, and I don’t think there has been anything remotely resembling a herd mentality rush to buy, yet.
Correct me if I’m wrong or elaborate. Your turn to add to the list.. On a side note, one of the things that has stuck with me after 9/11 is that our economy and our nation are quite a bit more fragile than I would like to believe. We’re further weakened as a result of war in Iraq and as a result of taking a few hurricanes in our soft gulf coast underbelly.
Loose monetary policy was common underlying causal factor in both the late 1970s and the early 2000s…
Nope, see below..
CONTRACT RATE ON 30-YEAR, FIXED-RATE CONVENTIONAL HOME MORTGAGE COMMITMENTS
DATE , MORTGNA
1972, 7.38
1973, 8.04
1974, 9.19
1975, 9.04
1976, 8.86
1977, 8.84
1978, 9.63
1979, 11.19
1980, 13.77
1981, 16.63
1982, 16.08
1983, 13.23
1984, 13.87
1985, 12.42
1986, 10.18
1987, 10.20
1988, 10.34
1989, 10.32
1990, 10.13
1991, 9.25
1992, 8.40
1993, 7.33
1994, 8.35
1995, 7.95
1996, 7.80
1997, 7.60
1998, 6.94
1999, 7.43
2000, 8.06
2001, 6.97
2002, 6.54
2003, 5.82
2004, 5.84
2005, 5.86
Check gold prices for the same time periods:
http://goldinfo.net/goldchart.html
By “Loose monetary policy” you could argue that the Fed was printing money, but rates were 250-300 basis points higher, underwriting standards were higher (you had to qualify), and there were no “alternative” mortage products like ARMS/IO’s.
I’m trying to warm you up to gold friend, ya know, make some money.
Gee if you’re so smart, why did you mock my advising people to get into stocks? Do you know how much I made in the last 6 months being positioned in international equities - specifically continental Europe which is STILL cheap?
Cash or low duration instruments are just a notch better than fixed income, but “risky” equities are the best way to monetize excess liquidity that is not manifesting itself in lower bond prices…
Yes, U.S. interest rates need to go up because the potential for inflation is there given the tightness in labor and commodities. But when and how it comes is the 64,000 dollar question. Until it does or until the Asians pull out of US fixed-income in a significant manner, the ’savings glut’ is subsidizing torrid earnings growth worldwide.
You’ve been schooled, playa.
Was GetStucco on you? I wish I would have been 50/50 international and gold 6 months ago! Regarding your comment “U.S. interest rates need to go up because the potential for inflation is there given the tightness in labor and commodities”, I’m in some pretty good company that says inflation is far above the official 2-3% rate, I believe it’s probably closer to 8-10%. Also, along the lines of the Then/Now conversation above, I recall that the CPI included real estate median price calculations, not some silly “equivalent rent” figure that they use today. I agree with everything else, especially the worldwide and US earnings growth.
“through-the-roof home prices are inflationary”
Now there’s a Revelation……Duh….
IMHO this points out why RE optimists are in for such a rude shock, they are fighting the fed. And for those who believe the fed will know just when to stop raising…..the following from the WSJ.
Fed Debate on 2000 Tech Bust
Holds Lesson on Current Risks
By GREG IP
April 5, 2006; Page A2
WASHINGTON — Federal Reserve officials remained bullish on technology spending through most of 2000 even as a massive bust got under way, and may have delayed easing monetary policy for fear of reinflating stock and bond markets, newly released transcripts show.
Transcripts of the Fed’s deliberations through 2000, released with the customary lag yesterday, offer some lessons for today. Like in 2000, the Fed has been raising interest rates to stave off inflation. In 2000, the economy was being propelled by surging tech spending and high stock prices. Housing plays a similar role today. An important difference is that in part because of the lessons of 2000, the Fed is on the alert for any downdraft in housing.
WASHINGTON WIRE
1
See the expanded online version of Washington Wire2. The Journal’s Washington bureau updates the Wire during the day — every weekday — with analysis, news and buzz from inside and outside the Beltway.
The stock market peaked in March 2000, then began to decline with a brief rebound in August. Tech orders peaked that summer, and tech shipments at the end of the year. Still, as late as October, Fed officials remained bullish on spending in the sector.
In June 2000, then-Fed Chairman Alan Greenspan acknowledged that the economy had begun to slow, but from an unsustainable pace.
That August, David Stockton, the Fed’s research director, said there was little sign of “an appreciable dent in the demand for equipment and software. It just doesn’t look like this boom is about to dissipate any time soon.”
In retrospect, a multiyear tech boom peaked at about that time. Business equipment spending grew at double digits in the second quarter of 2000, then screeched to a halt in the third. It was the first of eight quarters of negligible growth, or declines, in equipment spending. That slump was the main cause of the recession that ran from March to November of 2001.
By October 2000, some leading tech companies began to warn of disappointing sales. “Is there something there that those companies are seeing that we’re not seeing?” William Poole, president of the Federal Reserve Bank of St. Louis, asked. Mr. Stockton replied it was probably noise while acknowledging he was “nervous.”
According to the transcripts, Mr. Greenspan wasn’t worried. “There is nothing terribly significant going on in the economy excluding energy,” he said.
The Fed had last raised short-term rates in May, to 6.5%. Thereafter, the “balance of risks” in its post-meeting statements were tilted to risks of inflation, suggesting a rate increase was more likely than a rate cut. But even as a slowdown became apparent, officials were reluctant to change that. They thought tight labor markets and high energy prices threatened to raise inflation.
Mr. Greenspan said even if the risks were balanced, saying so risked sending markets higher, creating “financial conditions that would be too easy.”
Fed Governor Edward Gramlich agreed that “it is certainly possible that this would spark a rally and I don’t think anybody wants to see that,” but nonetheless suggested the change ought to be made.
That December, Mr. Greenspan acknowledged that growth had “unambiguously moved down dramatically.” A few weeks later, the Fed began to cut rates
PS: Note that despite denials the fed was closely watching the effects of interest rates on specific asset prices.
So are they actually HOPING that massive defaults as the housing bubble implodes will soak up enough to the free money driven, incredibly bloated M3 money supply before it sloshed back into the rest of the economy and causes high inflation? There’s just no good way out of this is there?
I am another middle class family that left CA. It has become a terrible place for a family to try and exist. The politics is too ridiculous. The state is broke, and wants to take money from those working hard to give to those that don’t work. Roads are horrible. I could go on and on. Just voted with feet and left. Good riddance to Arnold and Co.