patrick.net

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?

SIM, let me read more about the specifics of the contracts. I doubt that they can have a contract for each home because the contract needs to be somewhat standard for it to be traded on the exchange and to have liquidity at all.

To return to the main thread subject...

I've been wondering about wither we go - inflation or deflation. I strongly suspect it'll be the latter.

Why? Well, we can be sure the feds will be forced to monetize the debt once the bottom falls out of the dollar. And while that will be inflationary, along with the oil shock that's certainly coming, I don't think it's enough to drive inflation against the other two main forces - the stall, then collapse of the housing market, and the fall of the stock market. The housing market fall has been discussed here. The stock market fall can be easily demonstrated with one thought experiment - what happens when the boomers cash out their 401k's? Their shift to bonds in preparation for retirement has certainly moved that market of late.

Additionally, wages won't grow, due to competative pressures from China & India. Can't get real inflation w/o *some* wage growth.

So, for investment opportunities, what have we got? All I see is gold and asian-denominated bonds. Anyone see any others?

Two things:

(1) I do not think that I am particularly insightful. I am learning a lot here just by throwing around ideas.

(2) Our discussion is meaningful only if we approach the problem with the intention of taking positive actions.

Looks like th MACRO contract will be on some housing indice. This will be of limited value to homeowners because individual home prices do not track a index perfectly. In fact, half of the homes are sold for less than the median price (Duh). Also, additional tracking error may come from the fact that in a down market, there is little liquidity for homes.

On the other hand, I can see that insurance companies can write equity protection policies using these instruments.

Potential buyers can use Up-Macro to "protect" themselves from panic buying.

One interest thing is that Robert Shiller is a co-founder of this. If this is done right, the introduction of the contract can induce a healthier market. I still see it as a misguided attempts and there are lots of caveats (real trading opportunities).

Patrick,

On craigslist today:

http://www.craigslist.com/eby/rfs/81075446.html

BayQT~

"If the CBOE would exer get the VIX offered, there’s a real volitile instrument. Imagine trading the volitility of the markets."

TWIT, there are currently many ways to trade volatility.

To buy volatility, one can go long a straddle/strangle or implement a calendar spread. Or even a ratio-spread if you want a directional component. A good options simulator is really helpful.

SPY options look reasonably liquid. I have not been trading options for the over a year now. Do people still trade OEX?

Oil breached 60.00 soon after opening and is currently trading at 60.37!

We may be seeing a major breakout if it closes above 60.

Oil above 60 in the same week as the FOMC meeting. Hmm....

TWIT, there is also the VX futures for the VIX index.

Jack, saying that low interest rate will keep housing prices high follows the same line of logic as asying that low rent will keep housing prices low.

Fake P, if low rent makes it harder for people to buy a house, won't it keep housing prices low as I said?

BTW, you may be able to refinance into a better 30-yr fixed rate, but I think yours is already very good (4.5%).

Jack, it is not all about the payment. Both interest rate and rent are part of the fundamentals. Price movements are dictated by changes in the fundamentals or expectations among market participants.

If low interest rates are to stay, the bubble bust may be deferred but this does not mean that prices can just stagnate.

If I read him correctly, TWIT was describing a conundrum. As we all know, conundrums get resolved eventually, either by intervention or by market forces.

As I said earlier, the current price implies a large speculative premium, which is based on the expectation of high appreciation. A stagnant market will remove this speculative premium and is not probable state.

Oil is retracing some of the recent gains, just ahead of FOMC.

Of course oil will return. It may hit some resistence at 90 though. It is widely acknowledged that 90 (inflation adjusted) is the all time high.

Home prices have reached what looks like a permanently high plateau.

It is a totally new paradigm. It is different this time. There is no irrational exuberance; we are seeing a productivity miracle.

Indeed, housing wil not crash, it’s stationary.

Remember the SoCal landslide? Homes can and do crash although they are stationary most of the time.

Did you mention "economy improvement news"?

Why would they report anything that does not "improve" the economy?

Economists are optimists. Do you expect them to say that the sky is falling? That would be politically infeasible.

If I were you, I would observe the behavior of traders. Lower long-term bond yield is not part of a conundrum. It simply says that the market is predicting a recession.

Jack/Hannah, do not feel that you must disagree with us for a peace of mind. Unless you are over-leveragized everything will be just fine. Enjoy your house and ride out the correction!