patrick.net

On the other hand, volatility is cheap. Looks like VIX is at a very low point:

http://finance.yahoo.com/q/bc?s=%5EVIX&t=my

Do you guys think it is better to trade price or volatility at this turning point?

Fake P, I have been receiving those for a while. I usually try to take advantage of them. Buying yuan is not a bad idea at all because the downside is quite limited. Be careful about possible scams though.

"There is something quite Darwinian about this whole process.. isn’t there?"

Absolutely. I am not saying that I like this at all. But we are all in the game already and we must play to win.

:|

Scott, we can have asset deflation and commodity inflation at the same time. If prices for consumables go up without wage increases, real wage will actually plummet. We are competiting with emerging markets for both jobs and commodities. It is not difficult to see how this can happen. Globalization will redistribute wealth. Position yourselves accordingly.

I am not too sure about gold, but oil price can go up because of a reduction in supply even if economic growth slows (Hubbert's peak?). I am doing some research on grains. We need to eat and animals that we eat need to eat too. :)

I think the demand for grains will be less growth-dependent than the demand for timber and steel.

"Does anyone here want to admit that buying a house and taking out a big 30 year fixed loan to finance it might just be the best strategy in an inflationary scenario?"

Er... the government is actually flooding the market with *debt*. The hyper-inflation scenario is possible only if the government monetizes debt in large scale. This is realistic only as a reaction to massive debt deflation.

I firmly believe in the deflation scenario. Whether there will be "inflation" in commodity prices is definitely up for discussion.

Buying a house is a good hedge against wage inflation and debt inflation. Both unlikely scenarios going forward, right?

A sudden thought:

The housing bubble marks the end of debt inflation as buyers exhaust their income to participate in the debt exposure. With globalization exerting pressure on real wage growth, the giant credit bubble will burst and debt deflation will follow.

"Peter - Can you explain debt inflation vs debt deflation?"

One concept is that debt and asset value have mutual effect on each other.

Debt inflation occurs when asset values is rising, the increase in collateral values invites and allows more debt to chase after assets, which causes asset values to go up even higher.

Debt deflation is the reverse process. (The term was actually coined by Irving "High Plateau" Fisher.)

Jack, we need to first identify where inflation will occur. Without wage growth, all-out inflation is unlikely.

"If fixed interest rates go lower than 5 per cent, then what?"

Then it is a true indication of possible deflation. As we have discussed many time, fixed rate is having decreasing effect on the housing bubble because of the reliance on creative financing (Option ARM is already at 1.75%).

Djuro, do you at least agree with the deflation scenario?

I honestly do not know what will happen if the governement prints money massively in this scenario. Hyper-inflation is a possibility. It really depends on how they choose to inject liquidity. Lowering interest rate will not have the same result as paying bills with printed money.

hymie, how about renting a nice condo in the same area? I am sorry, but the debt-to-income ratio is crazy by any standard.

But this is a joke, right? :)

You almost got me.

Jack, lower FRM rates will be great for existing FRM holders (like you and Fake P) because it means lower payment after refinance. It is irrelevant to new buyers and speculators who stretch to get into homes.

"So you are saying that at NO point, substantially lower fixed rate mortgages would ever be a factor in softening the impact of the housing bubble? I do not agree."

It would have helped years ago when fixed mortgage was the popular choice. The impact of the housing bubble is mostly due to falling asset value AND tightening of credit because of lower collateral value.

"With all the bad press that IO is getting, and YOUR predicted softening of the market on our doorstep, many people will re-fi to protect themselves."

People resort to creative financing for affordability reasons. Some will refinance to fixed-rate, but most will not refinance to a much higher cost structure.

"You seem use the bubble as a given when talking about a lower interest rate scenario, but then deny that a soft landing could occurr in that same scenario."

Name one instance of soft landing among various credit boom/bust cycles in our history.

Scott, fixed mortgage rate is different because the borrower can refinance without prepayment penalty. This option-like property (similar to that in callable bonds) prevents FRM rate from dropping below ARM rate.

Or perhaps I am wrong. Anyone?

Scott, I would assume that a retiree would build a ladder of bonds with different maturity in order to match his monetary needs. This will lessen the effect on a particular maturity. I don't know.

Jack, the 1980's boom ended in a hard landing for much of the country. Question: did the Bay Area have more growth in rent than other areas over that boom?

"I have no idea how bay area rents behaved relative to the rest of the country during the mid to late 80’s boom. Sorry."

Places with high rental growth rate will weather busts better than others. I am just speculating. :)

Is it just me or the BA inventory is having a leap today. (Much more than other recent Fridays)

"Better give your speculator friends the heads up!"

Their heads are so too buried in sand and nothing I say will help anymore. Oh well, time will inevitably tell.

Anyone has experience in trading GSCI (Goldman Sachs Commodities Index)? I heard that it is quite heavy on energy.

This may not be a bad way to trade a basket of commodities but I am worried about liquidity though. (The CRB index is practically worthless as a trading vehicle)

Escape from DC, welcome back!

Lies can only go so far. It will not be long before reality asserts itself firmly over fairy tales.

The original article is CNN here . . .http://money.cnn.com/2005/06/24/news/economy/newhome_sales.reut/index.htm
And no, they didn't provide the methodology for the adjustment.

Yep,

100 + 27.3 = 127.3

127.3*.755=96.1, so the net loss is about 4% over the two months.

Boy, if you're in the Northeast and you see the number dive that much in one month, you've got to be thinking, Huh??? Again, I recall reading that 75% of high school seniors couldn't pick out the U.S. on a globe with no labels, so they probably are alright hoping that most people in the NE can't figure out the math.

T. Boone Pickens is big in the alt fuel/natural gas industry now so it is in his interest to say oil will be $120. When I worked for the City of LA, we hired his company to build us a natural gas refueling station. Not that he's necesarily wrong, but he is biased at least.

ptiemann, I do see something weird going on. Some homes are getting multiple bids and are going fast. Some homes are just sitting and are reducing prices. Some homes are back on the market.

On the other hand, the subset on the MLS that I monitor grew quite a bit just over the last week.

I suspect that something fishy is going on here...

BTW, has your gf sold her current place yet?

Forgive Surfer-X. :)

The alternative fuel debate is comical. There's so little science involved.

People get hysterical and want to talk about wind power and tide power and solar.

IMO, there is only one realistic energy source that will last through the next several centuries - dirty uranium. Hopefully within 300 years somebody will master cold fusion.

The best one yet is the "hydrogen car" theory. Not only do we all get to drive Uber-Pintos with H2 bombs strapped to our asses, but they're planning on generating the H2 by, get this, stripping petroleum products. So we pollute at the H2 production plant, not in the streets, and we end up using just as much oil. Great for Chevron.

Here's a thought - generate the H2 from uranium. The only pollution that you need to worry about then is the spent uranium. Granted, a significant issue, but certainly within the scope of science to corral.

"I also suspect that some fools do buy at these ridiculous prices."

Great fools will even overbid 100K on top on these already ridiculous prices. :)

Higher median prices with lower volumes is in line with this theory.

Escape from DC, alternative energy will upset a lot of oil and gas interests just like a potential AIDS vacine will upset companies that sell expensive cocktail drugs. Totally disgusting.

I think we are perhaps seeing the beginning of a secular crude oil bull market. However, I am tempted to short oil near 60 for a probable counter-trend retreat as it failed breaching 60 repeatedly. Any thought?

Matt Walsh, to capture a minor trend, futures/options will be the way to go. For a secular trend, you may be able to trade oil companies that are valued in your favor.

Honestly, I have not traded oil before. (I have traded interest rate before but I have to admit that I still have the fear to pull the trigger)

News and Netrugu probably have a lot of experience on this.

I do feel that commodities will offer more opportunities than equities and real estates in the near future. I will probably start trading again.

The single most important thing in trading is risk adversion. The focus is to avoid loss. This is all I can say. I am in search of a mentor myself.

(Futures trading is very risky and losses can easily exceed initial investment. It is not for eveyone. Not investment advice.)

P - I have my economic game plan, and I've started to fully implement it.

With regard to oil, which is not part of my game plan, I think your prediction is tight.

I think that there are very many powerful interests who do not want to see oil keep spiking. Spiking oil is very very bad for the U.S. economy for many reasons, the most obvious two being 1) shakes stock investor confidence and 2) creates real inflation and lowers standard of living. I see the powers that be pulling out everything to suppress oil prices. I see the economic reality winning out, and oil continuing its climb. I think 80 by this time next year is a very supportable conclusion. I think a few months tapering back down to mid 50s is also very supportable. But I don't think there is any chance oil stays down.

SurferX you are like Eminem. After about the 1,000th "fuck," the word is pretty much the same as "the".

As in, I'm so theing tired of reading your theing rants, because they aren't worth a the, and whatever charm they added to these threads two months ago got theed like a theing theer.

So the off.

What are MREs? Is that food?

theing A! Yes, I often don't sleep. The. The problem is, I have way too much on my theing mind. I wish I just didn't give a the. Then, life would be easy. I could play X-box 10 hours a day and watch my kids the-up in school. I could blame the school and squeel that the Governement shoudl do more for my kids. Theing governement never does enough. I wish I didn't care about other people. I wish I could watch them hang themselves and laugh and think, "what the the!"
But unfortunately our Creator has given me both sense and conscience, and I am obliged to apply both.

The.

SIM, I believe we talked about this particular hedging product in this blog before. It may come into existence just in time to mark the climax top of the housing market!

I have said earlier that the market maker of this contract will have trouble managing risks. If you are long the contracts, do you short the housing market to hedge (HAHAHAHA)? If you are short the contracts, do you buy homes to balance (and manage those properties too)? Are we going to rely on more derivatives or delta hedging (remember 1987)? Are we going to rely on speculators (more instability)?

It may help homeowners or insurance companies to shift risks, but it will also allow investors to speculate on home prices without buying homes! This is very significant as it breaks the feedback look between prices and price appreciation.

I will await the arrival of this contract. I suspect that it will spike and then crash. Trade accordingly.

Let me add that excess liquidity and money creations are mostly caused by the FED.

Economics textbooks offers better explanations of inflation. However, I doubt that they will talk about asset bubbles.

Most economists live in the fantasy land where the market is always right and perfectly efficient. The very existence of bubbles is in conflict with these views.

You may want to read the works of Joseph Stiglitz (2001 Nobel). He has a lot of regarding the role of "asymmetric information" in the market and can offer some insight.

But where is the money utimately created?

If the pool of money is fixed then there will be no inflation, right?