[davelj]

technically, the fed doesn’t set bond yields. however, for all intents and purposes it does set short-term interest rates through its open market operations. and every other interest rate in the world is, to one extent or another, priced off of short-term interest rates in the u.s. that’s why the fed “matters” to the extent it does. so, the obvious question as it pertains to the current yield curve is, “why haven’t long-term rates been rising as short-term rates have been increasing?” one should get paid a time premium, after all, to compensate for the risk associated with holding a longer term bond as opposed to short-term note. the answer is that bond market participants, in aggregate, are thinking, “i think the fed’s raising of short-term interest rates will slow the economy so much that they will end up lowering rates in the not-too-distant future. consequently, i’m going to stay put in my long-bond position because as rates begin to decline, my time premium will be restored. and, who knows, if things REALLY slow down, maybe my positions will actually increase in value and long-term yields will decline.” they may be right or they may turn out to be wrong. i don’t know. but, that’s what the market’s telling us.

[davelj]

the first part is right, it all comes down to supply and demand. the rest of your post, however, is incorrect. unfortunately, i can’t explain it in any simpler terms than i already did without going into excruciating detail – there are books written on the interelationship between deficits, inflation and interest rates. at the risk of sounding didactic, if you really want to understand this stuff, i’d get a good grasp on econ 101 and 102 either by taking some classes or reading a few books. until you have the basics down, everything that flows from the basics won’t make much sense. just my two cents.

[davelj]

imagine our world had just two countries: the u.s. and china. the u.s.’s trade deficit grows because we are importing more than we are exporting. as we import (purchase) more chinese goods we must buy the chinese yuan (and sell u.s. dollars) to pay for them, thereby pushing up the value of the yuan versus the dollar (or, conversely pushing DOWN the value of the dollar versus the yuan – the same thing). thus over time imports will rise in price (inflation) as the dollar falls in value versus the yuan, all else being equal (which it never is, of course). bondholders want to be paid a premium to inflation to be induced to hold onto a bond as opposed to cash (bonds are more risky than cash). consequently, even if this premium remains steady, higher expected inflation will lead to higher overall bond yields.

one of the reasons that “headline inflation” numbers have remained tame (as opposed to “real inflation” numbers, which are much higher) even as our trade deficit has grown is that the foreigners we “owe” money to (china in the previous example) have been taking the money we pay to them and recycling it back into our economy via investments – more specifically, they’ve been buying a lot of our government debt. in order to buy this debt they have to sell their own currenty and buy dollars, a process that mitigates what would otherwise be a disaster for our currency and interest rates.

what our trading partners either don’t realize or don’t want to think about (the latter most likely – they’re not clueless) is that we’ve been printing money like mad over the last god-knows-how-many years and inflation is higher than the “headline” figures. consequently, these foreign debtholders are being paid back with dollars of diminished (and diminishing) value, but for now they’re looking the other way.

why? because their own economies are dependent on enormous exports to the u.s. (that is, they rely on america continuing to live beyond its means) and the moment this little game of chicken is over, everybody – including their economies – will lose. in fact, the music stopped a long time ago… but people are still dancing.

hope that helps.

[davelj]

the market’s P/E is a reasonable starting point for valuation but you also have to consider profit margins. after all, as a guy i once worked for used to say, “it’s only got a low P/E until the “E” goes away.”

after-tax corporate profit margins are running at 7.2% here in the u.s., which is in the 90th percentile of profitability performance over the last 80 years – the average over the period is 4.9%. the reason is principally because consumers have levered themselves and over-spent relative to their incomes. consequently, as all companies have some degree of operating leverage, this incremental spending bolsters corporate america’s bottom line disproportionately.

aggregate profitability in corporate america is THE single most consistently mean-reverting time series in finance. which makes sense – after all, if profits don’t mean revert, then capitalism is broke.

thus, even if the market’s P/E stays at 16x-17x, mean reverting profitability alone could easily hit stocks for 20%-30% over the next few years. just something to keep in mind.

[davelj]

inventories are up another 500 units in the last two weeks. this “peak selling season” must be quite a gangbuster.

There are currently 20640 listings in San Diego County

1. North County Coastal (3149)
2. North County Inland (6723)
3. Central San Diego Coastal (1394)
4. Central San Diego (4221)
5. South Bay (2295)
6. East County (2858)

[davelj]

the fact that you’d be $1300 in the hole renting it out tells you all you need to know: your house is currently eggregiously overvalued.

even assuming that some level of lunacy remains after the bottom falls out of the rotting foundation of this housing market, your home would only be worth $250K-$275K on a cashflow basis. my bet is that that’s where the price is headed over the next five years unless rents increase dramatically in your area or rates come down substantially. remember: pigs get fed, hogs get slaughtered.

[davelj]

just my opinion, but if you want this thing to move anytime soon i’d take the lowest listed comp and mark your place’s price down by at LEAST 5% below that comp and pray that it sells. there are a lot of people in your situation and a lot more that will be coming online over the next several months. the dummies will hold out and eventually mark their prices down by another 10%, 20%, etc. i’d be aggressive NOW and not try to get too cute. otherwise, i suspect you’ll end up regretting it.

[davelj]

Here’s the link to Williams’ work…

http://www.gillespieresearch.com/cgi-bin/bgn

It’s among the best you’ll find in the business. But, like most worthwhile analysis, you have to pay for it.

[davelj]

TIPs are not a good idea in my opinion because they track changes in the CPI, which is a sham of an index calculated by the government. For the last several years, economist John Williams has been re-calculating the CPI using the early-80s methodology – in other words, not using the imputed rents, substitution effects and hedonic adjustments that have been instituted into the CPI methodology over the last twenty years – and has found that using the original (“real”) methodology inflation has been running in the 5%-6% range for many years now. This also conveniently explains how reported CPI inflation can come in at 3% over several years while the money supply has been expanding at more than twice that rate – because the CPI is government fraud! Recall that with hundreds of billions of dollars in government payments tied to the CPI it’s in the government’s best interest to keep the reported number as low as possible. Each percentage point increase would increase government outlays by billions of dollars per year. I’m not a conspiracy theorist by nature, but the CPI calculation is a total and complete fraud used to placate the masses.

Personally I’m not much into negative real rates of return on my investments. But, if you still like those TIPs, by all means… dig in.

[davelj]

this inventory number has been increasing by 25-100 homes every day for the past several weeks. now that we’re entering the spring selling season, i’d be willing to bet we’ll hit 23,000 by the end of april.

There are currently 20132 listings in San Diego County

1. North County Coastal (3058)
2. North County Inland (6510)
3. Central San Diego Coastal (1395)
4. Central San Diego (4127)
5. South Bay (2291)
6. East County (2751)

[davelj]

there were about 2.5 million people in san diego county in 1995. today there are around 3.1 million (or thereabouts), so the population has increased by around 20% over the last decade, most of that coming between 1997 and 2002. so, if we adjust the 19,000 inventory figure upward by 20% we get to around 23,000 as a “population-adjusted” high water mark. for what it’s worth.

on a side note, everyone here is aware of all the reasons we have a bubble and the fact that it will eventually burst. math and common sense rarely lie… over the long term. but, let’s put aside the “logical” arguments for the moment. the reason i’ve known we’ve been in a bubble for quite some time (aside from all of the quantitative arguments) is simple: too many dumb people have been making too much money. it’s not unlike the stock daytrading phenomenon of 1998-2000. a bunch of dumb people were making too much money and 90% of them ultimately ended up losing their asses. that’s how markets work. rarely do idiots (or perhaps i should say the “less informed”) get to keep their gains.

i’d imagine that 90% of the real estate speculators, etc. will ultimately lose their asses in the next real estate correction; most don’t know when to stop, after all. they’ll keep leveraging up until it all goes *poof*, kind of like most gamblers in vegas. of the other 10%, about half are probably “skilled” and the other half are lucky.

the role of markets is to make people bullish at the top, bearish at the bottom and confused in between. that’s just the way markets work.

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