Marc Faber, Bloomberg, Rate Cut in US

[Jim Nickerson]

http://www.bloomberg.com/avp/avp.htm...YbMUXzXOBg.asf

13 minute video, in which Faber opines US will cut rates later this year. He also discusses bubbles and says the largest bubble in the US is "low quality debt."

Since the Fed has stopped raising the Fed Funds rate, the equity markets have gone up in anticipation that at some point the Fed will begin to lower rates--I'm sure that is overly simplified.

What would have to happen between now and the time at which the Fed would actually lower rates in order to prompt the Fed to such a move?

[Tet]

Re: Marc Faber, Bloomberg, Rate Cut in US

[quote=What would have to happen between now and the time at which the Fed would actually lower rates in order to prompt the Fed to such a move?[/quote]
Need to have more people/bagholders thinking rates are heading higher before the Fed is going to cut, looks like rates need to approach 5.45% on the 10-year which would be 2002's high before they pull the rug out. Also need somebody other than ourselves to blame, China, Turkey, Russia, Indonesia, Africa anybody but us for the reason rates needed to be cut. That should be easy enough to come up with, hell we're just going to make up that bit of news anyway. Maybe a Asian market crash occurs and rates need to be cut, not to save our own markets but to save their's, because we're a bennevolent lot and only do the best thing for the rest of the world when we're not busy bombing the crap out of them.

[jk]

Re: Marc Faber, Bloomberg, Rate Cut in US

http://www.bloomberg.com/avp/avp.htm...YbMUXzXOBg.asf

What would have to happen between now and the time at which the Fed would actually lower rates in order to prompt the Fed to such a move?

possibilities:
1. market dislocation- some more hedge funds blow up and cdo's really get marked down leading to major losses, selling of other assets and a general and sudden distaste for risk. the extreme case would be a 1987-type event.

2. housing downturn worsens and causes rising unemployment and decreased consumption, i.e. a recession or close call.

[bill]

Re: Marc Faber, Bloomberg, Rate Cut in US

Faber

For the full report:http://www.gloomboomdoom.com/portalgbd/homegbd.cfm

“the current debacle threatens the growth of asset-backed bonds, securities
that use consumer, commercial and other loans and receivables as collateral.
That market, which includes mortgage securities, has doubled to about $10
trillion since 2000, according to the Securities Industry Financial Markets
Association, a New York-based trade group”.
Also, according to The Bank for International Settlements (BIS), the total
notional value of global derivatives in existence has grown by now to $415.2
trillion, which is almost 800% of global GDP. Should, therefore, the fall-out
from the sub-prime lending and CDO market affect other sectors of the
credit market, which is in my opinion almost inevitable, some derivative
defaults could aggravate the problem and lead to a “perfect” credit storm!
So, what should one invest in? In general I recommend investors to move
away from complicated financial instruments and anything related to
history’s greatest debt bubble, and to shift funds into hard assets such as oil,
gold, and farmland, whose quantity cannot be increased at the same speed as
paper money is created by irresponsible central bankers

I have to admit that I am hesitant to buy oil now since it has already

appreciated considerably following its bottom at $ 12 in 1998. However, in
real terms (inflation adjusted) oil is still down by about 50% from its 1980
peak and looks technically strong (see Figure 9). Moreover, I could see the
following scenario unfolding in the second half of 2007: The problems in the
housing industry worsen, sub-prime loan default rates soar, the CDO market
collapses, and the US economy does contrary to expectations not recover.
The Fed is forced to ease massively and cuts interest rates. The US dollar
resumes its downtrend. As can be seen from Figure 10, the US dollar tends
to be seasonally weak in the second half of the year.

[metalman]

Re: Marc Faber, Bloomberg, Rate Cut in US

Faber

For the full report:http://www.gloomboomdoom.com/portalgbd/homegbd.cfm

“the current debacle threatens the growth of asset-backed bonds, securities
that use consumer, commercial and other loans and receivables as collateral.
That market, which includes mortgage securities, has doubled to about $10
trillion since 2000, according to the Securities Industry Financial Markets
Association, a New York-based trade group”.
Also, according to The Bank for International Settlements (BIS), the total
notional value of global derivatives in existence has grown by now to $415.2
trillion, which is almost 800% of global GDP. Should, therefore, the fall-out
from the sub-prime lending and CDO market affect other sectors of the
credit market, which is in my opinion almost inevitable, some derivative
defaults could aggravate the problem and lead to a “perfect” credit storm!
So, what should one invest in? In general I recommend investors to move
away from complicated financial instruments and anything related to
history’s greatest debt bubble, and to shift funds into hard assets such as oil,
gold, and farmland, whose quantity cannot be increased at the same speed as
paper money is created by irresponsible central bankers

I have to admit that I am hesitant to buy oil now since it has already

appreciated considerably following its bottom at $ 12 in 1998. However, in
real terms (inflation adjusted) oil is still down by about 50% from its 1980
peak and looks technically strong (see Figure 9). Moreover, I could see the
following scenario unfolding in the second half of 2007: The problems in the
housing industry worsen, sub-prime loan default rates soar, the CDO market
collapses, and the US economy does contrary to expectations not recover.
The Fed is forced to ease massively and cuts interest rates. The US dollar
resumes its downtrend. As can be seen from Figure 10, the US dollar tends
to be seasonally weak in the second half of the year.

sounds like ka-poom theory to me.

[cakins]

Re: Marc Faber, Bloomberg, Rate Cut in US

A quick question:

If Heli-Ben cuts short term rates, could that make the housing situation worse?

Cutting rates is an inflationary move, and the buyers in the long bond market might demand higher long term rates because of inflation fears and dollar weakness (return of the bond vigilantes?).

Higher long bond rates would put further upward pressure on mortgage rates, which causes yet more defaults and even higher risk premiums. Wash, rinse, repeat...

[jk]

Re: Marc Faber, Bloomberg, Rate Cut in US

A quick question:

If Heli-Ben cuts short term rates, could that make the housing situation worse?

Cutting rates is an inflationary move, and the buyers in the long bond market might demand higher long term rates because of inflation fears and dollar weakness (return of the bond vigilantes?).

Higher long bond rates would put further upward pressure on mortgage rates, which causes yet more defaults and even higher risk premiums. Wash, rinse, repeat...

i think when the fed next cuts there will be a new conundrum: long rates will rise, not fall. this effect will be mediated by a dropping dollar.

however, lower short rates will help real estate because financing will move strongly towards floating rate arm's, which move with short rates, and away from fixed rate mortgages which link to the 10yr rate.

[cakins]

Re: Marc Faber, Bloomberg, Rate Cut in US

i think when the fed next cuts there will be a new conundrum: long rates will rise, not fall. this effect will be mediated by a dropping dollar.

however, lower short rates will help real estate because financing will move strongly towards floating rate arm's, which move with short rates, and away from fixed rate mortgages which link to the 10yr rate.

Makes me wonder: who would want to buy the floating rate mortgages in that case? If I were a bond investor, and rates were that low on a riskier asset, I would opt for the T-bonds.

[jk]

Re: Marc Faber, Bloomberg, Rate Cut in US

Makes me wonder: who would want to buy the floating rate mortgages in that case? If I were a bond investor, and rates were that low on a riskier asset, I would opt for the T-bonds.

if underwriting standards are tighter than the recent past [and they are, and are becoming more so], then the mortgages will have some value. they'll be packaged and bought by institutions [pensions, hedge funds, banks] which will finance those purchases by borrowing at still lower rates [or even in yen], and pocket the spread.

[cakins]

Re: Marc Faber, Bloomberg, Rate Cut in US

if underwriting standards are tighter than the recent past [and they are, and are becoming more so], then the mortgages will have some value. they'll be packaged and bought by institutions [pensions, hedge funds, banks] which will finance those purchases by borrowing at still lower rates [or even in yen], and pocket the spread.

Thanks for the clarification.