Housing, Econometrics, Benny & The Feds
Michael Shedlock aka Mish has a wonderful update on the housing bubble and the Fed raising, some excerpts:
Why would you buy a house in California or Florida when you can rent it for half as much? Please add Boston and Las Vegas to that list. Also note that the Phoenix active listing count is now over 40,000 homes. That does not include for sale by owner.
Outside of a few still appreciating areas (One trusted source tells me that Atlanta is still one), housing has turned. But not only has housing turned, it has turned 180 degrees. Yet Bernanke keeps hiking. Why?
Bernanke hikes because he has to. The stock market, the carry trade players, 5,000 hedge funds, and the mortgage loan sharks still have not gotten the message. The message is that the Fed no longer wants speculation.
Speculation was fine "nudge nudge wink wink" when the Fed was acting to contain "the deflation monster", but now it seems that perhaps they have unleashed something else indeed: a bubble credit blowout that they do not know how to contain.
Yet each hike in rates is another nail in the coffin of housing. Given that "Housing Is The Economy, Stupid" Bernanke better damn well be praying that the markets get the message before he turns a recession into a depression with these rate hikes.
Right now he simply has no choice whether he likes it or not. Market speculation is forcing his hand. Laugh if you want, but it seems to me that housing says Bernanke has overshot already. It remains to be seen how long it will take before the market gets the message.
Oh yes Mish, to be sure the genie is out of the bottle. The overliquification of the last 6 years has spilled over worldwide and the FED in order to attempt control over high end market rates by torqueing the low end, must bring the hammer down HARD.
ERP (enterprise resource planning) and other IT automation technologies have trimmed operations and supply chain inefficiencies while labor at the margin in China (and elsewhere) masks the real inflation rate of 10% plus.
All this concern, central bank jawboning and market fear over something that is in reality out of control, but for the publics eye "tame and benign" could just be theatre for the masses, and the central banks will raise no further.
The Central Banks are all caught in a two faced game of trying to make their economies look good for the current political juntas in charge, while attempting to manage a discontented publics expectations regarding cost of living, inflation, prices and wages.
At a minimum, Benny & the Feds will raise one more time to 5%. Then as Mish suggests, you better pray some "negative" data trickles in that changes the Feds mind.
Otherwise, and I think otherwise is highly likely as I have stated before, the latency and inaccuracy in the current econometric methodologies used will cause the Fed to overshoot and in the extreme.
The energy pass through effect has permeated the supply chain, and attempting to strip out its effects at this point, is futile at best.
Much of what appears to be economic growth, is in fact a margin sustaining efficiency and wage squeeze that is nearing its cyclical end. The sustained $60 per barrel pass through and parabolically rising commodity input prices are now trimming profit margins and generating stagflation.
Add what little trumped up "real" organic growth there is and the Central Banks including the FED are being "misled" by the numbers. Whether this is due to ignorance, stupidity or by grand design does not really matter.
Anyone (read indirect bidders, foreign central banks, pensioners) who have been buying 10 & 30 year Treasury paper at 3.5-4.5% had better be banking on a MAJOR deflation of all asset classes.
This must occur ALONG WITH a big drop in interest rates, in hopes of making their locked in ROI over 10 or 30 years being a good one. Unless they just have the "extra cash to burn" on a bad investment.... think about it.
My sense is still another two 25 bps raises to 5.25 and perhaps a third on the misread to 5.5. At the point where the latency in the econometrics reflects what HAS happened, the FED will stop and drop rates, but that will be too late. Not to be a purveyor of doom, but...
As we have maintained all along in these pages, rates as a function of the FED and marketplace will go up far beyond what anyone expects, and we are just seeing the beginning of this process.
In the near term, we could see 30 year fixed mortgages at 7.5% and higher, this would crush the housing market, cut consumer spending, tank the "new economy"; and as Mish aptly pronosticates, "turn a recession into a depression", and possibly a global one, I might add.
As Bullwinkle would say: "Can the central banks and FED pull a rabbit out of their hats? Lets watch and see. Buckle up my sleeve, presto!!! Oh, I guess I don't know my own strength."
Why would you buy a house in California or Florida when you can rent it for half as much? Please add Boston and Las Vegas to that list. Also note that the Phoenix active listing count is now over 40,000 homes. That does not include for sale by owner.
Outside of a few still appreciating areas (One trusted source tells me that Atlanta is still one), housing has turned. But not only has housing turned, it has turned 180 degrees. Yet Bernanke keeps hiking. Why?
Bernanke hikes because he has to. The stock market, the carry trade players, 5,000 hedge funds, and the mortgage loan sharks still have not gotten the message. The message is that the Fed no longer wants speculation.
Speculation was fine "nudge nudge wink wink" when the Fed was acting to contain "the deflation monster", but now it seems that perhaps they have unleashed something else indeed: a bubble credit blowout that they do not know how to contain.
Yet each hike in rates is another nail in the coffin of housing. Given that "Housing Is The Economy, Stupid" Bernanke better damn well be praying that the markets get the message before he turns a recession into a depression with these rate hikes.
Right now he simply has no choice whether he likes it or not. Market speculation is forcing his hand. Laugh if you want, but it seems to me that housing says Bernanke has overshot already. It remains to be seen how long it will take before the market gets the message.
Oh yes Mish, to be sure the genie is out of the bottle. The overliquification of the last 6 years has spilled over worldwide and the FED in order to attempt control over high end market rates by torqueing the low end, must bring the hammer down HARD.
ERP (enterprise resource planning) and other IT automation technologies have trimmed operations and supply chain inefficiencies while labor at the margin in China (and elsewhere) masks the real inflation rate of 10% plus.
All this concern, central bank jawboning and market fear over something that is in reality out of control, but for the publics eye "tame and benign" could just be theatre for the masses, and the central banks will raise no further.
The Central Banks are all caught in a two faced game of trying to make their economies look good for the current political juntas in charge, while attempting to manage a discontented publics expectations regarding cost of living, inflation, prices and wages.
At a minimum, Benny & the Feds will raise one more time to 5%. Then as Mish suggests, you better pray some "negative" data trickles in that changes the Feds mind.
Otherwise, and I think otherwise is highly likely as I have stated before, the latency and inaccuracy in the current econometric methodologies used will cause the Fed to overshoot and in the extreme.
The energy pass through effect has permeated the supply chain, and attempting to strip out its effects at this point, is futile at best.
Much of what appears to be economic growth, is in fact a margin sustaining efficiency and wage squeeze that is nearing its cyclical end. The sustained $60 per barrel pass through and parabolically rising commodity input prices are now trimming profit margins and generating stagflation.
Add what little trumped up "real" organic growth there is and the Central Banks including the FED are being "misled" by the numbers. Whether this is due to ignorance, stupidity or by grand design does not really matter.
Anyone (read indirect bidders, foreign central banks, pensioners) who have been buying 10 & 30 year Treasury paper at 3.5-4.5% had better be banking on a MAJOR deflation of all asset classes.
This must occur ALONG WITH a big drop in interest rates, in hopes of making their locked in ROI over 10 or 30 years being a good one. Unless they just have the "extra cash to burn" on a bad investment.... think about it.
My sense is still another two 25 bps raises to 5.25 and perhaps a third on the misread to 5.5. At the point where the latency in the econometrics reflects what HAS happened, the FED will stop and drop rates, but that will be too late. Not to be a purveyor of doom, but...
As we have maintained all along in these pages, rates as a function of the FED and marketplace will go up far beyond what anyone expects, and we are just seeing the beginning of this process.
In the near term, we could see 30 year fixed mortgages at 7.5% and higher, this would crush the housing market, cut consumer spending, tank the "new economy"; and as Mish aptly pronosticates, "turn a recession into a depression", and possibly a global one, I might add.
As Bullwinkle would say: "Can the central banks and FED pull a rabbit out of their hats? Lets watch and see. Buckle up my sleeve, presto!!! Oh, I guess I don't know my own strength."
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