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Minyan Mailbag - Real Rates



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

I am not convinced that rates are negative now. If they are negative, how long will they stay there? PPI is going to drop this month as will CPI.

IF (big IF) housing starts to tumble and consumers pull in their horns, prices will fall. I can easily foresee a credit crunch where lending halts due to declining asset values of houses. Result: more job losses and a falling money supply to boot.

In this environment, rates in Europe, Canada, and the UK will fall rather than rates in the US continuing to rise. That is in fact the scenario I forecast.

No one seems to be counting the LAGGING affect of what will be the 5th hike in just a couple of weeks. Well IMO those hikes are starting to bite. It showed up in consumer confidence numbers and it showed up in latest job numbers.

Of course predictions of the early demise of U.S. consumer spending have been wrong for some time. But... Housing started to fall in the UK after 5 hikes, I expect to see the same here. Japan is a virtual train wreck.

Japan Oct leading index at 20.0; 2nd month below boom/bust line

Japan Oct household spending down real 2.0 pct yr-on-yr, 3rd drop in 5 months

You want Japan to start selling US$ and increase the Yen further? Will it accomplish anything for Japan? What?

UK Home loans drop to a five-year low

UK House prices at 2003 levels

UK Nov high street spending falls for 1st time since Dec 2003

What is the UK going to do? Keep hiking? I think not.

Finally take a gander at these charts:

Consumer plans to buy a new car

Consumer plans to buy a home

Consumer plans to buy a new appliance

Now those charts are admittedly a little skewed because there is no "zero line" but the following text from Contrary Investor explains the situation nicely I think.

"As of the November consumer confidence report, the consumer response regarding plans for buying an auto dropped to the lowest level ever recorded in the history of this data. Responses literally plummeted. The positive response rate for those planning on buying a new home dropped to a level not seen since 1994. And in 1994, the survey trend was headed up, not down. For those planning on purchasing a major appliance, the response rate dropped to a reading not seen since 1995."

This tells me there are just far, far too many treasury and interest rate bears. There is plenty of room for treasury demand in the U.S. if there is a flight out of junk bonds and stocks. People looking for a bond bubble are best advised to look at junk and not treasuries in my opinion. If we start seeing numbers like what is posted in the UK and the above consumer charts suggest, Greenspan will go on hold, treasuries will rally, and the UK and Europe will be cutting rates.

Minyan Mike Shedlock


I am in complete agreement. I think the Fed is in a box and may have to lower rates next.

You correctly point out that the fixed income bubble is really in credit spreads.

My comment is in the context of what I have been writing about for some time: CPI is under-reported through hedonics which "persuades" markets to accept free printing of money. My point is that despite very low rates (I call them negative) economies are not responding; they are lackluster at best as you point out. This has to do with the fact that the "velocity" of money is slowing due to the high debt levels, which acts as a drag as central banks futiley print money to counter-act (forces of deflation). This is all due to years and years of easy money policy.

Prof. Succo

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