patrick.net

RE: Inflation, below is an editorial from yesterday's (8/7) WSJ: basically, as many of us suggested, the Fed is in a damned if you do, damned if you don't position.

http://online.wsj.com/article/SB115490432853028234-search.html?KEYWORDS=inflation+fed&COLLECTION=wsjie/6month

It concludes,

The Federal Reserve has a difficult task ahead. It is understandable that it would like to achieve the soft landing of low inflation with continued solid growth. But that may not be possible. And if the Fed wants to convince the markets that inflation will be contained in the future, it must show that it is willing to take the risk of tightening too much.

Randy said:
DS,
Can you provide reference for the history of Fed reserve requirements over the past 3 decades?

wrong sean, randy, but i'll answer for him, heh.

seriously, NI. the intricacies of the banks and Reserve don't interest me, except inasmuch as they are a sop propping up the rot of capitalism and usury, good on the other Sean for having a go tho...

my answers are:
'if banks didn't exist, it would be necessary to invent them', and
'they (bank managers) will be the first against the wall, come the Glorious Revolution'

i think First Sean makes a good point about cheaper commodities disguising inflation of other sorts... i personally fear 'flow-on' inflation from the housing boom, the latest oil price shocks, etc...

the 'Fed' here (Reserve Bank) just raised interest rates 25 points again 2 days ago... clearly this will cool the housing market some more, in conjunction with petrol prices at the pump. the hottest markets have already plateaued and cooled for 1-2 years. however, i'm still getting emails suggesting where the next 'hot market' will be for keen specuvestors, i.e. in commodities-rich areas, the 'quarries of Asia'. these greedy spruiking f*ckers should be shot, it's a sick, rotten society...

Sean Who Is Not Different Sean

So again: when were reserve requirements last changed?

Sorry to beat on this, but with all the "big evil Fed fiat hedonic conspiracy" talk around here, I'd just like to know exactly when and how the Fed has supposedly pulled the rate lever one direction while moving the reserve lever the other.

hmmm, anti-Federalists...

Anyone have the word on the Fed rate hike/no rate hike yet?

HARM Says:

Anyone have the word on the Fed rate hike/no rate hike yet?

"Minutes are released at 2:00 p.m. (eastern time) unless otherwise noted."

from,

http://www.federalreserve.gov/FOMC/#calendars

2:15ET, or whenever you start seeing volume spike on the big board, whichever comes first.

5.25%. The pause is upon us. The statement sounded like as much a pause as a hold to me.

I get the feeling rate hikes are over for the time being. Dove.

Only 1 dissenting vote (Lacker, who wanted another hike). What a bunch of losers. Bendover Ben really fits now.

Barnanke will be a short-termer, especially if this is the dawn of stagflation.

I don't know why he didn't at least use the recent oil-shock as an excuse to pre-emptively cut inflation.

Oil-shock + high debt + slowing economy + inflation + flat rates = future unhappiness.

Bill Gross on CNBC right now.

Sucks for us non-homedebtor savers, but can't say I didn't fully expect it. Pausing is the path of least political resistance right now, and gives the appearance of "helping out" distressed FBs. I don't think Bendover Ben wants to endure another Senate grilling at the hands of Jim Bunning anytime soon.

My view of soft-landing v hard-landing has shifted a little further towards soft.

You can still do ok as a saver if you revisit your diversification strategy. Short rates are very strong right now, and may actually rise with a slowing economy.

Got GLD anyone?

The pause was already priced into GLD. GLD dropped slightly on the news.

Randy H Says:

My view of soft-landing v hard-landing has shifted a little further towards soft.

It still seems possible to me that BB's wussing out will only serve to delay the inevitable correction. As all asset bubbles are inherently unstable, an alternative outcome is that this will make for a harder landing in the end, just farther down the road.

Long & short rates already dropping, but yield curve maintaining inversion:

http://www.bloomberg.com/markets/rates/index.html

Maybe we are in for a Japan-style "soft landing." Unfortunately, 20 years later they are just now starting to take off again.

I prefer the Volcker approach. Get it over with. Like ripping off a band-aid.

From ben's blog --thought you'd appreciate it:

Comment by moqui

last week; buy now b/c rising interest rates will price you out of the market forever.
this week; buy now b/c rising inflation will price you out of the market forever.
Realtors confuse Mongo...

Will the pause effect cd rates? I'm short term right now - should I look into longer term cds? I'm worried about my down payment savings.

lanarpark,

In my opinion, there's not a huge amount to worry about unless your savings are pretty large. If you're talking about enough $, then look into a large fund group like Vanguard. There are lots of tax-exempt and tax-managed vehicles there that will beat CD rates at a very low risk profile.

Randy,

Thanks. I appreciate your input. I'm going to check out Vanguard.

Randy,

I have been wondering the same. How "safe" are the money market funds ? Esp. the CA tax exempt ones ? If FDIC is 100% on scale of safety, are these 99% ? How do I determine their risk ? Historically, they have been very safe. But can a long term recession increase their risk ?

Thanks in advance.

Stuck,

(here we are talking only about market risk, not inflation risk, which complicates things tremendously)

I personally think the money funds are pretty safe. They are 100% safe up to 100K for FDIC deposits. Call those a market risk of 0, and the S&P a risk of 1.0, then most of the Tax-Exempt money & bond funds come in 0.2 or lower. I think Vanguard has one that ranks about 0.3, but it is a short-term tax-exempt bond fund with a small portion invested below premium. Maybe it's an ultra-short fund, now that I think of it.

I'm not affiliated with these guys, but I recommend them often to friends and family because I like their approach:

http://www.financialengines.com

They use a pretty sophisticated Monte Carlo simulation to do a mean-variance-optimization of your investment based upon whatever goal and time frame you set. Most of it is retirement-focused, but I've used it to set up home-purchase goals for folks. It lets you carefully evaluate the riskiness of any portfolio, and then you can slide a little bar up and down to fit your own sentiment.

It's a pay service. Not free though.

As for the risk of commercial paper suddenly failing, you're talking about the simultaneous destruction of the balance sheets of just about every public corp in the US and most globally. I'm not going to stay awake worrying about that.

If you want to factor in inflation then you need a much more sophisticated model. Mainly because various stocks/sectors/funds have different exposure to inflation.

SGV,

Thanks for the repost. Obviously some of that was satirical and some of it wishful thinking, but I still stand by the reasoning (except for the last couple of points which are my dream).

The problem is this:

* But the Fed has to raise rates again and again to keep inflation in check.

If that point fails to occur, then all bets are off. At least for now, that is the case. Many FedWatchers are saying today's comments signal an end to rate increases, not just a pause. In fact, the market priced in about a 20% chance of a CUT at the next Fed meeting, at least according to some talking head on CNBC (I'm not a Fed Watcher, so I cannot independently verify this, but someone here will correct me).

If rates EASE, then inflation kicks up -- continuation of the credit bubble. Here's my forward looking view based upon that possible case:

* The Fed Eases rates.
* Inflation ticks up much worse than my previous scenario.
* But, it is largely hidden at first because of a weird, quiet, lingering "near-recession" that isn't called a recession for probably 6+ quarters.
* Because of the falling consumer confidence, the Housing Bubble soft-lands.
* The credit bubble goes on to fuel another speculative bubble. Probably not just one, but a few simultaneously. An easy guess is the stock market + other smaller, but rapidly inflating things like gold, commodities, maybe even a giant expansion of millions of "self-employed small businesses". Imagine everyone able to get free money to start their own little company, work from home, and think they're going to sell it to some bigger company for 100X in a year or two.

Eventually all that ends in stagflation and a new Fed Chairman who surprisingly resembles the zombified corpse of Paul Adolph Volcker.

But really, isn't September a bit late for a rate hike? Wouldn't they just wait til after the November elections to do it? The Fed's move this time is obviously motivated partly by political pressure, wouldn't that pressure increase by September?

Conor,

Thanks. He did say that (actually 25% hike). But he wasn't invoking Fed Futures, but something including Economists consensus, which included a 20% easing sentiment.

Randy,

Thanks. I was looking for analysis on investment risk only.

I doubt highly there will be a rate hike in Sept. unless all hell is breaking lose due to some serious shock that sends gas to $5/gal in the Midwest.

Short of that, no hike for a while, if ever in the near future.

I concur. No hikes. Fed is done. The only interesting bet is when will the easing start.

The 'Contrarian Chronicles' by Bill Fleckenstein have argued for years that Fed is run on an "applause meter". Also on CNBC someone mentioned that the Fed futures have been extra-ordinarily consistent in predicting rate hikes over last 10-12 years.

Reminds me of a classic quote from a very old BBC series "Yes, Minister". The lead protagonist once exclaims,

"I am the leader of the people. I must follow them."

Ah....but what happens if the Bank of England and the EU raise rates? Won't the Fed have to follow?

Ah….but what happens if the Bank of England and the EU raise rates? Won’t the Fed have to follow?

I don't think the Fed will get caught off guard and have to react to the actions of foreign central banks. Seems like monetary policy is fairly well coordinated by the leading central banks. Unlike our political leadership, I think the fed has shown that they can work well with others.

Nobody wants to see a "disorderly" collapse of the carry trade, so I think the major players will work together to avoid it.

"I concur. No hikes. Fed is done. The only interesting bet is when will the easing start."

I hope not. The last thing this economy needs is more people sucked in the RE by a "now or never" interest rate. I suppose a small number of ARM people might wise up and go to a fixed rate, but I doubt that's even a possibility for the majority of the group.

astrid :

From now onwards, Fed will be desperately searching for reasons to lower the rates. If the data keeps pointing towards inflation, or US$ devaluation picks up speed they most likely will not dare to cut rates. Otherwise any lame reason will do.

It is extremely important to revitalize the economy before 2008 elections, don't you think ? Coincidentally the ARM resets will also increase from 2007 end onwards. Many people bought in 2004 with 3/1 ARM.

I am just being realistic.

SiBA,

Yeah, I know. The power of short term thinking, it's always about getting past that next election hump.

I don't think revitalization is possible. The die is cast and it's now all a matter of friction and velocity of fall.

It is extremely important to revitalize the economy before 2008 elections, don’t you think ? Coincidentally the ARM resets will also increase from 2007 end onwards. Many people bought in 2004 with 3/1 ARM.

Should be very interesting. It is virtually impossible to predict future interest rates and currency fluctuations, IMO, especially when you project more than a few months into the future... still, it's fun to guess.

If the Fed keeps rates low, or lowers them even more, then I predict a steepening of the yield curve as foreign investors demand a larger premium on long bonds. But usually a recession keeps rates low, so that would seem to cut against my argument. This is too hard to figure out. My head hurts.

A 1/4 point drop isn’t going to mean much when you financed the house at 3% and the market is now down to 5%. It’s still more than you bargained for, especially if you took the lower rate to squeeze into a house you couldn’t otherwise afford.

People were getting 3/1 ARMs when the fed funds rate was at 1% (the rate on the ARM was probably in the 4-4.5 range). With fed funds at 5%, those adjustables are going to go to 7.5 or 8%. Not to mention all the teaser rates which will be expiring soon...

The point I was really trying to make is that it would take many fed cuts to bring the rates down to the level they were when all the ARM’s were being snapped up. One or two cuts wouldn’t stop the foreclosures.

Agreed. Even if they went to 0% fed funds, it might not help (eg: Japan). Should be interesting.

SQT,

That nothing can stop the bust that is well underway is a foregone conclusion to me as well. Again the only interesting topic is how fast/slow and how hard/soft.

The Fed behaviour is an independent topic to some extent. Their actions will not help homedebtors, but that doesn't mean they will not hurt us. I am more worried about their effect on me and my savings. I don't mind if I don't own a home in next 5 years, but I would hate to be in/out of jobs with pathetic salary and high inflation. Being "less worse" than a FB would be little consolation.

It doesn't matter if the cuts will actually do anything good for the economy. Fed "needs" to do them to show that they are trying. I am stealing lines from Bill F. here. "Fed wants to be loved".

We are in for a long, slow downturn that neither us nor homedebtors will like.