Monday, March 06, 2006

The Death of the Bubble?

You've probably heard it said time and time again from various sources that this housing bubble is not supported by such things as rising incomes, demand (of the non-speculative sort), our flexible-shadow-knowledge-based economy, and other such dissonance-reducing rationalizations, but because mortgage rates have been incredibly low. That in combination with a flood of liquidity by the Fed since 9-11 and ultra-relaxed lending "standards" have resulted in a credit binge of historic proportions that found its way into housing. As Kindleberger argues, nearly every bubble in recorded history has been proceeded by easy credit of some sort or another. You have also probably heard before that as soon as such folks as China, Japan, and others stop buying so much of our debt then this whole phoney house of cards comes down. Well, check this out (and here)...it looks like it's starting. But is it inevitable or is this just "the sky is falling". If it is inevitable, why should you care? Which of the following do you think the Fed actually cares enough about to bail out: 1) you, the housing debt slave, or 2) the dollar?

Some choice quotes:
Long-term Treasury rates broke out of a month-long range…upward, and today above last November's two-year high at 4.68 percent. Mortgage damage is modest for now, fixed-rate loans still within sight of 6.25 percent, but we are going higher.

The source of pressure is global, having nothing to do with new domestic economic data. The rate rise on Thursday was, if anything, limited by weakish news: February retail sales disappointed, consumer confidence continued to sag, home sales slid for the fourth-straight month, and long rates rose anyway.

Global: the European Central Bank raised its cost of money for the second time, from 2.25 percent to 2.5 percent, and signaled that more hikes are coming. Inflation in Germany is running 2.7 percent; all modern central banks are trying to hold it below 2 percent.

Global: Japan's consumer prices appear to have risen for the first time in a half-dozen years. During that time the Bank of Japan has kept the cost of money at zero, trying to get out of a deflationary spiral that began 15 years ago. The BOJ this week said that it will soon reinstate a cost of money –- no matter how low, a shock.

Yields rose on all bonds everywhere in response to these changes in foreign central bank outlook, German 10-year bunds to 3.6 percent, and the 10-year JGB to 1.64 percent (after years and years 1.5 percent or lower).

Among the consequences rippling outward: confirmation that a portion of the "yield curve inversion" (short rates above long) has been caused by speculative borrowing in low-rate Germany and Japan to buy high-yielding U.S. Treasury bonds. If ECB and BOJ rates are rising, this "carry trade" is no longer a good idea. Thursday's breakout was entirely a flight from long bonds, short rates here unchanged, and that sell-off cut the inversion to negligible; a deep inversion presages economic slowdown, while a shallow one is just an event, maybe predictive, maybe not.

That far, the chain of logic makes sense. However, voices are rising to the temptation of what comes next. The loudest say, in varying sequence but always the same elements: "We have warned you for years that foreigners will stop buying our bonds, then sell them, then the dollar will crash, then interest rates here will rise, and the Fed will have to tighten more, which they have to do anyway because inflation is getting worse."

6 Comments:

Anonymous Anonymous said...

Wow! I guess if inflation goes up, eventually we will have wage inflation (it happens with long-term inflation) and THEN we'll be able to buy a house in Marin!

Mar 6, 2006, 1:58:00 PM  
Anonymous Anonymous said...

Either house prices fall by 50% and wages stay the same, or wages double and house prices stay the same. Either way the real value of houses is coming down. Either way, it sucks to be an owner now.

Mar 6, 2006, 2:01:00 PM  
Anonymous Anonymous said...

wages double and house prices stay the same.

Yeah, but I'm one of those fools with a fixed-rate motgage...so I get to pay back my loan with cheap, inflated dollars.

Mar 6, 2006, 2:07:00 PM  
Anonymous Anonymous said...

Screw Marin. I wouldn't want to buy a house there, even if I could afford it. Totally overrated place.

Mar 7, 2006, 12:40:00 AM  
Anonymous by_palladium said...

eventual wage inflation?

I seriously doubt it. Not when the price of the "benefits" of employment like health insurance are rising at rates higher than the inflation rate.

The net out will be stagnant wages and overall decreasing payrolls as workers are removed through attrition and not replaced.

That has been the trend in the past, and there is no reason to believe it will change.

Mar 7, 2006, 1:37:00 PM  
Blogger Pete said...

Nice site you have!

Mar 13, 2006, 7:41:00 PM  

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