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Pastimes : The Big Picture - Economics and Investing -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (628)	7/9/1999 4:49:00 AM
From: Sid Turtlman	Read Replies (1) \| Respond to of 686

tippet: Not counting mortgages for people buying new homes, the inclination to borrow additional money against residential real estate is partially a function of interest rates. Rising rates are reducing the number of people who will get any benefit from refinancing, and the current Grant's Interest Rate Observer has a clever article that talks about the future of interest rates and sheds light on the bubble psychology. Several weeks ago there was a mini-scandal about clients of day trading firms exceeding 50% margin rules by privately borrowing from each other's accounts. The going rate was 1/10th of 1% per day. Grant's points out that works out to 36.5% per year. It asks, why would anyone borrow at 36.5%? The obvious answer is, they expect returns of greater than that. So, generalize that. Yes, the current 6% t-bond rate seems high relative to inflation of things, as measured by the CPI, PPI, etc. But it is very low relative to the inflation of asset values, or at least people's expectations of growth in asset values. A lot of people think, if my stocks are destined to go up at 15% per year, why shouldn't I borrow at a rate lower than that? If my real estate is rising quickly too and I am assured of my job because the economy is booming, why not take some dough out and consume it, or borrow against the house to meet cash needs, rather than liquidate appreciating assets. So as long as the market continues strong, it is reasonable to expect interest rates to continue to rise, regardless of the inflation or deflation of things. But this is a obviously a setup for trouble - at some point the higher interest rates cut off demand for stock, end refinancing, and place too much of a burden on the budgets of those borrowing against their equity, regardless of how much equity they have. This would set up a weak economy, a weak stock market, and a reversal of the direction of the spiral, as people decide to dump declining stocks to pay down debts. As to when this gets underway, as usual, it beats me. But it will happen.