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FRED
06-30-06, 09:54 AM
<small>More mortgage pain coming (http://www.mercurynews.com/mld/mercurynews/news/local/14937455.htm)
June 30, 2006 (The Mercury News)

Get ready for mortgage rates of 7 percent -- or higher.

The Federal Reserve on Thursday announced a quarter-percentage-point increase in its federal funds rate, the 17th boost in its benchmark short-term interest rate since mid-2004.

But while the stock market jumped in response, ripple effects from the decision mean most consumers will soon be paying even more on their credit cards and home equity loans, whose interest rates have more than doubled since 2003.

The Fed doesn't directly affect the mortgage market, but mortgage rates have been moving higher in anticipation of the Fed action and experts say more increases are likely.

Mortgage financing company Freddie Mac said in its weekly report Thursday that the national average rate for a 30-year fixed-rate mortgage rose to 6.78 percent, the highest level since May 2002. Bankrate.com said that as of Wednesday the rate for a jumbo 30-year fixed-rate mortgage was 7.11 percent, while a one-year adjustable-rate mortgage was 6.09 percent.

The monthly cost for someone taking out a $500,000 fixed-rate mortgage at 7.11 percent is $3,364, or $487 more than what a borrower with a similar loan would have paid in June 2003, when fixed rates hit their lowest point in decades.

</small><small>AntiSpin: Every asset class on earth celebrated the Fed's decision to let inflation rip with the implicit promise to back off rate hikes. The DOW jumped 217 points (up almost 2%) while gold blew through $600, up more than $20 from $582 the day before (up over 3%). The one asset class the continues to suffer is real estate. This is consistent with our theory that in the ongoing stagflationary environment, the stock market will continue to rise in nominal (inflation-adjusted) terms but decline in real terms as it has since 2001, assets such as real estate purchased using ever more expensive credit may decline only modestly nominally but decline significantly in real terms, and hard assets that function both as a means of exchange and as a store of value (i.e., money: oil, gold, silver, platinum, etc.) will increase in value in real terms. </small>

jk
06-30-06, 01:10 PM
i bought my first house in 1979, and i remember i was happy to be able to finance it at 9.5%, since rates went still higher shortly thereafter. of course, house prices were a little lower back then.

9.5% mortgages are not consistant with current incomes and current housing prices, and i don't think even 7% is consistant with current prices. so if rates continue to go up and incomes stagnate, we all know what to expect.

i'd like to add one little piece to the scenario in the post above. that is that interest rates can continue to creep up, "two steps forward and one step back," on and off, and the game will keep going as long as rates stay "behind the curve" of [truly measured] inflation.

nikki
06-30-06, 10:48 PM
But where will all the liquidity go as fewer and fewer people buy homes? It's not like there's credit tightening going on, as we discussed in another thread, so will that all fly into commodities, and we'll see $90/bbl oil even without a hurricane? If you read the oil markets, they see US demand as high now, which it is, (it's amazing with all the whining about gas prices that we're using almost 1% more than last year), but futures markets seemingly see basically zero percent chance of a significant reduction in demand, as is evidenced by contracts as high as $70/bbl years from now. While oil is global, a recession in the US will certainly impact other economies such as China, and likely reduce oil demand, at least slightly, worldwide. But it seems as if recently the oil market does not pay much attention to fundamentals, only what could possibly happen to disrupt supply in the future. I've read that OPEC may have to cut production in Q3 due to high world inventories--that will make prices skyrocket! Prices will be high indefinitely unless we get a '98-style glut or until we don't use it anymore. My guess is the latter, which means we're in for a long period of expensive gas (by US standards, those who travel know better), with everyone b*tching but everyone driving.

And speaking of gasoline, I've got a question...it seems as if for the past three summers everyone has been talking about the tight supply and possibility of a shortage of gas for any number of reasons--hurricanes, Iran, ethanol, there's always something. While these are legitimate concerns, did we not see the success of the worldwide oil/gas market by the massive imports that streamed into the US after Katrina to replace our lost supply? There was no shortage after that massive catastrophe, so how can a few weeks of gas supplies dropping to the "middle of the average range" around peak driving season seriously spark "renewed concerns" of a shortage? Or, as I began this post, is this the excess liquidity moving from things like RE to oil and other commodities regardless of "not-weak" fundamentals because there's nothing else left?

jk
06-30-06, 11:18 PM
credit is easy but liquidity is still diminishing, courtesy of the boj. tokyo is where the real action is. but you're asking the right question i think: "where is the next bubble?" if any sign of slowdown is greeted by easing, the money is going to go somewhere. where? commodities seem plausible. is another equity bubble possible? how about emerging markets really taking off? nominations are open.

Jim Nickerson
07-01-06, 11:14 PM
credit is easy but liquidity is still diminishing, courtesy of the boj. tokyo is where the real action is. but you're asking the right question i think: "where is the next bubble?" if any sign of slowdown is greeted by easing, the money is going to go somewhere. where? commodities seem plausible. is another equity bubble possible? how about emerging markets really taking off? nominations are open.
Perhaps you read International Trader--Asia in Barrons 7/3/06

There, some expert (Russell Napier) whom I do not know says the time to buy Japanese stocks is when deflation is fading and that is now, he went on "You buy American equities when there's a period of deflation or threat of deflation. That's not where America is today--but that is where Japan is."

jk
07-02-06, 05:22 AM
Perhaps you read International Trader--Asia in Barrons 7/3/06

There, some expert (Russell Napier) whom I do not know says the time to buy Japanese stocks is when deflation is fading and that is now, he went on "You buy American equities when there's a period of deflation or threat of deflation. That's not where America is today--but that is where Japan is."

i hadn't read it til now. he's plugging japanese [and by implication, i think, other asian] equities. i think asian equities are a great long term idea, but i've been holding off in the expectation of a global equity downdraft accompanying a major correction here in the u.s., which i've been thinking would bottom in the third quarter this year. so everything did sell off a bit in the last few weeks, and now is on the rebound. is that it?

it's hard for me to sit with any cash- i feel like i want to put it to work, and i feel an impulse to buy more energy stocks, asian equities, miners, etc.

a lot of people, myself included, are comparing this time to the 1970's. but i wonder if, instead of major bear moves like in 74, this market can move in a narrow trading range, or even up a bit, while the dollar undermines the equity market's nominal value?

Jim Nickerson
07-02-06, 10:29 AM
i hadn't read it til now. he's plugging japanese [and by implication, i think, other asian] equities. i think asian equities are a great long term idea, but i've been holding off in the expectation of a global equity downdraft accompanying a major correction here in the u.s., which i've been thinking would bottom in the third quarter this year. so everything did sell off a bit in the last few weeks, and now is on the rebound. is that it?

it's hard for me to sit with any cash- i feel like i want to put it to work, and i feel an impulse to buy more energy stocks, asian equities, miners, etc.

a lot of people, myself included, are comparing this time to the 1970's. but i wonder if, instead of major bear moves like in 74, this market can move in a narrow trading range, or even up a bit, while the dollar undermines the equity market's nominal value?

jk,

http://www.marketwatch.com/News/Story/Story.aspx?column=Peter+Brimelow&siteid=myyahoo&dist=

Above is a link that discusses Bridgewater Associates' observations. In it are references back to two earlier columns. From the 5/11/06 column:

"And then there's the REALLY bad news: Bridgewater also expects a major international system crunch exactly like the collapse of the fixed exchange rate Bretton Woods system, which lead directly to the inflationary crisis of 1974. See my March 16 column (http://www.marketwatch.com/News/Story/Story.aspx?guid={B08B1127-327B-4433-9867-84EC34016FC9}&siteId=myyahoo) "

If you wish to comment, what do you make of all this? I guess you'll likely stick with what you said above, but I can always be wrong.

jk
07-02-06, 12:28 PM
jk,

http://www.marketwatch.com/News/Story/Story.aspx?column=Peter+Brimelow&siteid=myyahoo&dist=

Above is a link that discusses Bridgewater Associates' observations. In it are references back to two earlier columns. From the 5/11/06 column:

"And then there's the REALLY bad news: Bridgewater also expects a major international system crunch exactly like the collapse of the fixed exchange rate Bretton Woods system, which lead directly to the inflationary crisis of 1974. See my March 16 column (http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BB08B1127-327B-4433-9867-84EC34016FC9%7D&siteId=myyahoo) "

If you wish to comment, what do you make of all this? I guess you'll likely stick with what you said above, but I can always be wrong.
jim, thanks for the link. i have enormous respect for ray dalio - it's been a while since barrons did an interview with him, but each time i'm impressed. I just looked it up- barrons' last interview with him was jun13 '05 - you might want to pull it up - i just reread it.

some key quotes:
Barron's: What's your outlook for inflation?

Dalio: I think inflation is gradually trending higher. It won't emerge as a threat probably until late 2006. World economies are late in the economic cycle, and there are not the same excesses there used to be. The dollar will go down a lot and commodity prices will go up a lot. There is a structural surplus of labor and there's disinflation from labor and manufactured goods and productivity, but commodity inflation will offset that. The rate at which this will occur will be gradual at first, and as we get later into 2006 we'll have run out of slack and there will be more of a depreciation in the value of the dollar and more appreciation in commodity prices and the Fed will lag that move. Real rates will be relatively low.

You're not concerned the Fed tightens too much?

No, I don't believe they will tighten too much. Rates will continue to rise and the Fed will continue to tighten, but their moves will lag the forces of positive economic growth, a declining dollar and rising commodity prices. The Fed is looking at general inflation, and that will rise slowly. The economy is growing at a moderate pace, and so any tightening will be comparatively slow and modest. The balance- of-payments issue is a major issue, but it is not going to be a major problem this year. This year will be the first attempt to remedy the problem, but what is going to happen is our balance-of-payments position is going to worsen a lot. In 2005, 2006 and 2007 we are going to see our current-account deficit go from 5% to 6% to 7% of gross domestic product. Our need for foreign capital is going to continue to grow at the same time that China's desire to buy our bonds -- and Japan's to some extent, as well -- will diminish. China's desire to have an independent monetary policy will be a driving factor. But there is a bipolarity in the world: The mature industrialized countries are in relative stagnation, and the big reason the U.S. is growing faster than most of other countries is because we are being lent capital. We are substantially dependent on foreign lending.

....We are very, very bullish on emerging countries, particularly Asian emerging countries and their currencies. Fundamentally, though, you have to ask yourself whether the ties between us and the emerging countries that are buying our bonds will last. It doesn't make sense. The balance-of-payment situation reminds me very much of the Bretton Woods breakup in 1971.

When we came off the gold standard?

Yes. What we had then was a fixed-exchange-rate system. Japan then was very similar to what China is now in terms of per-capita incomes and growth rate. Japan was emerging from a post-World War II economy that was dilapidated. Japan and Germany acquired very large surpluses. They believed the U.S. dollar was a credible exchange rate and they needed stability from that, and so we borrowed and overconsumed until the price of the exchange rate was out of line. They had to buy lots and lots of bonds, and when you buy bonds, you have to print money to do that. So Japan and Germany had to stimulate their economies and then they wanted to slow their economies, just like China today.

China has an overheating economy, and because of its fixed exchange rate, it has to produce more money supply. For a country like China to tie its monetary policy to a country like the U.S. doesn't make any sense. One is growing at a 9% real rate, the other is growing at 3%, if it's lucky.

etc

again, i recommend you pull the column and read it, keeping in mind that it appeared over a year ago - it's quite prescient.

bridgewater says this isn't the crack up, right now, just some noise on the way to the ok corral, at which we will arrive in a year or two.

the reasoning is again based on parallels with the '70s. but this kind of analogy can be useful only to a limited extent.

sometimes i think that i think too much, and too often, about this stuff. marc faber has written that, in retrospect, you only had to make an investment decision about every 10 years. in 1960 you bought american equities. in 1970 you sold them and bought oil and gold. in 1980 you switched to japanese equities. in 1990 you switched to u.s. equities. and in 2000? ah, there's the rub. my guess- commodities and precious metals. if i had to pick just one asset type, that's what i pick, and again it parallels the 70's. and again i think of jesse livermore's remark that it's easy to be right, but hard to sit tight. richard russell, too, is basically saying buy gold [and some oil stocks] and sit tight. don't even bother to follow its price movement. just buy it, put it away, and forget it, except if you want to add more from time to time.

Jim Nickerson
07-02-06, 03:55 PM
sometimes i think that i think too much, and too often, about this stuff. marc faber has written that, in retrospect, you only had to make an investment decision about every 10 years. in 1960 you bought american equities. in 1970 you sold them and bought oil and gold. in 1980 you switched to japanese equities. in 1990 you switched to u.s. equities. and in 2000? ah, there's the rub. my guess- commodities and precious metals. if i had to pick just one asset type, that's what i pick, and again it parallels the 70's. and again i think of jesse livermore's remark that it's easy to be right, but hard to sit tight. richard russell, too, is basically saying buy gold [and some oil stocks] and sit tight. don't even bother to follow its price movement. just buy it, put it away, and forget it, except if you want to add more from time to time.
jK, as some someone who professes not to be a trader, your opening sentence above must be correct; however, there are those whom I cannot think of to quote that say the market these days is not a buy and hold market. Trying to be on the right side of swings certainly demands a lot of attention and wears me out, but making long term bets either way and trying to sit back is unbearable for me. You need to go to work and think about something more important for a while. Blue Monday, if that applies this coming week.