patrick.net

The Fed is desperate to get inflation going again. The best way it knows how to do this is by putting $400 in the average American mortgage holder via 3.75% refinancings.

Either income goes up, or prices come down.

From Yahoo Finance :

After helping corporations issue over $1 trillion of debt a record-low yields, the Fed is now turning its attention to consumers' balance sheets, says John Lekas, senior portfolio manager at Leader Capital where he runs the Leader Short-Term Bond Fund.

"They're going to continue to buy" Treasuries until the yield on the 30-year bond hits 2.75%, Lekas predicts. That, in turn, will drive 30-year fixed rate mortgages to around 3.75%, which "reloads the consumer with a 30-year stream of income," he says, estimating savings of about $400 per month for the average U.S. household.

Of course, you have to be able to get a refi, but "they're setting this thing up to get the consumer refinanced, it is a critical piece of the puzzle," he says.

The bad news is Lekas' believes this "huge wave of refinancings" will be preceded by severe deflationary pressures that will batter the economy and financial markets. Among his dire predictions:

-- The Dow will fall to 4200 by the middle of 2011.
-- The VIX will rise back into the 80-90 range.
-- The "real" unemployment rate (U6) will hit 24%.
-- Housing prices will fall another 20%
"It's all about GDP," he says. "Either incomes go up or prices go down. We're going to see a lot lower prices."

Lekas attributes the stock market's robust September rally to short covering and the "reflation" in commodity pries, which he (naturally) expects to end soon.

"We'd be taking this opportunity to get off here and move into the credit markets," the bond fund manager says. "You're taking excessive risk in the equity market."

#housing