Bill Gross who only wants the fed rates at 0.00%, seems to like the fact that the term "firming" was removed from the fed statement. Seems like the street liked that too. A little abstract when the overall context is considered? DOW might move up 200pts today and the banks are on a tear????

Well of course you are Urbandigs (who asks "Am I wrong in this thinking?"). One is not to ponder why, One is but to do or die.
So, I am afraid to report that this looks like Urbandig pondering to me which is the inappropriate response: follow instructions...such as they are...doubts about inflation? well it's high TOO HIGH for a "loosening"...is the desperate message IMO.

But izit? (Can't leave Urb to do all that wrong thinking by hisself) Does it seem a tad bit odd to see the OER still up there at 3.6%? Given the recent inventory build and fall in sales as Mcburger flippers are no longer able to pick the $400,000 condo of their choice, would you expect rents, real rents to go up or down? Last skill testing question: if there is no let up in the OER for real, how soon before the municipalities start retracting their woes about not being able to collect revenues they thought were in the bag?

Some one must have leaked that the fed will bail out their buds from the losses due to lending to people who couldn't repay their loans. The government will help the poor borrowers and the fed will bail out the banks. Perfect scenario, no one loses, except the rest of us.

Moral of the story, bet the wife, children and the farm and don't worry, just spend spend spend and be happy because your government will never let a bad thing happen to you, unless of course you are among the middle class or the poor.

Ben has no choice. He has to live with Easy Al's lagacy and is too new to his position to do anything but stand firm and potentially to raise rates to counter inflation. I had been thinking there would be a discount rate cut after the spring makes clear that the real estate market has not bottomed out. Not being able to cut rates will only make the housing market downturn worse. This could get ugly, but only in a slow way, as the resets come due. Alternatively, though unlikely, if China does something to reduce foreign reserve accumulation, that would push up long-term US rates which should also do wonders for the real estate market.

Well I will say our government has been pushing food inflation up with all this talk of producing ethanol. The US war machine can also can increase or decrease fear in the mid-east and direct oil prices. Policy can change inflation to the upside fairly fast if we see deflationary pressures come on like I am expecting. It is all smoke and mirrors based on human psychology.

Off-Topic:
Does anyone have a pointer or opinion on the 2005 banking law? I've heard that it "reallocates risk way from borrowers and towards those lenders." That sounds incredibly wrong to me - my impression was the opposite.

CR,

The sky is falling, the sky is falling...but not yet

On a serious note, I had a conversation today with the CEO of a California Credit Union. Like me, he is an inveterate optimist. Over the past sixty days he has seen a dramatic change in his business. Auto loans are down 50%, mortgages are flat (not a sub-prime lender) and writeoffs are twice that of a year ago and as high as they have ever had. After looking at competitors Federal filings in preparation for a board meeting tomorrow he is coinvinced he is taking share and that other Credit Unions will need to lay people off to compensate for the lower auto volume. I asked him "Are we in a recession?" He responded "Well...I don't know." That's as restrained as he ever gets.

I don't know if auto purchases and loans correlate to consumer confidence, but my get says there must be some tie. So if auto sales are way off, is the consumer pulling in his horns? If so, you may be proven correct after all.

I thought you'd find the anecdote interesting.

From a previous thread...

As you are probably well aware, there were more millionares made per capita after the depression than any other period thereafter. At least that is what I have read. - Quincy K

Warren Buffett Quotes 
At the bottom of the bear market in October 1974 a Forbes article interviewed Buffett. Buffett, for the first time in his life, made public prediction about the stock market.

"How do you feel? Forbes asked.

"Like an oversexed guy in a whorehouse. Now is the time to invest and get rich."

Of course, we can't take advantage of that if we are already fully invested and/or we are in debt up to our eyeballs.

I can't say when (or even if) another recession is coming, but I'm more than willing to wait. It is possible that the commodities rolling over is similar to 1980. It is possible that we'll have 20+ years of bull market. It is possible I'll miss out on all of that. However, if so, the economy will be doing better than I expected. I'll still be earning interest. I'll be sleeping better than I am now. What's not to like?

On the other hand, that's not exactly what my gut is predicting. It may not be the smartest organ in my body, but it does have a tendency to know when things aren't quite right. It certainly doesn't like inverted yield curves and banana republic level trade deficits. Go figure.

So how much did being a bear cost me today? Well, my conservative TIPS bond fund (TIP) is up about 0.30%. When is the fund supposed to perform best? Slower growth and higher inflation...stagflation. Go figure.

It's That 70s Show!

Well, maybe.

If the Fed decides inflation is currently more palatable than slower growth, it seems likely that interest rates are just going to end up rising more later on. If so, perhaps the bargains to be found by waiting will be even bigger bargains (1974?).

They will cut rates soon; it's all they know.

Maybe the slowing economy will reduce inflation...

Wage inflation maybe, but not price inflation. A weakening economy translates into a weakening dollar, which raises the cost of imported goods & energy. Then again, we have "global competitive devaluation" at work, too.

Nothing like trying to find something to cheer in a race to the bottom, eh?

Oh, inquiringMind, oh you percipient devil.

The yen simply cannot be allowed to rise in relation to the dollar. If it does, billions, not to say trillions, will disappear in a flash in the yen carry trade.

As I have said, ad nauseum, the Secretary of the Treasury and his former colleagues are collaborating (how precise do I have to be) with the Japanese Finance Ministry to keep the yen down.

Meanwhile, the US$ has been banished to the woodshed again, getting ready to test the low for the year. I guess some would say 82 is key support. Anyway, it's doubtful the Fed would be stand idly by with the the dollar in the 70's and gold $800+ so forget about any rate cut - the next move will be probably be a raise. I don't think the stock market would behave well at all if the dollar started crashing from this low level.

Remember, RE in the toilet and the Fed is still in business, dollar in the toilet and the Fed is out of business.

Darth- Taking out "additional firming" sentence certainly doesn't sound like a raise is in the cards. They changed the statement to more likely accomodate a cut than a raise.

Cal,

I have no doubt that the Fed would love to cut, I just think they're backed into a corner right now. Unless you are saying that we'll skip the asset deflation and head staight to the hyperinflation? For my money, I'm betting on asset deflation first, then a nice dose of hyperinflation. Who knows, maybe if there is a worldwide recession then the currencies can all race to the bottom together and the US$ will be ok relationally.

The market rallied because our dollars just went tankety-tank-tank.

Look at the market in Euros if you want to see what's really going on...

Bernanke is a former Princeton professor who was a colleague of Paul Krugman.

That is a slightly different constituency from Greenspan's.

I don't think Bernanke gives a damn what happens to the mortgage industry as long as people can buy bread and don't have to pay too much for a roof over their heads.

Aren't rents coming down?

Anecdotally, the rental market on Long Island is booming. The prices are a little high (it's hard to pay those mortgage payments ever month with reasonable rents), but there is a ton of product on the market.

CR,

As far as the statement, the Fed has to stay confident. So the statement isn't a surprise.

So what you are saying is that the following would not be an appropriate FOMC statement?

Has anyone seen That 70s Show?

That's too bad. It cuts right to the chase. It seems as transparent as Bernanke and yet at the same time as cryptic as Greenspan. I would look forward to the analysts parsing the sentence and attempting to determine the question mark's importance. Would it still be there in their next statement? Who knows! Heaven forbid it turns into a exclamation point though.

More evidence of slowing consumer spending

NEW YORK (Reuters) -- Applebee's International Inc. said Wednesday that it will close 24 underperforming company-owned restaurants as the chain continues a strategic review of its business.

Applebee's, which has been under pressure from hedge-fund investor Breeden Capital to cut capital spending and sell more restaurants to franchisees, said the restaurants were not meeting acceptable levels of return on investment and other operating metrics.

The Overland Park, Kansas, company, which has 528 company-owned restaurants, has been hurt by a pullback in consumer spending as competition increases with other casual-dining chains.

Mark M., prior busts didn't have the magnitude of unoccupied inventory this one does. Any rise in rental rates will be localized and short-lived. - tj & the bear

But is the inventory well suited for renting? Are the following the typical renter's first choice?

• Condominiums
• Apartments converted to condominiums
• Single family homes

I don't know.

In any event, even if you are right, since rents did not rise nearly as fast as home prices, I would not expect for rents to fall nearly as fast as home prices. There is a gap between rental prices and home prices, and it seems at least possible that it will be closed from both directions (rising rents as home prices fall).

tj & the bear,

Here's an article that supports your point of view. It tends to make me even more bearish than I already am.

REITs Face Swelling Problems
And he sees rising rental competition from the many speculators who hoped to make fast killings by buying and flipping condominiums, single-family homes, and townhouses. With housing slumping, many flippers, unable to flip, have resorted to renting, thus putting increased pressure on the rental market.

Here's yet another article to consider.

Housing and the CPI
Ultimately, rents will regain their historic relationship with home prices. There is currently a large glut of unsold and unoccupied homes. Eventually somebody will occupy these units. Unsold homes and condos may become rental units, adding to the rental inventory which will soften rent prices. But there is an estimated overhang of 1.5 – 2.5 million excess housing units in the US. It could take 3-7 years to absorb that entire inventory. Until then both home prices and rents will be under pressure. But it is likely that rents will hold up better than home prices simply because rents are undervalued relative to homes. If rents hold up, then the CPI will understate the decline in housing.

If I was absolutely sure that housing would shortly crash in a major way I'd certainly be doing a few things differently.

• I'd sell my house and rent. Can't say I haven't thought about it.
• I'd move entirely to short-term treasuries (maybe even mid-term treasuries) and await the carnage.

I'm just not sure about anything these days. I'm more worried about inflation long-term than I am about deflation short-term. I've been a bear for 2+ years and we continue to muddle along somehow.

I don't get it. The stock market rally is based on the perceived likely fed rate cut, some time soon presumably. Yet, that same perception should also be interpreted in the same way in the currecy markets but the yen loses ground. What am I missing or is there really Japanese currency manipulation?

barely: FOMC announcement days generally have a market rally its part of the show.

Mark M.

Gotta love the spin on that statement "But it is likely that rents will hold up better than home prices simply because rents are undervalued relative to homes." It's patently obvious that homes are massively overpriced relative to rents.

barely,

Check out Russ Winter's blog for some good reads on the yen.

tj, but the statement is making a point about the relative changes in rents vs house prices, no? Current rents/house price ratios are way low (historically) as renters vacated to become owners, but that scenario is reversing. Inventory overhang alone suggests that while house prices remain out of reach for buyers, and vacant houses are a larger liability than rented houses, the number of rental units should be increasing. But as fast as the number of renters is increasing? The Mexican workers are headed south, suggesting that fewer renters will be seeking a larger number of rentals => lower rents =>lower OER =>lower inflation => lower FF rate.
Of course that's only Supply and Demand (Econo 101) and doesn't take into consideration, how exactly "equivalent" was determined and the possibility that this number could be easily manipulated in its compilation, unlike say that used truck you just bought.
[For instance: how does the OER adjust for vacant McMansions which generate zero rent? Is it an empirical assessment of what other occupied and rented McMansions are rented for or just scaled-up more modest stock that is rented? Hard to believe that the OER of a McMansion would be pencilled in lower that actual rented stock, but I believe that is what you would discover: McMansions are not easily rented and generate less rental income than a similar group of modest houses...and hence my worries about the "compiled" nature of this stat.]

Despite the economic contraction, the housing market is still quite a good investment because house prices have been falling faster than rents, leading to higher yields.

LOL! Left out the word "short", didn't they?

Calmo,

I'd suggest the current supply at all levels will overwhelm demand for years to come.

Oh, and not to mention there being a significant amount of "demand destruction" that has only gotten started.

Can BB simply change and re-change the statement wording, hinting obscurely about a cut, for the rest of the year and continue to do nothing with the rates?

You know, like the NAR's description of the RE market, "A permanently high plateau"?

dryfly,

Your experience appears to jibe with Jim Rogers' positions on metal commodities. I still can't seem to find any "lead eagles", though.

I dont understand Roubini. He lays it all out and then says its a recession this year and recovery soon after?

He also says that liquidity is about confidance and without confidance there can be no liquidity.

I think there might be something wrong with his eyesight? He sees all the details but somehow the vision is blurred.

I am not sure i go along completely with the conspiracy theory on usdjpy.

From one point of view Japan is still barely out of a 20? year long deflation. What was signalled yesterday was that the Fed is more worried about recession than inflation and the eurusd rate showed dollar devaluation was not going away as rate increases to defend the dollar became unlikely. So the euro benefits as a reserve currency or store of value. On the other hand Japan which is reliant on US consumers and probably trades heavily with china (which is reliant on US consumers) cannot really welcome a developing US recession as a world slowdown scenario is now looking likely. Almost certainly cheap money from Japan is sloshing all around the world and is supporting liquidity and of course nobody wants that to end any time soon and so obviously coordination activity must be taking place but does this amount to a conspiracy?

Euroland (ignoring the threat of a superpower russia and war in the middle east and war in europe itself) seems a more likely store of value than Japan which is a tiny piece of land moored off the coast of the next superpower....would you invest there really?

Kevin,

Sorry I just saw your question.

A core inflation rate of 2 1/2 to 3 1/2% per year is near the bottom of the range of the past 30 years according to a chart the econ prof showed the roundtable. And that is where the core rate appears to be right now.