Sounds like Greenspan is going to hike until he gets his mild recession. We need a true cleansing of excess housing and consumer debt. That flattening of the yield curve at 3.5% won't do it. Are you or Heinz aware of the true extent of the housing mania going on in parts of this country? We need fixed rate mortgages at 7.5%+, tightening credit standards abolishing the 1% starting pay rate on ARMS, require at least 10% down on any purchase and stricter credit checks and documentation of income or this bubble will not burst even in another minor recession. We were in that recession mode in 2001 and housing never missed a beat. It is even worse now as perceptions of 10% inflation and appreciation is ingrained in the thought process of the masses in much of this country. Even you guys would have to admit the BLS manipulates the CPI somewhat. Add in the housing component along with gas, food and real estate taxes and we are certainly much closer to 10% than 3%. In this latest 5 year cycle the long term treasury purchasers, commodity buyers and the leveraged to property investor have made out very well while the savers, renters and stock market investors have not. Someone is truely the fool in this new world it just has not been played out yet and none of us knows for sure....LOL
The next recession will NOT be a mild one.
Yes both Heinz and I are very aware of a housing bubble.
Unlike you and everyone else here it seems, we do not think it will take anything close to 7.5% interest rates to kill it. It could just die on its own. The bubble in 2000 did not take huge hikes to burst it. In fact, I think the tech bubble would have burst on its own accord. We just ran out of people willing to buy PCs and lay more unneeded fiber.
You state that falttening of the yield curve will not do it.
Do you have any evidence to support that idea?
IMO all it takes is a trigger.
Some kind of trigger.
GM reduced to junk swamping the junk bond market, FNM derrivative blowup, a major city defaulting on bonds, terrorism in the US, an overthrow of Saudia Arabian govt, violence in Iraq, sharp downturn in housing, SS reform bites the dust, consumers just give up, etc etc etc. You can probably come with more ideas to add to that list. It is very hard to say what the trigger will be and as I said, there just might not be one.
We have had recessions without the yield curve inverting.
It can easily happen again. In fact we could even see an inverted yield curve in a few months at the current pace of curve tightening. The 5-10 spread is down to 40 bps.
Your assertion that it will take 7.5% interest rates has no real basis in reality. I think we see either a trigger or consumers just plain give up.
BTW, your assertion that the masses see 10% inflation is simply not true either. I do not see 10% inflation. I sure wish my home doubled in the last 4 years cause if it did I would sell it. I personally think food is a bargain. I buy meat when it is on sale and freeze it. Chicken breasts on sale for .86, whole chickens for .69, $2.50 for a 12-pack of diet-rite or pepsi, pork chops for $1.79, round steak for $1.79. Yes you have to wait for sale prices to get those, but I wait. Chicken breasts today for .86. Some of those prices have not changed much in over 20 years! I worked in a grocery store in 1968-1971. Roiund steak on sale then was .99, it is now $1.79. Whole chickens were .49 and on sale .29. Since 1968 prices on food have doubled at best. If you want to say meat prices tripled, then OK tripled. That is not a lot compared to about everything else.
I have no freaking idea what is happening with prescriptions but it sure is not all "inflation" related. A lot of it is handouts to the medical industry, litigation, etc. Oil has to do with demand from China and geopolitical concerns as well as peak oil, that price rise is not all due to inflation. Is some of it? Yes some of it is.
At any rate I digressed, certainly the treasury market does not sense inflation either. Finally you are looking at what happened. You are NOT looking ahead to actual expectations. We just had another hike and the affect of the first 5 have not been fully felt yet. IMO the FED is very near neutral on interest rates right now. The housing boom may continue or it may not.
I believe as does Heinz, that once we reverse (housing), the FED will NOT be able to put it back together again regardless of how low rates get, just like Japan.
Mish |
