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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: GST who wrote (39657)8/24/2005 11:02:15 PM
From: mishedlo  Read Replies (2) of 110194
 
As far as I can tell, Mish seems to think that interest rates are set by housing demand, rather than the other way around with interest rates having a strong impact on setting housing prices.

As best as I can tell you have not read a single thing I have ever said.

Interest rates are set by perceptions of inflation and inflation expectations. I think inflation looking forward, is not a problem and the market agrees. You can look at hindsight I am looking at what is coming.

I see that a housing collapse and a credit implosion will be deflationary events. Actually let me be more bold, a housing collapse WILL be a deflationary event.

Not only will it destroy mal-investments of capital it will cause an enormous loss of jobs as well as an enormous loss in purchasing power. Those are all deflationary. That is a fact. You can accept those facts or you can bury your head in the sand. I do not care. I do care, however, that you after all this time keep mistating my position and that gets me annoyed.

Now, some legitimate questions (off the top of my head) are
1) IF the US dollar falls out of bed will it more than compensate for the deflationary affect of a housing crash?
2) Will the Fed's attempt to fight deflation cause a bond market revolt?

Again my position should be clear but after all this I am sure it is not. As for #1, I say no, because the US is the consumer of last resort for now and demand worldwide will collapse, China will keep producing anyway to keep people employed and there will be mammoth overcapacity that more than compensates for a falling US$. As for #2, again I say no but fully understand as I have stated a zillion times there might be a spike up when the FED pauses and then again when the FED cuts but both (if they occur) will be short lived.

Your theory that interest rates are low because the economy is strong or perceived to be stong is quite simply preposterous.

Now all that said, can there be some sort of panic in the US$ that causes a sudden complete loss of faith in the US$ and totally soaring interest rates? Yes it is in fact possible. I do not think it is a high probablilty event. Should it occur, I hope I am smart enough to throw everything I have into US treasury calls because I do not think it will last.

Mish
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