The Fed’s New Conundrum: Slowing Housing

Yesterday’ 1/4 point rate hike was no surprise . . . but the thought processes behind it may be. Consider the conundrum left to Ben Bernanke by his predecessor, Alan Greenspan.

Post market crash, recession, 9/11, and Iraq War, this was a flatlined economy. Anytime a major market takes a 78% whackage, huge swaths of capital gets destroyed. The Fed’s response to this was to slash interest rates to half century lows.

The initial results of this were somewhat predictable: the Housing sector accelerated and the global economy reflated. Back in December 2002 I mentioned that investors might want to watch gold due to the inflationary potential of these ultra-low rates. (Not quite the table pounding of last year, but quite timely).

At the same time, China began building out its infrastructure in anticipation of its Olympic hosting duties. Concurrent to this was the enromosu boom in direct China investment by Western companies, all seeking to dramatically lower their costs.

Technology companies may not be the benficiaries of this — at least not their stock prices. The subsequent economic expansion was atypical and lumpy, unevenly distributed. Leadership came from Housing, Materials, Energy, Industrials and Transports — not your typical bull market leaders. Noticably missing were Technology and Financials. How’s this duality: Job creation was amongst the worst on record, yet profits are at the top of historical ranges. Housing drove employment, consumer spending, and sentiment.

Then there was inflation. Despite the tortured gyrations that the BLS and Fed goes through, only the most myopic or clueless economists continue to deny the robust price increases across industrial metals, health care, housing, energy, precious metals, insurance, food, education, transportation. Indeed, the only place inflation has been well contained has been wages. 

Since August 2005, we described what we saw as the cooling beginning in Real Estate. Yet despite this slowing, and its eventual impact on consumer spending, the same inflation pressures remain, mostly due to Globalisation and demand from Asia

Hence, the conundrum. The Fed cannot risk allowing very apparent commodity inflation pressures to continue to rise unabated; at the same time, the end of the housing rally is clearly in site.

This is the conundrum that led IMO, to the "Pause" line of thinking.


So where does that leave us? Pimco’s Paul McCulley notes that housing related demand for credit is one of the key elements in money growth. Getting the balance right of credit and money supply versus demand, the Monetarists warn us, is a key element in keeping inflation under control. 

Meanwhile, there is little evidence that the nation’s "obsession with real estate is abating," notes the WSJ.

The takeaway of all this comes from Harpers magazine, who may have accidentally come up with the most astute visual. Their most recent issue has an article on "The New Road to Serfdom: An illustrated guide to the coming real estate collapse."

That’s supposed to be John Q. Public shouldering the exotic interest-only no-money-down mortgage load in the graphic.

Instead, I think that’s a drawing of how Ben Bernanke must feel:  He’s facing monetary pressures at home, a slowing U.S. economy as Real Estate cools, and hot global inflationary forces beyond his control short of forcing a global recession.

A soft landing for a man shouldering that load looks increasingly unlikely.

Source: Harpers 

What's been said:

Discussions found on the web:
  1. vf commented on May 11

    it’s interesting that the chart of the ffs rate looks just like the chart of the Dow over the same time period. it also corresponds to margin debt levels on the NYSE. traders borrowed the most money in 3/00 when the ffs rate and stocks were at the high and borrowed the least amount (at least over the last cycle) in 9/02 a month before the low in stocks and just off the low in ffs rate. today the level is, you guessed it, back to where it was near the top in 12/99. traders borrow more more money as rates go up and less when they go down… i’m no economist but that flys in the face of logic.. what will it portend for stock prices?

  2. Ricardo commented on May 11

    Well, the FED will have to decide which is more of it’s important duties, keep inflation in check by raising rates, or, stopping to help the economy but running the risk of letting inflation get out of control. Judging by the USD, the FED has no choice really but to keep raising the rates.

  3. erik commented on May 11


    thought you might like this article on the bank of england’s decision to cut rates after a similar arc of raising.

    “The Federal Reserve hopes to engineer a soft landing for US home prices, similar to the feat performed by the Bank of England. The BoE began its mini rate hike campaign a year before the Fed, lifting its base rate 125 basis points to 4.75% until August 2004. Then, the BOE left its base rate unchanged for a year at 4.75%, and slowed home price inflation from an annualized 25% to zero percent a year later.

    But the BOE panicked in August 2005 at signs of a possible decline in UK home prices in August 2005, and lowered its base rate by a quarter-point to 4.50%. The rate cut halted the slide of British home prices, and according to Nation-wide mortgage brokers, prices are now moving higher again into record territory. London futures markets are pricing in a tiny quarter-point BOE rate hike to 4.75% by year’s end, taking back the bank’s insurance against lower home prices.”

    just to add anecdotal evidence that the commodity markets are awash in speculation i have recently been reading more articles from kitco! this ones pretty good though…

    i’m considering putting in a short soon on gold. i was waiting for another gasp in silver to make the move and it looks like today we’ll get it. any thoughts?

  4. John Navin commented on May 11

    Silver above $15 this morning…that was the 1982 high following the Hunt Brothers bankruptcy sell-off.

    From the standpoint of technical analysis, there’s no resistance now until it gets to $50.

    It’s an amazing chart.

  5. B commented on May 11

    I may be wrong but to me the global economy is only healthy if the American economy is healthy. The American economy is only healthy if the American consumer is spending. The American consumer is only spending if they are confident of their housing assets.

    The housing market is in a state of panic in some places right now. PANIC. Boston condo prices down 40%. People in Florida losing their life savings speculating. These are not isolated incidents and they are headlines in local papers and headlined on blogs by real estate agents. Even people I know who are clueless to any possible real estate bubble know there is a housing problem. Even a friend of mine who lives in Westchester County said her 17 year old son comes home and tells her they are in a housing bubble and are going to possibly endure a great depression from what they are being taught in social studies.

    None of this other stuff matters unless the American consumer is spending. If not, the global supply chain will likely bust and so will the rampant speculation in commodities with it. Bernanke needs to pause and look at some forward/coincident data. His number one goal right now must be the American citizen’s house with a few caveauts towards unabated growth. Commodities have no history of continuing what they are doing. So, IMO keep your eye on them but it should not be his goal to bust them at this point. Nornal supply and demand action will eventually crater their pricing. If they wanted to be concerned about commodities, they should have done that time ago with more aggressive tightening. Coincident GDP could be falling off of a cliff for all we know. 4.8% is yesterday’s news. Just like it was in 2000. What is tomorrow’s news?

  6. me commented on May 11


    Not to worry. Soon everyone will be refinancing to the new 50 year mortgages. Banks will lend 150%, figuring in 50 years they can get their money back, and the consumer ATM is open again.

  7. fred hooper commented on May 11

    Barry, your synopsis nailed the major economic issues of the last 5 years right on the head.
    B, “The housing market is in a state of panic in some places right now. PANIC.” Only disagree as to “some places”. Economic historians will someday view the great real estate crash that began in August 2005 as the start of the global recession of 2006-2007. The Fed has lost any control of the housing crash: Even if they reduced rates back to 1%, housing is unaffordable at current pricing levels, and the cat is out of the bag, i.e. the media has finally begun informing the public that the end of the real estate boom has begun. Panic to sell will be even more vicious than the frenzy to buy that occured during the 2001-2005 boom.

    B, your posts are extremely informative, but you’re missing the boat on gold. The dollar is in the midst of a great crisis:

  8. Idaho_Spud commented on May 11

    I have to agree with Barry: It looks like the end of the road for this nearly jobless, debt-induced, service-based recovery.

    Right now it’s stagflation though. Where do we go from here?

  9. MoneyforFree commented on May 11

    I’m with “B” on the dollar issue. Where is the next world currency to be found if not the USD? I think at the moment the USD is acting as a canary in the world coal mine. It’s warning of trouble ahead, but when the trouble does really start, where do you want your money? In Asia? The Euro? If there’s big trouble coming I want my assets in US dollars.

    Unless one of the other major currencies goes back to a gold standard I can’t see anyone replacing the USD’s position.

  10. B commented on May 11

    I’m not missing the dollar crisis. I’ve waxed and waned about it so much that I sound like a broken record. That said, no one can divine the future so everyone’s speculation including mine is just that. It’s logical but not preordained. Gold may go to 200,000 or it could go back to 250 but either way I won’t be buying it. There is a fever right now in gold. Especially the speculative penny stocks of the minors.

    I would entertain buy a major but not without a significant correction. And not without some confirmation of what may or may not happen. If you are already in it, that is fantastic news for you but just remember that long term, gold has been through many dollar cycles and a few crises yet it always turns out to be a pig. So, unless we are near an apocalyptic ending, it will eventually do the same as it always has.

    At the minimum, a correction, probably significant, will happen at some point. And that some point might be soon. Good luck!

  11. tjofpa commented on May 11

    Also recommend excellent article on Bloomberg yesterday about Japan’s 5-yr bond hitting highest yield
    ever. It includes a little diddy also about reserves available to banks at the lowest level since… Nov 2002.
    Many believe that Global Liquid eminated from Japan.

    Putin’s comments about “Fortress Amer” & new arms race could be puttin(sic) the kabosh to Global capital flows also.

    Could it be that Russia and China are behind current commodity surge, showing displeasure over US stance on Iran?

  12. MtHood commented on May 11


    I heard an analyst recently say that inflation is not a problem as long as wages don’t go up significantly. For example, energy costs are only about 5% for the typical corporation, while wages comprise 70%. With a low cost work force available globally, this should keep US wages relatively contained, and thus allow the Fed to say inflation not a huge problem (despite the fact that commodities, health care, energy, etc. are going up rapidly).

    What is your view (as well as the others on this board)?

  13. jim commented on May 11

    MtHood, that sounds about par for the Fed. Hence the clubbing I bond investors received May 1st with the new 2.14% interest rate.

  14. jim commented on May 11

    Actually 2.41% but whats the difference?

  15. jkw commented on May 11

    Inflation is a problem with or without wage increases. With wage increases, inflation becomes a vicious cycle that is hard to stop. Without them, American consumers lose buying power and can’t afford to keep the economy going.

    We are in the final phase of capitalism. Businesses depend on having consumers with money, and don’t need workers as much as they need people that are getting payed. With sufficient increases in automation and productivity, the only reason to give someone a job will be so that they can afford to buy your product. I’m pretty sure the available choices are to switch to something that resembles socialism within 50 years or destroy the world (wars always become more popular when the economy goes bad).

    As for housing, it can’t be relied on forever as a source of spending money. First time buyers are mostly priced out of the market already. If prices keep going up, there won’t be anyone who can buy a house that doesn’t own one already. The government should have been issuing warnings that housing may have been a bubble for at least the past two years. Now it’s too late and the options are to let it correct now or inflate it more and deal with it later when it will be a bigger problem. A soft landing would be nice, but I don’t see how it can be managed. The softest landing would be to let inflation get up to something like 7-10% a year so that nominal house prices can stay level and the bubble will correct itself after only 4-5 years. But then you have to bring inflation back under control, which has proven to be difficult in the past.

  16. JWC commented on May 11

    Inflation is not a “problem” as long as wages don’t go up??? Maybe not for the guy with the big job, big income, and big tax cut. As long as basic things like gas for the car, the cost to heat and cool your house, increasing health care premimums, and almost out of reach cost to send your kid to college keeps rising, inflation – without an increase – IS a problem for the vast (but getting smaller) middle class! Sooner or later the middle class consumer is going to slow or stop buying extras.

    Regarding real estate, as a midwest anecdotal point, I talked to our real estate salesman yesterday as we are in the process of negotiating to build this fall…. Everyone agrees there is very little “bubble activity” in the Midwest and prices are still pretty reasonable. He has told us to expect “less” when we list our current home. Our builder allowed us to “reserve” a prime lot for SIX months before starting to build – unheard of a few months ago. And our guy said that things are moving real “slow” right now, especially for spring.

  17. Mr. Beach commented on May 11

    The Fed is now in painted into a corner.

    It has to simutaneously:

    – Contain inflation
    – Contain unemployment/wage growth
    – Defend the dollar

    It would appear that the massive liquidity injected from 2001 to 2004 was NOT put to good use by the market. Instead of borrowers using the liquidity to build income producing assets such as businesses and factories, the liquidity largely went into the housing market. Consumers pulled it out via cap-gains and other equity extraction methods.

    The problem is that the liquidity was CONSUMED (as cars, tvs, vactions, etc.) instead of INVESTED.

    So now the Fed has to clean up its own mess. Every option sucks:

    1. Keep the consumer afloat by lowering rates — and inflation gets jacked up.

    2. Contain inflation by raising rates — and you knock down the consumer attempting to pay back his debt.

    The Fed’s inflation fighting credibility is now going to be tested. Already businesses are passing on fuel surcharges. If these charges get worse, the Fed will have to act.

  18. Bastiat commented on May 11

    We are in the final phase of capitalism

    Hey, Marx. I am happy to relieve you of that burden of your house and money. Send me a email so I know where to pick them up.

  19. john commented on May 11

    Gold – as long the the buck continues to go down in the face of continued interest rate hikes gold should continue to go up. It has taken 18 months to get to this point I don’t think it will turn on a dime. It could but it probably shouldn’t.

    Housing – the problem isn’t with the current prices the problem is with the coming inventory. The baby boomers are going to be selling their primary residences, or trying to and there is going to come a time in many places where there just isn’t going to be a bid.

    Inflation – how long can wages be held against rising fuel costs? Eventually, and probably beginning soon wages are going to have to be raised. Once more the quadrillion billion dollars worth of useless big screen TV massive hummer SUV mcmansion buying debt is eventually going to be foreclosed on unless people’s paychecks start reflecting the reality of fuel costs. Otherwise they are going to stop buying stuff and when that happens only one thing can happen – massive deflation. And the only safe place in the face of massive deflation – Gold.

    And that’s where I came in.

  20. Barry Ritholtz commented on May 11

    MT Hood,

    Well, since consumer sonding oas over 2/3 of the US economy, I would be concerned about ANYTHING that imperils that.

    Wages are an issue impacting both corporate profitibility (i.e., that comprise 70%) AND consumer spending. How long can real wages stay negative and consumers keep it up? At a certain point, the math becomes prohibitive.

    Yes, Virginia, there is inflation — and its only get increasingly more problematic as time goes on . . .

  21. KirkH commented on May 11

    The Fed is creating money at record rates because if they didn’t we’d have been in the midst of productivity induced deflation long ago.

    The first use of the Internet was fairly inconsequential. Static home pages with contact information. It has taken a decade for standards and applications to really take advantage of it and now the onslaught of efficiency is pushing down prices across every industry. Sure you have some asset bubbles due to Fed tinkering but when they pop, as housing is right now, the correction is going to be massive.

    My only question is when rates are at zero and the Fed has to keep deflation at bay, what will be the consequences of an M3 explosion? Is it even something they can manage with only historical data?

  22. erik commented on May 11

    so are you looking for the end of this commodity boom? it’s only been a few years of a typical 15/year cycle.

    with the prospect of deflation on the nearing horizon wouldn’t the fundamentals of the commodity craze take hold and crash the cycle?

  23. Bob A commented on May 11

    Is there inflation to a new college grad who wants to buy a house that costs twice what it did when he entered college? I think they would say yes.

  24. D. commented on May 11

    It’s amazing how American centric most of you posters are!

    True, the world has been built up to serve the American consumer and if he retreats it could be hell.

    BUT, if China plays its cards well and Americans keep gazing at its navel, the American consumer could easily be replaced with an Asian one.

    A country can close its doors to the world and prosper if it has everything it needs. The US was like that for a while. At some point it was so efficient that it exported the excess. Their wealth got so out of whack that the US had to let others produce (Europe) and start consuming to bring trade back into balance.

    But Amercians got addicted to consumption. To keep up their habit, they focused on cutting costs and set up shop in Asia. Thereby developing China. For 20 years, capital flowed into Asia as rates got lower and lower.

    Americans, instead of using low rates as the perfect opportunity to pay off their debts, increased them because as rates fell, and asset values grew, it gave them the illusion that they were getting wealthier by the day. Most of them are still convinced that the fed will never raise rates too high because it knows America would suffer too much. But it hasn’t dawned on them that maybe rates could get out of the Fed’s control in the form of inflation.

    A fact is that the trade deficit needs a reversal. America is obviously at peak consumption. It’s somebody elses’s turn to consume and America must start producing again.

    But here’s the twist… What does the US produce that Asia doesn’t? Will America be able to sell or will it be blocked?

    A country can close its doors to another if it has everything it needs. China has been investing like crazy, probably too much. And if they currently need something, it’s energy and resources, something America does not have either!

    What would they have to lose if the US dollar tanked? Their businesses are having trouble making a profit anyway. Despite surging exports, billions in loans are non-performing. Since resources, priced in US dollars, have soared, wouldn’t it be nice if that US dollar could drop and help margins? Now that they’re more developed, why would they keep on dilapidating their environment to send stuff to America when they could consume it internally?

    Ironically, major US banks have been taking 5-10% postions in Chinese banks. With such positions, would America now let them default on their loans?

    As a Canadian, it’s not obvious who’s going to come out of this stronger. A study of human nature makes me believe China will. America has become fat, entitled and complacent. China is hungry.

  25. erik commented on May 11


    “It’s amazing how American centric most of you posters are”

    why is that amazing, we are americans!

    go watch some “strange brew” hoser.

  26. Ryan commented on May 11

    I’d just thought I’d share the story that my grandfather told me about his experience during the great depression:

    “I knew that trouble was coming when everyone started talking about how bad it was to be involved in foreign entanglements. Those tariffs and price controls especially scared the bejesus outta me. I knew the first thing to go would be the value of grammama’s and I’s ol farm house. So I sold it. It and the whole darn farm. Then I sold the Ford car we’d just bought. Then I sold all our clothes too. I never did trust those banks either so I took all our money outta there too. I took everything we had—all of it and bought gold. It was wonderful. When everyone else had done run outta everything we had gold and that was all we needed. We looked like royalty walking around in our gold clothes. Our gold car was the fastest thing in the county rollin round on our gold wheels. We even ate it. Turns out it has zero fat and is high in fiber. Grandma never got clogged up again. When we were done we’d brush our teeth with gold-dust. I ain’t never had a cavity to this day. We were like the Aztechs of Iowa. We didn’t have no chickens but we made little gold animals to keep us company. None of the beggars ever came to bother us for soup like they bothered the churches—they thought we were nuts. Well, that may be so, but we’ve never lacked for anything BECAUSE GOLD CAN DO ANYTHING. We even stopped going to church when we made an idol outta gold and started sacrificing our gold animals to it. It was the best time of our lives.”

    Hope you liked it. Enjoy your gold.

  27. douglas commented on May 11

    “Is there inflation to a new college grad who wants to buy a house that costs twice what it did when he entered college? I think they would say yes.”

    And how about that large student loan they are trying to pay off. Has the cost of education been increasing? Let’s all face it things are unsustainable. Negative savings, funky home loans and soaring prices, stagnant wages, middle class people are afraid to open the gas bill in the winter and the electric bill in the summer. Hello Dow 7000! Hello France 1789!

  28. Detroit Dan commented on May 11

    Entertaining discussion today. I especially enjoyed the story of Ryan’s grandfather. That makes perfect sense to me. Fear not Baby Boomers, the golden years are at hand…

  29. muckdog commented on May 11

    Inflation. Sheesh. 3%? Core at 2.1% Something else explains the rise in gold, and inflation ain’t it. Maybe the economic boom in India and China creating more demand for it. And speculation. Unless you think that thousands of government workers are conspiring together to keep the numbers down. Everyone keeps saying that higher energy prices are going to be “passed along” to consumes, but whee are those higher prices? They haven’t been able to do it.

    What about the drastic decline in technology prices? Computers, hardware, software, and entertainment things like DVD, TVs, etc. Most companies use those former things to boost productivity and profit. Most of us consumers line up at Best Buy to get those latter things.

    Here’s an example. In 1998 I bought a 2 megapixel camera that took decent pictures for $900. I just bought a new 8 megapixel camera that cost $350 that takes great pictures, movies, and came with software for me to edit photos and movies, upload them to the web and share with folks.

  30. Roz commented on May 11

    There are some people deciding the consciously boycott buying housing. There’s even a website about it.

    Bascially, I think enough is enough and alot of other people are thinking the same thing.

  31. jkw commented on May 11

    There is definitely inflation in food prices. When I started college 8 years ago, milk was $1.49/gallon. Now it’s up to $2.49/gallon (and just this week they raised the half-gallons from $1.79 to $1.99, so the gallon price might be about to go up again). Cereal used to average about $1.60/pound, now it’s up to about $3.00/pound. I don’t remember other prices as well, but they seem to be going up. There’s a restaurant I went to last week for the first time in about 3 years and they had raised prices by about 30%. Based on what I can see, inflation in food prices has averaged about 7-9%/year for almost a decade. Computers and electronics are getting cheaper, but the things people need to live are getting more expensive. If that doesn’t count as inflation, then what are you measuring inflation for anyway?

  32. muckdog commented on May 11

    I look at the CPI, jkw. It’s a “basket of goods,” not just one or two items. I also look at the PCE. There is inflation, it’s just over 3%. I consider that to be fairly mild.

  33. D. commented on May 11


    “It’s amazing how American centric most of you posters are”

    why is that amazing, we are americans!

    go watch some “strange brew” hoser

    Well it doesn’t stop other nations from looking outside their own country!

  34. erik commented on May 11

    do you honestly think that the typical “american” investor that posts on a blog such as this isn’t savy enough or broadly aware of the collective investment environment oversees or to our north?

    i think its ironic that you make such as sweeping, and if i may say, cliche, observation about the collective mentality of the “american” investor, since in the end you fullfill your contractural obligation as the arrogant and self serving foreign press.

    i never said i enjoy all that comes with being an american, or agree with the current administration, but don’t come here and bring that sentiment and lecture us as if we are correspondents for fox news!

    ohhhh canada…

  35. B commented on May 11


    Anyone in the global financial community with half a brain is America centric as it pertains to watching the heart beat of the global economy. 30% of the world’s GDP is American. We are the engine for the world car. If you think the world is going to have smooth sailing without the American economy, you are on a planet where people smoke ganja endlessly and continuously. Your brain is fried.

    You may invest globally, which btw, is also driven by American money, but you cannot expect positive global returns without the American economy. I’d like you to show me a time when the global markets have gone up when the American market was going down. Global program trading originates out of England and America driven mostly by American money. They drive the global market movements as well as American VC money drives global development along with American corporate investments and American investors. We have alot of problems but we are the rich bastards that drive the whole bloody system for now.

    It has nothing to do with America and everything to do with using your noggin. If China had 30% of the world’s GDP and a healthy, vibrant consumer driven, capitalist society and America was the communist centrally planned economy, I would be inserting China into that equation.

    I’ll make you a bet. I’ll throw all of my chips on the table and bet that if we have a downturn, America will come out of this much sweeter than centrally planned, bankrupt communist China. Winner takes all.

    Oh, and if we devalue the dollar, guess who loses the most? A paper currency allows us to monetize our debt. So, just as inflation devalues assets and investments over time for Americans (You are likely a perma bear with a death wish for America so you’ll relate to this concept), so does it for foreign bond holders. Couple that with a falling dollar, if it comes to pass, and China just got caught holding a big bag of sh*t by piling their trade surplus back into treasuries. Sort of a Christmas present for not having a fully convertible, fully tradeable currency and not creating the necessary reforms that stimulate domestic demand and allow American companies to compete fairly in your markets. Absolutely silly that anyone would say China holds the cards. China is holding the bag. And so are you if you think that to be the case.

    I know what the “D.” stands for. Doofus. I just really don’t like people who have this death wish for America. Or, for that matter, anyone.

  36. john commented on May 11

    B – I disagree that “China is holding the bag”. The people who are “holding the bag” are the elderly and the soon to be elderly in our country (USA) who can’t get a decent rate of return on their savings or investments because a bunch of slap happy clueless cowboys rode into town and converted their holdings to sh*t.

    Deficits don’t matter – until, of course, they do. And they will come due in a matter of time – just about the time that the baby boomers start looking to Uncle Sam for their Social Security.

    Monetize the debt and strangle mom and dad. Great idea. Send in to Dumbya I’m sure he’ll jump on it. Maybe he’ll get Jeb to run using it as a campaign slogan.

  37. Estragon commented on May 11

    D – You live in a country with triple the export intensity of the US, a history of multiculturalism, a more multilateralist foreign policy, and a small domestic media industry. It’s only natural that Canadians have a greater concern for how the wider world might affect them.

    B. – I think you’re underestimating the degree to which the buildup of foreign debt might ultimately affect the US. The Chinese have a history of doing things not for themselves, not even for their children, but for their grandchildren. Your points about the US affecting the rest of the world are well taken, but similar points might have been made about Britain early in the 20th century.

  38. B commented on May 11

    And I’d rather have my money in Britain than communist China.

  39. john commented on May 11

    And the Brits – well they’d much rather invest in China. Probably because they know that China, which existed long before they did, will exist long after everyone else does. But then again, the British are known for reading history unlike us Yanks.

  40. someone commented on May 11

    Typo, Barry: “at the same time, the end of the housing rally is clearly in site.” Should be “sight”, as in you can see it.

    Wow, lots of good comments here today. I agree there is a conundrum between saving the housing market and keeping inflation under control and supporting the dollar. We over at have seen this coming for a long time. And today, I think people are just starting to see we have a problem. Just starting.

    I don’t think the world economy is going to function well without the US consumer. But the US consumer is done, like dinner. Barry was on with Larry tonight and someone brought up the fact the US consumer had lots of debt but also had lots of assets. Guess what the consumer’s major asset is ? HIS HOME. Bye, bye US consumer.

    I predict there is going to be a terrible slowdown in the near future. The world cannot rely on the US consumer to go into more and more debt to buy things, which is essentially what has taken place over the last 5 years. So now the world is going to have to adjust to living without the US consumer for a while. Europe and Japan might pick up some of the slack, but certainly not all of it and Japan is tightening now too.

    You can forget about China picking up the slack. China, as a nation, are savers. They aren’t going to turn into spenders overnight, especially if things tighten up in their country because…

    China is going to slow down dramatically when the US consumer slows down. Yep. You see that huge trade surplus China has with the US ? Remove 2/3rds of it from the Chinese economy and that is called a slowdown.

    I guess the funny thing in all this is that everyone thought this day wouldn’t come. Bond yields sat at 4% for seemingly forever. Global outputs climbed and climbed and nobody once thought that we would eventually run out of the commodities to feed the factories. Surprise, surprise.

    So… back to the topic at hand. Housing and dollar versus inflation. As some have pointed out, it is lose-lose either way. If you go the allow inflation route you will help the homeowner but alienate foreigners. We would somehow have to live with balanced budgets ! If you chose to control inflation, homeowners will hate you, business owners will hate you, fixed income people will hate you, etc.

    This inflation stuff is getting pretty scary and we haven’t even seen real evidence of feed through yet. Just wait until that starts happening. Everyone is still living in lala land yet in this regard.

    So… I think it would take a few shock interest rate hikes to actually get in front of inflation. Larry Kudlow doesn’t think inflation exists, but he is wrong, wrong, wrong. It is only a matter of time before prices start feeding through. I think Ben would have to get interest rates up to 6-7% by the end of the year to get in front of this. Copper nearly $4 a pound today ! Gold cracking $720. Wow.

    So… I’m guessing that Ben is going to try to walk the line and fail. The housing market will crash. That is a given. He’ll do his best to keep interest rates low and ultimately inflation is going to run. Obviously Ben is not an inflation hawk. Wages have grown, the economy is running full out, commodities are out of control and Ben is saying we need to see more data. Maybe he is just working up the backbone to get tough, but get tough he must.

    People are just starting to complain and wishing something could be done about this. But it is too late. People have the debt now. This needed to be corrected back when Greenspan was in power. First it was the dot com boom and then it was 911. Dealing with these issues directly wouldn’t have killed us back then. Moderation would have done wonders.

    Instead we threw a bunch of money at it. Now the party is over and the hangover begins.

  41. someone commented on May 11

    So.. who can tell me what tomorrow and the next week are going to look like ?

    Will gold and other PMs rally more ?

    Will gasoline continue to go up ?

    Are other stocks going to get hammered further or is the carnage done for now ?

  42. david commented on May 11

    muckdog said:

    “I look at the CPI, jkw. It’s a “basket of goods,” not just one or two items. I also look at the PCE. There is inflation, it’s just over 3%. I consider that to be fairly mild.”

    It is actually much more than milk that is going up. Over the last 5 years the only things in my life that have not gone up in price are tech items and the $h#t that is made in china to replace what was once made here.

    Do you really believe the CPI and/or the PCE are even remotely valid with respect to what it actually costs to live? You should take some time to look into how they measure inflation, hedonics in particular, as well as WHAT they measure. Or, perhaps just get out once in a while. If you believe that their numbers truly reflect the inflation that is out there, you deserve whatever disaster is waiting to happen.

  43. econjohn commented on May 11

    speaking of inflation, when did it hit the magazine rack? i saw that harpers cover story and was gonna buy it, but (wtf?!?) it was $7! (ok, $6.95)

  44. angryinch commented on May 12

    I’ve had about 10% of my portfolio in gold/metals. Now it’s up to 20%, thanks to the recent moves. So i’m paring back a bit to be prudent.

    But I’m amazed at how few people—including many gold bugs—believe that gold and metals can go much higher. Most seem to think that either the metal complex is due for a massive correction (where they, of course, will buy more) or it’s simply a bubble that will burst. Then everyone can go back to buying value stocks like MSFT.

    I don’t know what will happen, but it is intriguing how few truly believe this is for real.

    Yet RE still captivates so many. Still don’t understand how people here in Calif can buy homes that they could rent for less than half the monthly costs of ownerships. To me, that’s a real bubble—not the little gold stocks that, yes, have boomed, but are still trading at 12-15 forward P/Es.

    In the affluent county I live in here in Calif, the local newspaper just reported that over 80% of the residents could not afford to buy the home they live in. Just think about that for a moment. And this is a RICH area.

    No bubble here. Nah.

    I visited some friends last year in SoCal. They were sitting on $500K gains on the home they bought in 2000. They had re-fi’ed and HELOC’ed 3-4 times and had taken out about $100K a year each of the past three years. They had new cars, took trips, put in a new patio, new floors…they were living off this windfall. Instead of the original $450K mortgage, they now had a $750K mortgage.

    They regaled me with how well their house had done. They joked that the house was making more money per year than they were. Ha, ha, ha. We all laughed.

    They told me that they believed the house would go up at least $100K a year for many years to come because (pick one): RE always goes up, it’s a desirable neighborhood, etc.

    Fast forward one year. I got a call from this couple last week. They were desperate for money and needed to borrow $10K to tide them over until June when the next re-fi would come through.

    So these folks now have an $850K mortgage. No money left from the refi’s—it all got spent. And now, no equity left either.

    This was my first true-life encounter with the “Housing ATM” phenomenon. And it ain’t pretty.

    No wonder the U.S. eCONomy has been “booming” with the hundreds of billions in funny money flowing from RE.

    Problem is, it’s gotta be paid back. If/when housing prices slow or reverse, the well will run dry. Without the Housing ATM, what’s the U.S. eCONomy going to do for an encore?

  45. me2 commented on May 12

    I think you can take that basic story and multiply it by 1 million or so. Maybe not to the same degree, but pretty close. The US economy has run on the consumer for the last 5 years, with RE refis financed by China, with goods supplied by China. As far as I can tell, the whole boom we are seeing in commodities and China all stems from the US RE market.

    And now it is going to bust. I think it is inevitable. This morning CNN is running the headline ” If you’re a speculator … get out now.” Guess what that would do to the market ! I don’t think there is anything that Bernanke could do to save the market, save print dollars like we’ve never seen before, but I don’t think that will happen.

    So… buckle up. We are in for a wild ride.

    I’d love to hear if people think that oil consumption (and thus prices) will fall because of the recession.

  46. douglas commented on May 12

    “Copper nearly $4 a pound today ”

    And some homeowners in my neighborhood have been waking up in a house without gutters. Scrap prices are so high that there has been a spate of manhole cover thefts.

    Question: Does CPI include housing prices?

  47. Soldier Of Fortune commented on May 12

    Well it doesn’t stop other nations from looking outside their own country!

    i am from the other side of the world, Hong Kong!

    btw, China is now putting emphasis in stirring internal consumption demand so as to shift away from dependency of US consumption

    I am confident in China’s prospect

  48. hilmi sener commented on May 18

    There is a very nice discussion which i was seeking for.I am investing in emerging market which dynamics more depended on development countries datas than its own.I am Turkish and living in US.I believe there are too much “$” pumped in to world and these $ manupulated almost every asset in to world.Gold has been increasing even it called for “inflation protective investment” and inflation around 3% yearly, gold would gain this much a day.So there is a problem with hedge funds which standing on there will be higher inflation and financial crisis in the world even FED or any other economic actor tries to calm markets.Having interest rates increasing, i believe FED will have two problems in the future;

    1-If they overshoot, it will be a reason for recession in coming years.With credit and money tighting, money will be more expensive to borrow and it will affect the GDP.Also US consumes more than any other country, this will be affect also countries that works mainly with America.
    2-Housing will get slower with every increase.House market is a major market in US and when it will cool of, demanding durable goods and costumer spending will be decrease.

    With these two points, there will be inflation under control with recession.There is no way to having healthy housing market while inflation going up.Even commodities still peak, it will start to effect economies and inflation in this cycle.

    Having consume alot is not a good for economy.If you are dependent on imported products, think about twice devaluation of your money.If US economy can not handle domestic consume, there will be imported product which priced higher than used to.So yuan getting revulated which China supply most of American consume, imported product prices will increase and it will effect inflation at home.Having $ too weak also will be result of taking actions from FED with increasing rates to curb inflation.

    I believe US and most of countries working mainly with US will be recession if FED keeps up to increase.Instead of increasing rates, there should be seek reasons and controls hedge funds (SEC should have more efficient role) which reason on increasing commodity market.

  49. steven davies commented on Oct 31

    I like your story about the great depression Ryan,although it is a kind of an atypical story.

Posted Under