Tuesday, May 24, 2005

"Possible Speculative Excess": FOMC

Disregarding the so-called 'soft patch' in the economy, the Federal Reserve is signaling that the funds rate will be increased. "'Most members regarded the recent slower growth of economic activity as likely to be transitory,' according to the minutes released today in Washington."

"'All members regarded the stance of policy as accommodative and judged that the current level of short-term rates remained too low to be consistent with sustainable growth and stable prices in the long run.'"

"'Home sales and other indicators of activity in the residential real estate market remained at very high levels,' the minutes said. 'House price appreciation was expected to moderate over coming quarters, but a number of local markets were still regarded as `hot' with signs of possible speculative excess.'"


At 12:05 PM, Blogger David said...

Here is a theroy. Feds will continue to raise short term rates slowly. The bubble will pop and the economy will head back into a recession. Thus forcing FEDS to keep lower rates again.

This is a multi pronged seesaw economy. All this seesawing is making the passengers less productive and will lead to long term economic health problems.

At 12:11 PM, Anonymous Anonymous said...

I like these two paragraphs.

"Some members suggested the Fed may need to stop saying in its policy statements that ``policy accommodation can be removed at a pace that is likely to be measured,'' because it might limit the central bank's flexibility. Those members suggested that ``greater uncertainty called for eliminating or paring back forward-looking language from the statement -- if not at this meeting then fairly soon,'' the statement said.

Other members countered that the language did not preclude the Fed from raising rates or taking a pause, and that view prevailed at the meeting. Eventually, all members decided to keep the ``measured pace'' language."

So what they are trying to do is have the language, but not really, maybe, kind of, yes, no,

This reminds me of the cartoon of Greenspan speaking into a microphone....

`Twas brillig, and the slithy toves
Did gyre and gimble in the wabe:
All mimsy were the borogoves,
And the mome raths outgrabe fifty basis points.'

No matter what the take, they are weakening on the languge as they near an inverted yield curve.

The suspense!

At 12:32 PM, Anonymous Anonymous said...

There is also the possiblity that inversion of the yield curve is being carefully orchestrated......this forces the carry trade to be unwound AND provides a strong incentive to switch from ARM to fixed mortgate (if you are upset that your monthly payments are going up and are thinking about refinancing, 30 year fixed will look attractive because it will limit how bad the pain can get).

At 12:43 PM, Blogger desi dude said...

"if you are upset that your monthly payments are going up and are thinking about refinancing, "

if the homeow(n)er did not have the income two year ago to wualify for fixed income, how would he qualify now?

At 12:46 PM, Blogger softwarengineer said...

I don't think interest rates will ever go up again. My proof is we have all heard, the interest rates will rise for the last 5-7 years and they didn't. A 1 percent increase would destroy the fragile housing market and pile federal debt rescuing the excessive bad loans. I believe that's why the CPI is so ridiculously low, when gas and food are sky-rocketing in double digits. The questionable single digit CPI calculation evidently excludes housing bubble increases too.

So, if I'm wrong and interest rates actually follow real inflation, not the CPI, pop goes the real estate market. Its that simple. Let's hope I'm right.

At 12:50 PM, Anonymous Anonymous said...

If he is in an ARM that is already adjusting, a 30-year fixed is not very far away from his current payment..........the people that will really be left high and dry are the ones that are still in the interest rate lockup and don't see it coming.

Heck, I work with a bunch of people that refid into ARMS to do equity extraction....you can see them get quiet when interest rates come up in conversation....they don't look very happy.

At 12:53 PM, Anonymous Anonymous said...

"There is also the possiblity that inversion of the yield curve is being carefully orchestrated"

Good point, but Desi also has a good point. If they are trying to get the I/O loans to refi, they are certainly providing the incentive by raising short term rates and squeezing the I/O loans. But if enough of the I/O borrowers can't qualify, especially with things tightening up, it won't work. That is why I think we may have seen the last rate increase for this year. They are trying to jawbone as many I/O loans into 30yr refis that can qualify, but won't actually invert the curve.

At 12:55 PM, Anonymous Anonymous said...

Unfortunately, intest rates will go up considerably.

Bond market is dead wrong on rates if you look at inflation.

Even stripping out energy and food, core CPI is going up twice what the FED targets.

If you put energy and food back in, CPI is up the biggest 6 month increase since 1971......right before stagflation started.

Only thing holding back ugly double digit inflation right now is the cheap crap we are importing from China.

If the market truly catches up to what is going on with inflation, there are two possible scenarios:

-Wage inflation (not good for people that don't own homes)

-High intererest rates (not good for home owners)

At 1:23 PM, Anonymous Anonymous said...

"Only thing holding back ugly double digit inflation right now is the cheap crap we are importing from China."

True, but the CPI has been relatively sideways for five years as it is measured. And the cheap crap from China, hasn't this allowed a hyper-inflationary asset bubble to accur in the housing market? Imagine how many wheelbarrels the debt from this asset appreciation would fill if it were monetized.

At 2:48 PM, Anonymous Anonymous said...

12:55 -- where do you get the cheap crab? I'd love to eat some while I watch the crash on TV, but here in Florida it is pretty expensive -- at least the tasty stuff in the black cans.

At 2:52 PM, Anonymous Anonymous said...

Software engineer -- count on rates to continue rising, albeit more slowly that we might expect. The only way the government can get out of this mess includes a recipe of several measures and one of them is inflation.

At 2:57 PM, Anonymous Anonymous said...

(don't think interest rates will ever go up again...if I'm wrong and interest rates actually follow real inflation, pop goes the real estate market.)

It's not that simple. Real estate valuations and interest rates are not tied at the hip. Sometimes there is a strong correlation, sometimes not. It has more to do with liquidity, lending standards (or lack of them), and most importantly, sentiment.

In the early '90s, real estate fell up to 30% in some markets (Northeast, SoCal) even though mortgage rates fell 300 basis points (from 10% to 7%). And the RE market was at its worst, and foreclosures at their highest, when interest rates were falling the fastest.

From 1992-2000, property values in Japan (both commercial and residential) fell 30-50% (even more in some places) while interest rates fell 500 basis points (from 5% to effectively 0%---actually 0.25%).

In a debt deflation, liquidity dries up, lending gets tight as a drum and consumer sentiment withers. No one wants to buy anything via credit even if the interest rate was 0%.

Will that happen here? It's more likely than runaway inflation, IMO. When debt levels get too high and prices are falling, no one wants to borrow no matter what the rates are.

At 2:59 PM, Anonymous Anonymous said...

Desi Dude -- "if the homeowner did not have the income two year ago to qualify for fixed income, how would he qualify now?"

One of my relatives is having exactly that problem, right now, and it is predictably very stressful. I think many, many naive (and mostly young) people will get burned exactly this way. If they are fortunate, they will be able to bail on their homes without residual debt and know a lot more about the cold hard facts of life as they move into their rental, or much less expensive, homes. These are the kids who are not greedy -- they do not own multiple properties -- so I have some sympathy for them. The speculators, on the other hand, can go hang.

At 4:41 PM, Anonymous Anonymous said...

leave it to the feds - they'll never say something simple like "the sky is blue", because that's too obvious to the *ahem* narrowminded. rather, they'll say something like "the atmospher primarily refracts visible radiation in the near-UV". I know plenty of people to whom a statement like "Possible Speculative Excess" is a sign that they should get in before they miss out on the feeding frenzy.


At 5:26 PM, Anonymous Anonymous said...

All its going to take for the bubble to burst is for the emotion of the market to shift from greed to fear.

This fear will begin with speculators and those who are in risky loans. Recent speculators will be the first to sell--if they are smart. Alan G. knows they aren't, so he gave them a clue as to what they should do.

But the real turn is when the mortgage lenders start running scared.

Then all the free money will go run for the hills, and the tap shuts off.

Anyone who wants to refi to fixed will suddenly face "real" lending standards.

The irresponsibility of the mortage industry has turbocharged this bubble on the way up; it is what will accelerate its decline.

What will burst the bubble?

1) Sentiment shift -- greed to fear
2) Pure Speculators run for the exits
3) Lenders regain sanity/shut off tap
4) Sales volume plummets
5) Prices go down (quickly or slowly, but inevitably)

Note: this scenario is not dependent on:

China revaluating the RMB

The Fed inverting the yield curve

Fannie or Freddie blowing up

A major Hedge Fund with large MBS exposure tanking

A major fall in the US Dollar

Of course, all these may happen as well, and any one would most likely burst the bubble as well.

At 2:47 AM, Anonymous Anonymous said...

"we have all heard, the interest rates will rise for the last 5-7 years and they didn't"

Ahh, but as a contrarian indicator, many (Bill Gross + others) are now calling for rates to fall or at least hold. Does this mean that they will now go up?

Besides, why would you want this nightmare to continue (or worsen)? Yes there will be a recession when this thing pops, but we're headed there anyway so lets get on with it.

At 8:52 AM, Anonymous Anonymous said...

Bond market yield-curve inversion forecasts recession or depression ahead....

At 10:27 AM, Anonymous Anonymous said...

Nice uphemism. FOMC are just a bunch of smucks.


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