Monday, May 16, 2005

Rates Will Rise To Curtail "Spending Imbalances"

Donald Kohn, who sits on the board of governors at the Federal Reserve had this to say tonight. "We have not yet finished this task," he said in a video conference broadcast to an Australian Business Economists function in Sydney."

"The federal funds rate appears still to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run."

"And if growth is sustained and inflation remains contained, we are likely to raise rates further at a measured pace," he said.

"Further Fed changes to interest rates should induce an increase in the personal savings rate, by increasing a return to saving and dampening the upward momentum in housing prices, Dr Kohn said."


At 8:02 PM, Blogger CalculatedRisk said...

Ben, thanks for the Kohn speech. The BIG housing news today is the action of the Fed/FDIC/and other agencies to tighten home lending:

Agencies Take Aim on Housing Bubble

FED Press Release: Agencies Issue Credit Risk Management Guidance for Home Equity Lending


Best Regards!

At 8:20 PM, Anonymous Anonymous said...

(Agencies Issue Credit Risk Management Guidance for Home Equity Lending)

A related article in the Washington Post contains this quote from a home equity lender:

"As long as the housing bubble doesn't burst, home equity lines should remain strong and remain safe... As long as the bubble doesn't burst, there should be no serious problem."

At 8:25 PM, Anonymous ChrisH said...

Hmm... sounds familiar to me. I'm on the planning commission for the city I live in. We had a developer who had a 150 home development planned in two phases. We asked him when the second phase would begin construction. He said "IF interest rates stay low and IF the market remains healthy, we think in 18-24 months."

That's a big IF.

I'm hearing a lot more IFs lately.

At 8:30 PM, Anonymous nostradamus said...


The Fed created this bubble and they know it. It has served its purpose---by reigniting the wealth effect from the stock market boom---but now it is threatening to undermine the economy by overindebting and overleveraging consumers and overallocating capital in real estate.

The trick for them will be how they can take the air out of real estate without tanking the whole economy.

I'm sure many of the Fed's friends in finance are concerned that the real estate bubble is sucking the life out of the stock market. Joe6Pack hates stocks and loves real estate. He thinks stocks are risky and real estate can't lose. This worries Wall Street and it worries the White House which is trying to partially privatize Social Security.

These Fed governor speeches and these shots across the real estate bow from the FDIC and other agencies are very big news.

If I were speculating in tract homes via no-doc, I/O loans, I would seriously consider making my move now to unload these properties. The Fed (et al) has now in no uncertain terms declared that the froth will be removed from RE.

As they say, don't fight the Fed.

At 8:48 PM, Blogger CalculatedRisk said...

The Post article (referenced above) is very good. U.S. Warns Lenders To Elevate Standards

This could be a huge development! It will be interesting to see how the market reacts tomorrow.

At 9:05 PM, Anonymous Anonymous said...

this story is also covered in the online Wall St Journal tonight:

"U.S. households owed $881 billion in home-equity loans at the end of 2004, up 80% from $492 billion in 2000, according to the Federal Reserve.

About 55% of home-equity loans are held by commercial banks, 14% by thrifts and 7% by credit unions. The remainder is largely held by finance companies, the Fed reported."

Commercial banks could be at risk if the bubble pops. I'll be watching to see if this story hits the home building and mortgage lender stocks tomorrow.

The following home buildling stocks have long term options available (LEAPS): DHI, KHB, LEN, PHM, TOL, TYL, WCI

LEAPS allow you to take a position (by buying put options) that would profit if these stocks fall, with the farthest out series expiring on Jan 19, 2007. Although it defines your risk, which selling a stock short does not, you can also lose 100% of your money. So, I'm not particularly recommending this, but just mentioning it as one possible strategy to gain from a RE decline.


At 9:16 PM, Anonymous Anonymous said...

I almost start to like Kohn. I love his line: reality always asserts itself over wishful thinking.

But even if he is to succeed AG I am pretty sure greed will get him anyway.

At 9:22 PM, Anonymous Anonymous said...

DenverKen, I used to laugh at people buying Put options as they are so expensive that it is difficult to win. (The implied volatility skew does not help)

However, I have to agree that LEAPS Puts may be appropriate for this bubble bursting scenario because:

- The potential reward is large
- Timing is uncertain, so near-term options are no good
- There will be lots of bear market rallies

(Options investing involves great risks and is not suitable for all investors. This is not investment advice.)

At 9:38 PM, Anonymous Anonymous said...

From the Post article:
"They urged lenders to review interest-only loans...and "no-doc" loans...They also suggested that lenders that refuse to do so may find themselves facing heightened federal oversight."

Hahaha...sure they will. They'll face the same "heightened federal oversight" that Enron and Arthur Anderson did...once the crooks have safely stashed the money and everyone else is holding the bag.

At 9:58 PM, Anonymous alex norman said...

It's nice to hear that at least some fed members are publicly admitting that the housing bubble is a problem.

IMO all they need to do to start pricking the bubble is take the word "measured" out of their statement the next time they raise 25 more bps.

Then the pigs at the trough - the leveraged carry trade speculators - won't be sure how much the Fed will raise the next time, and they will then realize they should unwind before someone else does, and voila! The long end will finally rise and Al's "conundrum" will be solved.

Al tried to get the carry traders and leveraged speculators to unwind in Dec by stating that anyone who was betting on interest rates not rising "...was desirous of losing money." At the time, the bond market yawned. Why? The Moral Hazard Genie was out of the bottle. The only way Al can put it back in is by re-introducing uncertainty. Perhaps then the investment community will be reminded of a concept they have forgotten after three years of free money and guaranteed "arbitrage" profits enabled by an all-too transparent Fed: risk.

At 11:21 PM, Anonymous Anonymous said...

This issuance from the Federal Agencies is a contrary indicator. Just like the cover of the Economist lamenting the weak dollar just before it began a countertrend rally, and the Goldman Sachs prediction of $105 oil just as oil began its 15% decline from $58 (the GS $105 report is spot on, just not in the short term).

I think this might lure a bunch of contrarians in with a bunch of homebuilder shorts/puts. But with the general market so shaky, and everyone going to the safety of cash, long term rates are FALLING and, as a result of that flight to "safety", we could see yet another boomlet in real estate folks.

Personally I think the dollar is dead, peak oil is sooner than most think, and real estate will collapse. Just not right away. Be careful.

At 12:39 AM, Anonymous Anonymous said...

"I think this might lure a bunch of contrarians in with a bunch of homebuilder shorts/puts. But with the general market so shaky, and everyone going to the safety of cash, long term rates are FALLING and, as a result of that flight to "safety", we could see yet another boomlet in real estate folks."

I totally disagree. The other examples you mentioned are from companies or the media, and they have their own best interests at stake (especially the Goldman Sachs thing where they were trying to unload some of their oil stock at a high price.)

The Fed may be many things (incompetent, arrogant, weak, pandering, etc.) but I don't think they're known to throw out contrarian indicators to pull a bunch of suckers into a short position. To what end would they do this?

AG has, in his bizarre way, expressed concern many times about things like yield curves connundrums, individuals in the carry trade who are desirous of losing money, bringing back the 30yr. note (read: "we want long rates to rise and we'll get there one way or another.") Other Fed govenors have made more hawkish comments on RE.

With home ownership at an all-time high and affordability at an all time low, a boomlet is most definitely NOT in the cards. Even with long rates stable or falling right now, there's just not enough legs left in this thing anymore. That's why housing stocks, despite their incredible long positions, have been trading in a range and are definitely off of their peaks in March.

I don't know how much good these new regulations are going to do and I personally think it's mostly just CYA, but I belive the Fed is aware of this problem and they are seriously scrambling to position themselves for plausible deniability. IMHO disclaimer.

At 1:14 AM, Anonymous Anonymous said...

If one of the end goals is to raise the savings rate, doesn't this include decreased consumptions (of homes and all other consumer products)? This could adverseley affect a host of stocks. Any one think consumer staples stocks are a good bet? Vanugard has a good consumer staples ETF -- ticker symbol VDC. Or is cash best until all of this gets sorted out?

At 4:57 AM, Anonymous Anonymous said...

Don't know if anyone posted this yet... the cover story in New York Magazine (very trendy weekly) is the housing bubble. If NY Mag is writing about it, you can be sure it's finally breaking through to the collective conscious:

It's actually FOUR articles on it, with the main story written by none other than former Merrill Lynch analyst (and stock bubble cheerleader) Henry Blodget.

At 6:58 AM, Blogger Tim said...

A Light Goes On at the Fed

At 7:07 AM, Anonymous Anonymous said...

This housing bubble is big... and the fed knows it... and this is nothing but CYA from Greenie... this is just useless tough talk from the fed... and everyone knows it...

At 7:24 AM, Blogger John Law said...

(U.S. Warns Lenders To Elevate Standards

Agencies Cite Risks In Home Equity Loans)

a little late I might add.

At 10:10 AM, Anonymous Anonymous said...

If the FED is serious, they should raise interest rate 50bp in-between FOMC meetings. This should send a chill down the spine of the market!

At 12:13 PM, Anonymous Anonymous said...

greenspan thinks that he can just drive rates up by doing a mind-meld with the bond market... so far, as we all know, it hasn't worked... bond traders really don't care much for his little song and dance... and he really doesn't care that much to do anything about it... so he will continue his tough talk or send one of his stooges out to do it for him... and they will do nothing... they will not enforce any of these guideline or so called, and might i add ridiculously so, new implied regulations... in my neck of the woods, this is called all bark and no bite...


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