Remember the New Paradigm, the Soft Landing and the New Normal?

[Bugs]

Right about now I’m guessing most of the amateur permabulls are officially out of the slogan market and looking for a rock to hibernate under for a while. I know I would be if I were in their position.

For those who have been around Piggington’s for a while these current events come as no surprise. These declines are indeed occuring and they are occuring for exactly the reasons we said they would occur.

The speculators have withdrawn from the market because there are no more quick profits. The most savvy of the homeowners have either taken their equity out of state or have put it into other assets. The “fog a mirror” credit programs are gasping their last breath. The RE engine that was driving SDs retail and consumer goods environment is shedding its high-salary workers faster than a politician backing away from an inopportune public remark.

This market will recover at some point and I fully expect Piggingtonians to be as well prepared for that as they were for this downcycle. After all, we are an optimistic bunch. The difference between us and the permabulls is that we subscribe to Piggington’s Rule:

In God We Trust. Everyone Else Bring Data.

[4plexowner]

For all you permabulls: neener, neener, neener!

[ibjames]

high fives all around *clap* *clap* *clap*

[PerryChase]

Yes, we are a positive bunch. The realistic kinds.

I still want to know the direction of interest rates. Will the Fed be able to lower rates to alleviate the coming recession?

Will foreign investors demand higher yields to make up for dollar value loss, higher and the huge losses they are taking right now? If so, they’ll buy US debt at a discount resulting in higher interest rates.

I agree with bugs, the subprime meltdown is like the S&L meltdown. In the 1980s the S&Ls make easy loans to builders and land speculators. This time around the subprime lenders gave the easy loans to the buyers thinking that they could securitize away the risk.

Not only do we have the subprime market meltown, we also be faced with the bankruptcy of lenders to condo developers and converters. Think of the likes of Corrus Bank.

Yes, bugs, it’ll be worse this time around. But how much worse? Interest rates, the speed of the collapse in subprime lending, and the collapse of small lenders to developers, will determine how fast things will play out.

[pencilneck]

I happen to think it may be different this time. Lowering interest rates may destroy the housing market rather than save it.

Over the last several years the yen carry trade has provided the housing market with a lot of liquidity as investors borrow yen at a low interest rate and invest in the U.S. at a higher rate. Much of this money goes into the bonds we use to pay for our homes. If we drop our rates past a certain point, the money will flow out of the U.S. at least as fast as it flowed in. The system hiccuped last week, and we briefly saw a bit of the effects of a tiny bit of this outflow.

In decades past lowering interest rates helped create more liquidity and higher rates meant less. Ironically, today I believe the reverse is true. Keeping our interest rates relatively high will keep the liquidity flowing in and be much more beneficial to (temporarily) sustaining the housing bubble. Lowering interest rates will reveal our housing market (and stock market, and bond market) for the bubble that it is.

All in my humble opinion.

[PerryChase]

That’s what I was also thinking pencilneck.

There’s a lot of chatter about lower rates ahead and Realtors have been relaying that to buyers/sellers. I doubt the lower mortgage rates will materialize.

People are still thinking they can borrow for 5%. 7% is more realistic in 2007.

[Cow_tipping]

I think 7% is realistic for a few months in 07 and then 8, and then 9, and then 10, and then 11, then 12 … you get the idea …
To bail out banks and other financial institutions (freddie and Fannie) the printing presses need to be cranked up. That = inflation. However its possible that the chineese will stay indexed to the dollar and go down in flames with the dollar. lower interest rates = low inflation. Yes I would love that, but dont think the failing banks and federal institutions will.
So we inflate and gas goes up, rents go up, food goes up but all chinamart stuff does not. So its sorta like free money. Wages will stagnate but eventually creep up, so would rents, interest rates will be high but banks will have enough money to tide over the crash of real estate. That would be the only logical scenario … or the least painful scenario. Hyper inflation. Not so bad. Just dont sell your house when we are in it. Rent it out and you might not lose your ass …
Cool.
Cow_tipping.

[Chris Scoreboard Johnston]

Chris Johnston

I have also heard of the talk of the carry trade unwind. However, as a bond trader I can tell you that there is no way that can happen and also at the same time have 30 yr bonds rally like they are. The unwind would result in heavy sales in the 30 and 10 yr markets, and we are getting a big rally right now.

A friend of mine who is a local in the 10 year pit has confirmed this to me. As a result, we truly are not seeing this unwind right at the moment. Whether we will see it or not I have no idea, but it is not happening right now en masse. There may be some selective selling, but the buying is outweighing it presently. I think this is due to the anticipation of economic weakness ahead.

[PerryChase]

Rate Hikes Possible?

http://www.reuters.com/article/bondsNews/idUSN0723923820070307

Chicago Federal Reserve President Michael Moskow on Wednesday did not rule out another interest rate increase to tamp down inflation, even after a recent run of soft economic data.

The risk of high inflation is still greater than the risk of economic growth falling too low, Moskow said in comments to the Jewish United Fund similar to his most recent speech last month.

Moskow said that recent financial market volatility “imparts more uncertainty to the outlook” but did not shake his generally upbeat view on the economy.
Reuters Pictures

Moskow is a voting member of the policy-making Federal Open Market Committee this year but will retire in August.

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