patrick.net

I am not finding a way to justify inflation. Inflation, for now, is tame.

Yeah, right inflation is tame. Let's see, the Fed likes CPE and core CPI, both cooked to such an extent that they exclude the things everyday people use the most - food, energy, and (at least regarding its impact on daily budgeting) purchased housing. Just ask yourself a common-sense question: does my current paycheck go as far as it did X years ago? For most Americans, the answer is clearly no.

Once again, today patrick.net community members lost ... go buy a house now. Are there any other options??

One thing is for sure ... I am not voting for Democrats in 2008 ... they will surely lower interest rate more and provide housing assistance to speculators.

TIPS - inflation adjusted treasuries

inflation - you get your 3% (or whatever the going rate is) on top of inflation
deflation - you only get 3%, but your money got more valuable on top of that so who cares

ok, so it's not dramatic, but can anyone tell me where the risk is here?
other than the govt understating inflation, that is

I find it very interesting that people can think that lowering the cost of a fundamental element of their cost of living is bad for them. It reminds me of the people who think that a higher mortgage rate is good because they get a bigger tax deduction, while not realizing that the tax benefit is only a fraction of the increased cost.

skibum, If X is less than 10 you are correct. However, the purchasing power of the average american and most americans has steadily risen over the 60+ years. Compared to 30 years ago the improvement is great. But compared to 1999 most people have lost a few percent of real purchasing power.

Our "external debt" is about $10 trillion.

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

So when the dollar loses 1%, that's $100 billion lost by our creditors. I did exaggerate. $100 billion is nothing, right? I'll update the post.

Wondersalve, TIPS are a good safehaven for your money. However, after taxes you will make little or no money. No loss but no real gain either. That's OK for a parking place when you are having trouble sleeping at night.

Long term you need to be in something that beats inflation by more than a mere 2 or 3%. Normally, that would be stocks and real estate. But it is too early to buy real estate, and stocks are a tricky bet right now.

>> $100 billion is nothing

Yes it is nothing compared to the mess that Alan Greenspan created ...

>> But it is too early to buy real estate, and stocks are a tricky bet right now.

How about international stocks like Peter Schiff europac.net?

TIPS is only based on government cooked statistics. There is no risk if you are just in it for 2-3 years, fine, you lose 3-5% each year depending on what the real inflation is and how well they can understate. For the long term, we all know the power of interest rate difference, compounded.

May I remind those who have lost hope in the situation the experience of Japan. Japan literally dropped their interest rate to the floor, anywhere between 2001 and 2006, you could buy a home on an ARM of 1-2%. What happened to their housing price?

If dropping rate (printing money) alone can save the economy, recession as a word should have ceased to exist for a long time. Fed's action will prove effective in one aspect only, trashing the dollar.

not sure if alan greenspan is entirely to blame. easy credit banksters, MBs, REI hacks, mom and pop specuvestors, etc all had a hand in it, as that recently linked blame game article pointed out... altho if you dangle low interest rates in front of the mob, what do you expect??? maybe he WAS to blame, doesn't he understand capitalism by now? jeez...

In fact, the 10 year Treasury rate went up today, so they will now earn (slightly) more interest on new bond purchases.

I wonder how that is going to affect home sales.

Interest rate policy is like a leash on a dog. You can hold the dog back with a restrictive/tight leash, but letting the leash loose will not cause the dog to run unless the tight leash was the only constraint. If the dog wants to be lazy a loose leash will not change that.

You can't push a string.

So dropping interest rates will help the economy if the rates restrictive to the economy (as they have been for almost two years now). And lowering the rates below the balance point just fuels inflation, as we saw when Greenspan lowered the Fed funds target to 1%.

DS,

what do you think is going to happen to Oz Reserve Bank's Nov meeting? Rate cut? I was actually very surprised that you guys came through with a rate hike in August to 6.5%.

Greenspan understood that a 1% rate would cause a bubble. But he was trying to prevent a deflationary spiral at the time. Deflation was a lower probability outcome but a disaster if it occurred. He figured he could deal with the bubble, but not with a deflationary spiral.

I have a question based on the following scenario. Assume that only 10 % of the 60 billion of mortgages that due this October First (Deustche bank stats), what will happen to the stock market when these people (most of whom, have never saved a dime in their lives) fail to make their October payment. Will the FHA bail them out even though the bill is due Oct 1, and the FHA has no clue at this time. In other words how many months will these 2/28 sub prime borrowers be given to catch up?

Second problem. What do you think will happen to the prices of SFR? The Realtards hate any drop in house prices, the LO's and mortgage companies need every dime of profit because of the lower sales, so they ALL want the housing prices to skyrocket again. The lowest FED rate was in 2004, if Jim Cramer gets his way and the FED drops .50 percent at least three more times. WHAT THE HECK WILL HAPPEN?? It seems to me, we will be exactly where we were in 2004 when the 2/28's were invented as a way to keep the bubble getting bigger. But this time we won't have 2/28's we will have FHA playing games with JUMBO LOANS. I need some guidance on this. It looks very bad.

Can anyone help me understand this?

Zephyr said:

"If we do the math we see that a one half percent reduction in the value of the dollar reduces the value of their holdings by about $5 billion."

But you know, better than most, Zephyr that today's drop in the dollar isn't the whole story.

Once upon a time (early 80's), the dollar was over 160. Six years ago, it was 120. In 2005 it was 92. Today it's 79.2 and falling. And what's the all-time low? 78.something? Right?

So, the fall in the dollar means something to us as well as the Chinese. It's not an insignificant issue. How big of an issue it becomes is anyone's guess, but it is cause for concern.

floordog,

let me borrow some wisdom from history, recent history.

Here is the interest rate of BOJ upon which the Japanese mortgage rate is based. Just for convenience sake, add 1.5%-1.75% on top to arrive at the mortgage rate. It is in English and numbers so you don't need to understand Japanese to read.
http://www.economagic.com/em-cgi/data.exe/bjap/ehdis01

According to BW, "Japan's savings rate topped 20% of household income in the mid-1970s and clocked 14% as recently as the start of the 1990s. It is now no higher than 7%." Unlike the US, Japan's household savings rate never went below 0. We've been negative since 2001.

So, what do you think is going to happen?

OO Says:
DS,
what do you think is going to happen to Oz Reserve Bank’s Nov meeting? Rate cut? I was actually very surprised that you guys came through with a rate hike in August to 6.5%.

yeah, there was a 0.25% hike again, to stem 'inflation', with talk of another rise in nov. now the US subprime industry is collapsing with its flow-on effects around the world, plus northern rock in UK etc, there is less likelihood of another rise in nov, but whether they will reduce it is another matter. it will be interesting to see if Oz goes with US rates or contrary to them, in fact, depending on local conditions and the mood of the Reserve. (it's possible that you can't buck international rates trends for long due to the effect of carry trade, etc, that's beyond my ken)

Zephyr Says:
The dollar is down… And some think this is bad… now our goods will be more competitive overseas, and foreign goods will be less competitive here. So our trade deficit will decline and our employment will rise.

I think you missed the point here - at the moment, I am far less concerned (to put it mildly and politely) about the effect on trade balance.

My immediate and primary concern is to maintain the purchasing power of my own savings - if Bernanke and the "F'ed" are not going to act in support of the value of the dollar, I no longer wish to entrust my savings to that currency. I would rather keep it in a vehicle that isn't being driven off a cliff.

When those fuckers get serious about their responsibility to the dollar, I will reconsider. Until then, fuck 'em.

SP

And now this stinking pile of bullcrap from Reuters...
"Stocks soar as Fed makes bold rate decision By Caroline Valetkevitch"

Caroline, you ignorant slut, how about calling it "Your dollars sink as F'ed makes irresponsible rate decision"?

SP

SP,

Your purchasing power for foreign goods did just decline by one half of one percent (not a very big cliff). However, the effects on the economy and employment should strengthen peoples’ earning power. So you should come out ahead in the deal with time.

Another point I forgot to add is, when BOJ was cutting rate, Japan was genuinely sliding into deflation, which means, a bowl of ramen that was sold for 1000 yen in 1991 went for 700 yen in 1999. I went to Japan every other year so I kept myself quite abreast of the cost of living.

Today, we are in fact in an inflationary environment. Food, energy, medical, housing, everything essential to our living is going up, some more some less. Cutting rate in an inflationary environment is not going to help housing, because increasing cost of indispensables like food, energy, medicine etc. will make the portion of monthly pay left for paying mortgage smaller and smaller. Buying a house is optional, eating and driving to work are not.

Realtor-now,

I assume your reference to the exchange value of the dollar is to the Euro, and to the basket index of European currencies that was used as a reference measure before the creation of the Euro.

The Euro was created in 1999 (I believe it started at par to the dollar). It initially declined in value relative to the dollar (as I recall it fell to about $0.80 per Euro). I felt that the decline was just a temporary pessimistic resistance to a new currency. At that point, I expected the Euro would rise in relative value as it gained acceptance and an ever increasing share of global reserve currency status. The Euro is currently at about the same dollar value as the basket of European currencies held in 1995, a few years before the creation of the Euro. So in 12 years the total change is minimal.

I am not saying that the dollar decline is an insignificant issue. I am saying that the effect from today’s activity is an insignificant change in value. Of course, as I said before, the dollar could decline further or it could strengthen. It will likely do both over time, as it has before.

The recent decline could be cause for concern… or it could be cause for celebration, as the weaker dollar strengthens our domestic employment.

Like many things, how you interpret a change depends upon your perspective and your time horizons.

Zephyr Says:
SP, Your purchasing power for foreign goods did just decline by one half of one percent (not a very big cliff). However, the effects on the economy and employment should strengthen peoples’ earning power. So you should come out ahead in the deal with time.

No, thank you. The dollar may have dropped only 0.5% _tonight_ - but it has lost a lot more over the last five years. That is the cliff I am talking about.

It is funny you talk about 'earning power' - what the fuck is that good for if you are earning in toilet-paper currency that is backed by nothing more than the empty promises of a bunch of ponzi-dealing crooks?

Even so, it is far better to "earn" whatever I can in US Dollars Pesos, cover my living expenses and transfer all surplus to some other real store of value. When I need to actually consume something, I can:
1. buy it using non-USD savings
2. borrow long-term in USD debt and pay it back in steadily devalued USD
3. convert just enough into USD to buy whatever

Give me one good reason (besides convenience) why leaving the bulk of my long-term savings in dollars is a better strategy?

SP

Anybody know an easy way to follow what ECB and BOJ are doing? I expect them to already be in cahoots with the F'ed - so my hunch is one or more of the following:

1. Aggressively buy treasuries to prevent a dollar slide
2. Drop rates to push the dollar up against Euro and Yen
3. Sell gold reserves to slow down the rise of gold

I just want to see what they do, but don't know where I can get a reliable report on this kind of thing. I expect pretty much all fiat currencies will attempt to devalue to some extent.

SP

I hated "troll" am here to give a better alternative:

Siberia... economy based on oil, all the land you could want, and the women... Met I siberian girl the other day, and I may have to re think this studying mandarin and thai busines..

I heard they have a little snow or something, but I will have to trust in global warming in the long term and vodka and babushkas in the short term...

Dasvidania komrades!

SP,

I am not saying you should keep your money in dollars. But keep in mind that there is little reason to have greater faith in other currencies over time either.

You should put your money where you think you will get the most benefit. That is certainly what I do with mine. My 25+ year average annual compound rate of return on invested equity has been about 26% after tax. I have been very happy with that.

Good luck to you.

I am mixed about the drop in the dollar. I work in manufacturing (my god, he actually MAKES things?) and I am saddled with major student debt so inflation may make my life a bit easier. On the other hand, since salaries tend to move up slower than commodities it means I'm going to be paying more for everything else in life for a while to come.

Manufacturing will initially take a hard hit as the economy contracts. As things stabilize I anticipate domestic manufacturing will be able to recoup some work from offshore competitors. However, American management needs to get over themselves before anything serious gets going.

Patrick,

It is true that a 1% decline in the dollar would equate to a loss of $100 billion in value on our total debt if converted to foreign currency. Of this Japan and China would have about $10 billion.

Of course, the dollar has been declining for six years vs the Euro (after rising by the same pace during the preceding six years). So why would Japan and China suddenly get excited now?

But the real point is that there are more variables to consider. For example, foreigners hold only a small portion of our total federal debt. About 75% is owed to US citizens and US governmental agencies. Also, one must consider what the next best alternative is for Japan and China. I can assure you that they need our market to sell their goods more than we need to buy those goods. And we benefit from their really cheap financing (measured in Euros they are actually losing money by lending to us, and they have been for about six years).

And in any case the US government is having no trouble selling its bonds.

Zephyr :

Interesting points, as always. I am not as pissed off as others are about the US$ decline. As long as Indian and Chinese currencies appreciate, I will swallow the decline of US$. Because outsourcing becomes less attractive.

Unfortunately, the Indian and Chinese governments may not play along. They won't like the depreciating USD either. They along with other central banks MAY try to devalue their own currency to at lest partially offset the slide in US$. That can lead to global inflationary spiral.

As SP mentioned the slide did not start today. Still happened today is not at all insignificant as you say. IMO, it's exactly the opposite.

Today's event have the possibility to become one major event. We sent out a signal today. In a big way. Some economist/journalists are arguing it was bold. I think it's signaling a complete surrender. Everyone will have their interpretation.

I am very fascinated by the game theory aspects of such moves. Hence today was anything but insignificant.

SP,

Hindsight is 20/20. Still looking back it is now obvious why the commodity bull has been running so strong. The same question that you are asking - a real store of value - people found in commodities. Gold soaring above 70 and oil going over 80 becomes a headline news. But the uptrend started long ago. I don't know why but it coincides with certain rate cuts that happened a few years ago. Must be a random coincidence.

Housing must have been a good store of value for those rare folks who purchased using a serviceable loan with low fixed rate mortgage.

Fiat currency of another government is fundamentally no different. There is no reason to believe that other central bankers are better than ours.

So the real question to me is, are we late to that party. Given that housing is toast, does the commodity bull have any more room to run ? I have a significant portion of my portfolio in commodities already. I am hedging it now with covered calls.

I am betting that pure growth stocks - in US - will do better going forward. Especially those who earn significant revenue from exports. Many technology stocks fit that bill. I am long on QQQQ.

NOT ANY SORT OF FINANCIAL / INVESTMENT ADVICE

stuckinba: i like your thinking... I still believe the usa has an edge on efficiency, technology, legality, and a system that rewards entrepenuers and risk takers, better than anywhere else in the world... As the crash deepens in housing, all will seem doom and gloom, but behind the scenes and ureported the seeds of the rebirth of the american economy will be planted. Heck, we burned down and blew up almost all of japan, and they roared back a few decades later, am I really to believe a housing bubble and some currency issues will stop the USA long term? I think not.

Even so, it is far better to “earn” whatever I can in US Pesos, cover my living expenses and transfer all surplus to some other real store of value. When I need to actually consume something, I can:
1. buy it using non-USD savings
2. borrow long-term in USD debt and pay it back in steadily devalued USD
3. convert just enough into USD to buy whatever

This is exactly what I have been doing ever since Bush was elected. I recommended this back in 2003 when I first started posting to this blog. I see no reason to change this strategy.

BTW, anyone still wants to praise Bernanke ? Do it now before he announces another rate cut ;-)

We won't know how Bernanke is doing for at least another six months. If he can keep us out of a recession without sparking off inflation, then he is a genius in my book.

Jimbo said:
This is exactly what I have been doing ever since Bush was elected. I recommended this back in 2003 when I first started posting to this blog.

What do you convert your USD to?

@zephyr and others, thanks again for putting up with my ranting. If I seemed livid, it was because I felt that today's slide (0.5% in 21 minutes) was not insignificant - and I had not been smart enough to diversify out of USD sufficiently because I did not believe the Fed was going to abandon the dollar so wantonly.

SP

i got something wrong on the TIPS, i think. I said:

"inflation - you get your 3% (or whatever the going rate is) on top of inflation
deflation - you only get 3%, but your money got more valuable on top of that so who cares"

in the deflationary case, i think you can actually you can go to a 0% return if the CPI justifies it (goes quite negative), but you will never lose your principal.

yes, TIPS are not where you want to be long term. but when the economy feels on the verge of something big giving way, and you don't know whether it will end up being inflationary or deflationary or both, you can do a lot worse than parking in TIPS.