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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: GST who wrote (39657)	8/24/2005 11:02:15 PM
From: mishedlo	Read Replies (2) \| Respond to 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

To: GST who wrote (39657)	8/24/2005 11:55:16 PM
From: CalculatedRisk	Read Replies (2) \| Respond to of 110194

Mish has already answered for himself, but I'll add this ... I believe there is a strong relationship between housing, the current account deficit and interest rates. When housing slows down (I don't think it will crash, at least not in the next year) mish and I go separate ways on interest rates: Mish thinks rates will fall, I think rates will rise - at least for a year or two. I wrote a short piece on this earlier this year: Housing and Trade: Virtuous Cycle about to Become Vicious? calculatedrisk.blogspot.com It will be interesting to see how it unfolds.

To: GST who wrote (39657)	8/25/2005 2:32:08 AM
From: John Vosilla	Respond to of 110194

"A shift in the risk premium for mortgage credit would have a crushing effect on real estate leading to a cascading of defaults and increasing risk spreads -- a vicious circle of defaults-repricing-defaults-repricing, large enough to cause currency risk to come into play adding more risk to foreign sources of mortgage credit." A similar event took place in the late 80's and early 90's though I believe there appears to be much less of a credit spread this time. And don't underestimate the fudging of the numbers to make the deals work for the equity investors either. At least back then the cap rates and interest rates were much higher than today and fairly consistent with each other in every property type. Today is is not the case with residential being mispriced to dotcom levels and little in the way of lower interest rates possible in the future to bail anybody out of overly optimistic projections..