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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (17984)	3/1/2004 1:25:53 AM
From: Elroy Jetson	Read Replies (1) \| Respond to of 306849

During typical economic conditions, the current spread between short-term and long-term rates is very high. But I don't think current economic conditions are typical. Here is a chart comparing short-term Treasury Bill rates with long-term Treasury Bond rates from 1918 to 1998. (If you can post a chart bringing up current to today, I'd love to see it.) cpcug.org Compare short-term and long-term rates for 1931 (1% vs. 5.5%) or 1935 (0.25% vs. 3.85%). These spreads were quite extreme. Long-term rates later declined from 3.85% to 2.0% - but only after short-term rates had begun to rise. I expect a similar resolution to our current high rate spreads. But as Mark Twain suggested history doesn't repeat itself but it likes to rhyme. The rate history of the 1930's wasn't complicated by Japan and China purchasing massive quantities of dollars and using those dollars to purchase debt issues of various maturities. This introduces a significant political risk to trying to guess how the high rate spread will be resolved. I think we'll both agree that it's probably not possible to learn exactly what mix of time maturities China and Japan currently hold or are currently buying. But we know that they have previously purchased both GSE (Fannie and Freddie) and Treasury issues of various maturities. So the impact these buyers will have on the model of the 1930's experience is, in my estimation, pretty tough to game. On the other hand I am very convinced that the ultimate course of the U.S. Dollar is much lower. Because of the high internal debt load in America and rapid off-shoring, we don't have sufficient aggregate demand to provide a jobs recovery without a lower dollar.