patrick.net

No one who’s serious or respectable expects anything one could label “hyperinflation”. Some expect stiff inflation — something like maybe 10% per year. Hyperinflation is 1% per day.

Fed will raise rates to slow domestic, realized consumer inflation as in PCE. They don’t care about the dollar. The dollar is actually a very complex issue. In many ways a weakening dollar is tremendously advantageous for the US. It creates domestic jobs, increases exports, narrows trade and capital flow balances, reduces government debt burdens, and puts pressure on any country pegging to the dollar. Anyone who keeps their dollar pegs (to fight off losing their export-to-US cost advantage) is effectively taking inflation off our hands and eating it themselves. So, we don’t even pay the full cost of the inflation we create.

I completely agree and have been arguing this for some time. Those who believe that the Fed would actually tighten enough to allow (broad-based) deflation to take hold simply haven't been paying attention or considering this thing from a Washington D.C. risk/reward perspective. High (but not hyper) inflation is the path of least resistance to both Fed and the politicos it serves.

It's a safe bet they will continue to talk tough on inflation while doing precisely the opposite. How long it will continue keep our international rate & credit swap shell game going is anybody's guess though. Conor's scenario of successive waves of "raise-then-lower" rate cycles (but peaking lower on each successive cycle until you can no longer raise) sounds plausible.

With trends towards slowing jobs growth and indicators showing persistent inflation, stagflation seems to be the most likely outcome of all this. In my simplistic view of this, I wonder why the markets are so gleeful that the jobs numbers are tepid? So what if these numbers give the Fed an excuse to pause next week? The Fed is in a pickle no matter what they do. They can try to just "hold the course" and keep rates in this "neutral" zone, they can continue raising rates to beat the crap out of inflation expectations, or they can start lowering rates soon to rehash the lame attempt at "stimulating the economy." As I see it, at least for the myopic perspective on the housing market, none of this is very good. Raise rates more, and the hard landing scenario seems more and more likely. Keep rates in this "neutral" zone, stagflation persists, no one can afford anything as wages are flat and prices continue to go up. Lower rates, and inflation gets out of control. Pick your poison, BB!

Have you read The Misbehavior of Markets by Benoit Mandelbrot?

No. I have only read his book on his Fractal Geometry. Which was 15+ years ago, so I only remember a few things. Is it worth reading ?

MA,

When we pondered earlier what sector/asset class might be the new beneficiary of possible "rate reductions" I was hoping someone might have said, innovation?

There are still so many unresolved issues here and abroad that should demand our full attention and best efforts but as a country we seem to have abandoned innovation and are now perfectly content playing "round robin" from one established sector to the next.

*For those that have never played in a "round robin" tournament, no one is ever really eliminated, every team plays every one else at least once and in the end trophies are awarded to everyone for "participating".

Is this what we want?

No. I have only read his book on his Fractal Geometry. Which was 15+ years ago, so I only remember a few things. Is it worth reading ?

It is not bad.

HARM,

I too praise Conor's cyclical assesment. Why not? It's "worked" so far? The best part is that it keeps the California Real Estate Lottery System well intact. You lose? Better luck next cycle!

Peter,

I read Mandelbrot's book. It is a good one, though I think his central thesis can be stated fairly succinctly: Markets routinely and systematically underestimate the frequency and severity of "fat tail" cataclysmic events.

This is just one reason why I tend to discount the importance of mathematical modeling in finance. Every once in a while, a category 5 event occurs, which makes all of the models irrelevant. If there is a derivatives meltdown and/or severe and sudden dollar crash, I hope to avoid it.

The best part is that it keeps the California Real Estate Lottery System well intact. You lose? Better luck next cycle!

Have you watched The Island? Whoever wins the lottery gets to go to "the island".

A fat tail book I liked better is “Fooled by Randomness.”

I have two cats with fat tails. I do not need more reminders. :)

Michael,

I liked that one better too. Though it made me acutely aware that I am a fool for checking on my investments daily.

He’s second to Stephen Wolfram in self-love, however.

Wait, I rediscovered this cool little computer game called "Life". Eureka! It's a whole spanking new kind of science.

I am glad we are talking about what happens after Fed pauses. Hardly anyone else is doing that.

The Fed pause, this time or next time, is almost certain. It's boring to discuss that. So far, I am hearing a consensus being developed here towards -

1. Fed pauses, and most likely drops rates, in a year, or earlier.
2. That doesn't help RE prices anyways, but merely slows down the decline.
3. Short term inflation in stock prices and/or commodities
4. Longer term decline in US$
5. Consumer price inflation (actual, not voodoo) for the foreseeable future

If this plays out, there is systemic risk introduced. What happens to the "entitlement programs" as talked by US Treasury Sec ? Deficits of all sorts will increase. Will it lead to higher taxes or eventually the Fed will be forced to hike rates ?

There doesn't seem to be a way out. Unless some epoch making change happens (like Internet in the 90s) and productivity shoots up. But what if it doesn't ?

DinOR,

I am actually a optimistic about innovation for at least a few more cycles, which is effectively most or all of my lifetime. I'm a bit more cautiously optimistic that this will continue well into my children's and grandchildren's lifes as well.

There are indeed still a huge number of problems that need solving. Energy, medtech, biotech, agritech... Hell, even the tired old problem of software and IT hasn't been adequately solved yet. The number of people who believe their IT world is adequate and needs no further improvement please raise your hands. Why the hell does Windows get a little slower every freaking time I use it?

Wait, I rediscovered this cool little computer game called “Life”.

Is it an MMOG? :)

George Says:

I personally think the next bubble is going to be in gold.

Unless there's a sea change of attitude towards gold and ease of purchase/transaction, I don't see this happening on nearly the same scale as internet stocks, housing or even beanie babies. Your average sheeple just won't have the sophistication and access to gold markets to make this happen. This is, of course, unless people start buying decorative gold and jewellry. It may very well happen in with the investor crowd, though.

You mean people won't discover the GLD, SLV, DBC etc ?

Aaarghhhh. Why is my comment erased ?

StuckInBA Says:

If this plays out, there is systemic risk introduced.

If this scenario plays out, this administration, BB and Greenspan will go down in history as the ones who crippled the US economy for decades to come. I'd add to the above politicians caving in to the masses and introducing massive bailouts when FNM, FB's and their ilk beg for help. I'm also doubtful innovation will save the day in the long term. The US is losing ground to the rest of the world in training top-notch engineers, scientists, and the like. Moreover, as economic conditions become less favorable for business and innovation, and as India and China grow economically, the US will be less and less desirable a place for innovative minds to come and do their thing.

People may bubble up gold and other commodities through ETFs. They won't through the futures markets; and the goldbug "brokerages" aren't pervasive enough to capitalize on any rush to gold fast enough.

George may well be right, but I question the degree to which such a bubble can ultimately inflate. If the bubble is in futures it will abide by the laws of that market, which are brutal and ruthless, in which an individual investor is like a mark playing 3-card monte on the corner. Futures markets tend to correct bubbles pretty quickly, so don't blink.

If it bubbles up in ETFs then it will be self limiting as an irresistible target of arbitrage. In fact, how much of the GLD volume is already speculative hedge bets on a runnup? A lot of the new units being created in GLD are going straight to hedge funds. As soon as sheeple start buying in in significant numbers with a long-n-pray strategy, the HFs will start milking the cow.

If Vanguard et. al. start marketing gold or "golden" ETFs to people's 401ks, then the bubble could get pretty big. I'd like to think that someone would say "ahem" and put some regs into place if that started. Then again...

Randy H,

Well said. I get a little depressed watching all of the markets knee jerk reactions from one sector/bubble to the next. There are plenty of interesting, promising and worthy pursuits out there! Of course I don't have answer ONE! To think that gold will provide the next "thunder" is more depressing than I can handle. It's like we're working backward. Tech, houses, gold, what's next...... flints?

Tech, houses, gold, what’s next…… flints?

Ever see "Waterworld"????

Glen and tannebaum,

Both of you mention a possibility that is rarely seen here. Lower interest rates and lower house prices. We are so certain that we are different than Japan !

But you have a point. If the prices continue to drop, people won't have any equity to qualify for a refinance. The teaser rate, option ARM crowd is going to be in trouble. The rates may not drop enough for many 3/1 ARM holders as well.

So forget the rates. Just declining house prices can feed on itself.

Tech, houses, gold, what’s next…… flints?

Tulips fit in there somewhere.

skibum,

"The U.S is losing ground"

Well, that's kind of hard to argue with but I do feel that we still have a tremendous obligation to move things along. If India (or wherever) shows the most promising advances well then they should rightfully attract the investment capital! I'm O.K w/ whom ever gets it. I think my comments were more along the lines of coming up with real solutions (not necessarily the new "hot" thing for former daytraders and house flippers).

I think Skibum is right.

Long term, we got big problems.

If BB tries to stave off a dollar crash, he will trigger a recession. Even if the Fed tries to "reflate" this will exacerbate the fiscal crisis because SS benefits are inflation-indexed. You can only game the CPI numbers for so long...

But there are a lot of things that can happen to alleviate the pain. Randy makes a good point about potential for future productivity gains. Plus, we could cut a *huge* amount of fat out of our economy---we have enormous waste and inefficiency in education, healthcare and defense. The fiscal situation could be drastically improved with a more responsible administration. SS could be reformed. Healthcare and education could be streamlined. Unnecessary weapons programs could be cut. Ag subsidies could be eliminated. And on and on....

My fear, though, is that these kinds of changes may not be politically feasible. AARP, teachers unions, the military industrial complex, HMOs, etc. are pretty well entrenched and very tough to negotiate with. It will take some kind of major crisis, combined with decisive and intelligent leadership to address these issues... I'm agnostic on whether this will happen, but I'm definitely *not* optimistic. We are living in interesting times, I'm afraid.

Randy H,

I meant no disrepect to our good friends and brothers in arms at ITulip.com!

The US is losing ground to the rest of the world in training top-notch engineers, scientists, and the like. Moreover, as economic conditions become less favorable for business and innovation, and as India and China grow economically, the US will be less and less desirable a place for innovative minds to come and do their thing.

There's some sort bizarre assumption there that people care about the future. We're Americans damnit - planning for the future means some sort of communist centralized planning.

Besides, why do the boomers care? They're so self-centered that they even named the next generation after themselves!

See: Boomer Echo
http://www.cbsnews.com/stories/2004/10/01/60minutes/main646890.shtml

REUTERS UPDATE 6-Gold erases gains in US trade, silver holds firm [GGNYQGX]

LONDON/NEW YORK, Aug 4 (Reuters) - Gold shed early gains
and dipped into negative territory in the U.S. afternoon on
Friday, hit by pre-weekend speculative selling in more volatile
dealings.

...maybe the HFs are already starting the milking operations.

SHTF,

Just remember that TN has a very permissive (for the FB) BK and foreclosure environment, which probably raises the cost of buying.

And good luck and please let us know how the move turns out!

Besides, why do the boomers care? They’re so self-centered that they even named the next generation after themselves!

Did any of you see the WSJ article from 1-2 days ago re: the SEC chairman Cox assuring Boomers that a top priority for him will be ensuring that their assets remain intact? This is in the context of fears that as boomers retire and die, vast amounts of equity will be pulled from all asset classes (including stocks and housing), leading to a collapse in these markets. Indeed, we're in for very interesting times.

RE: boomers

Don't fight them. Join them.

Did any of you see the WSJ article from 1-2 days ago re: the SEC chairman Cox assuring Boomers that a top priority for him will be ensuring that their assets remain intact?

I wonder what he can do about that.

A top priority for me will be ensuring the happiness of every human beingsin the world. I just said nothing.

We haven’t seen how China performs in a recession.

China survived the failure of "Great Leap Forward" and the Cultural Revolution pretty much intact. A recession is absolutely nothing.

"We are so certain that we are different from Japan"

"We're Americans damnit"

"chairman Cox assuring boomers"

I believe that recent data would support that boomers have been net SELLERS of RE over the last several years? We aren't THAT different from Japan. No, we don't plan for the future and the good chairman can go on reassuring all he wants. Oh and in "Waterworld I believe that placed the highest value on soil, scraps of paper and "wee harems".

Relevant to this discussion, here's a link to the latest newsletter from PIMCO and Bill Gross. As a non-expert, I find his analysis usually spot-on.

http://tinyurl.com/eqbqx

Although the report is bond market-centric, he's also of the camp that the Fed is done and will start slashing rates in about 6 months, primarily based on historical analysis of Fed actions. The other interesting point he makes is about housing:

Recession/no recession is really a faux decision to be entertaining at bond market turning points. Any number of cyclical histories point toward bond market prices bottoming – and the Fed peaking – as the economy downshifts into second or first gear as opposed to breaking to a full stop.

We find that real house prices are pro-cyclical and tend to reach a maximum near business cycle peaks, often after a prolonged period of buoyant growth in activity has raised output above its potential level and inflation pressures have begun to emerge. Subsequently, real house prices fall for about five years and their previous run-up is largely reversed. Real GDP growth slows during the first year or so after house prices peak as do growth rates of private consumption and investment.

MA,

I really appreciate the "don't sweat the boomer factor" link. I've suspected this for the longest time but it's the first time I've seen it from a source the likes of the GAO! Good find. Now we can begin to be as disrespectful to boomers in public as we've been in private.

DinOR Says:

I believe that recent data would support that boomers have been net SELLERS of RE over the last several years?

That, combined with the GAO report MA linked to (whew, thank goodness! Now we can all stop worrying!) makes me even more alarmed about the future. The implication is that boomers are really counting on home equity to fund their retirement. What happens when they all start selling their McMansions and downsizing to some "active adult" community while prices are flat or declining?

Michael Anderson Says:

What more needs to be said? I think we can all look at those two numbers and see the asset dumping hypothesis is all wet.

It's hard to argue with that. Again, more bad news for boomers counting on their housing "nest egg."

What happens when they all start selling their McMansions and downsizing to some “active adult” community while prices are flat or declining?

Perhaps I should look to get a nicer 2/2 condo with an elevator instead.