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Posts Tagged ‘Alan Greenspan’

A Weakening Economy (If It Is), Has The Makings Of A Refi Boom In 2007 (If It Does)

February 8, 2006 | 12:02 am |
Source: Charles Atlas

In Peter Coy’s insightful post Will Housing Make Bernanke Cranky [BW], he discusses Goldman economist Jan Hatzius [BW] argument that the “soft landing” that has been described more times than can be legally be allowed will provide a significant drag on the economy, to the point where the Fed may actually be forced to drop rates in early 2007. Hatzius expects a full 1% cut in rates at that time.

The argument goes: housing is overvalued in many markets, construction will slow, stalling GDP growth and less people will pull cash out of their homes for spending.

However Bernanke may be reluctant to react too soon after taking over from Greenspan, which makes a case for the 2007 argument for change. Perhaps we can bank another refi boom like 1993, 1998 and 2004? Seems a little too soon for that to me.

Whats been amazing about this recent housing boom, is how the housing market has seemed to come out on the plus side after each economic condition gets thrown at it. With the supposedly weakening economy and build up of inventory, and if Hatzius’ assumptions play out, 2007 could be yet another good year for mortgages, boosting sales and refi’s. A rate drop would be key for that to happen though.

Perhaps I am seeing the glass as half full a little too much these days.

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Bernanke’s First Full Day Is Groundhog Day: Will He See Greenspan’s Shadow?

February 2, 2006 | 12:11 am |

On Wednesday, Bernanke was sworn in as the 14th Fed Chairman so his first full day is…you guessed it…Groundhog Day

According to legend, if Punxsutawney Phil sees his shadow, there will be six more weeks of winter weather. If he does not see his shadow, there will be an early spring.

translated really means

If Bernanke does not want to see Greenspan’s shadow, then he has got to keep the housing market in tact as a lynchpin to the overall health of the economy. If he is successful at implementing his inflation-targeting strategy, then he won’t see Greenspan’s shadow and the housing market would likely see a soft-landing.

Source: AP

After all, Bernanke’s got much better credentials then Punxsutawney Phil.

[Webmaster’s apology: Sorry, it was a late night post.]

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Once Measured, Greenspan Says Goodbye With Number 14: Bernanke Starts Today

February 1, 2006 | 12:02 am | |

Source: WSJ

The housing market has greatly benefited from the Greenspan era, especially over the past decade. The Federal Open Market Committee strategy began to finally crimp growth in the housing market this past summer after 12 months of rate increases. The recent change in the housing market was effected by rising short term rates designed to reign in the inflation threat, before which low rates previously had provided an historic level of affordability to purchasers and triggered one of the most significant housing booms of all time.

Over the last several months, long term rates have remained largely stagnant, even falling, but short term rates have continued to rise.

Of great concern to the housing sector is the actions of the incoming Fed Chair Bernanke since Greenspan seemed in favor of asset appreciation, both in stocks and housing, while at the same time, was inflation-averse.

Mortgage rates have driven this housing boom and will determine the eventual outcome.

The FOMC raised the federal funds rate for the 14th time in a row by 25 basis points to 4.5%. Most economists think there is at least one more increase left before FOMC takes a breather. However, Bernanke, may have some wiggle room and forgo or skip a rate increase at the next meeting.

The removal of the word “measured” has been seen as a sign that the Fed is nearing the end of this 18 month strategy. The WSJ does an amazing job dissecting the FOMC letters after each meeting [WSJ]

One thing I will miss about Greenspan is the intense analysis of his vocabulary. Just think about what the WSJ has done here. It has dissected a one page letter to generate clues about future rate moves. This is insane, but necessary.

Bernanke is in favor of more openness with the target rate goals of the Fed. This will likely only work if he does not burn up the credibility that Greenspan has amassed over the past 18 years. How his moves impact the housing market and its importance to the economy, will largely determine his success.

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I’ve Fallen Down And I Can’t Get Up: The Fed Might Stop Rate Increases Soon

January 4, 2006 | 12:01 am | |

Source: WSJ

In Greg Ip’s Page One Article Fed Suggests It’s Close to Ending Run of Rate Rises: New Manufacturing Data Underpin Officials’ View Of Waning Inflation Risk [WSJ], “Federal Reserve officials are less worried about inflation and thus may raise interest rates just one or two more times in the next few months, minutes of their December meeting suggest.”

Meeting Minutes [Fed]

Language in the FOMC minutes suggests 1-2 more increases in the federal funds rate as economic data was weaker than expected.

The minutes said Fed officials’ inflation concerns had “eased somewhat” since the previous meeting Nov. 1. They noted that slowing housing-price gains would restrain consumer spending, and that officials had to be “mindful of the lags in the effect” of past rate increases on the economy. These factors all weigh in favor of the Fed halting its policy-tightening soon.

My chief complaint with the Fed in the Greenspan, that it always seemed to me that they go 1-2 more rate increases than actually warranted, and it up loosening economic policy within 18 months. Its refreshing to see concern that the effects of their strategy has not taken full effect on the economy yet. In addition, the weakening economy and lower inflation threat may actually influence long term mortgage rates to decline within the year, which would provide stimulus to the housing market. Then again, it may not.


When Economic Metaphors Are More Exciting Than Reality

December 27, 2005 | 12:01 am | |

In the Lewis and Parrish article Economic Addiction [Barron’s] their premise is that “for decades, desparate people have turned to 12-step programs to overcome their addictions to alcohol, drugs, overeating or even sex.”

The question facing incoming Federal Reserve Chairman Benjamin Bernanke is how many steps will it take to recover from an addiction to easy money?

“Like many addictions, America’s current problem came from the overuse of a good thing, in this case monetary stimulus. Like many addictions, its consequences pervade all aspects of daily living, as prolonged low interest rates are reflected in rising inflation, the frothy — if not bubbly — housing sector and the low savings rate. And like many addictions, the self-destructive behavior has been facilitated by enablers, in this case the traders and investors in the bond market.”

They contend that the bond market is tempting the Fed to ignore warning signs of inflation. The Fed has limited options if inflation does appear because of such low rates. They content that Bernanke, because of his “inflation targeting” will be more focused on inflation than Greenspan.

The authors suggest that energy prices will affect core inflation [MarketWatch] and housing too.

Higher housing inflation is a certainty: Owners’ occupied-housing costs, nearly 30% of the core consumer-price-index basket, are calculated using rents, which are moving up as higher rates dampen the ownership boom.

Thats an interesting take and a bit gloomier than I would have thought. While rents are likely to move up as mortgage rates rise, mortgage rates have been largely docile for the past two months. The authors seem to assume that housing prices must fall if they are not rising, with no option for more modest increases or even a sideways move. The dramatic metaphors make for an interesting read as well (just mention sex in the same sentence as economics and I pay attention).

This all or nor nothing stance has been one of the characteristics of the housing commentary and media coverage which has been more pronounced than in the last cycle.

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Chinese GDP: Apparently Its A Game

December 20, 2005 | 12:01 am |

I have been meaning to post this since last week but I’ve been trying to squeeze in my holiday shopping…

Daniel Gross, in his excellent MoneyBlog observes that the Chinese economy grew 15% overnight

This is particularly disturbing since we are looking long and hard at Chinese GDP and wondering what affect the Chinese economy is going to have on mortgage rates in the US next year.

In Richard McGregor’s article China to up GDP estimate by 20% [FT]:

“The revision is set to restate the size of its economy, in effect adding on the equivalent of Turkey and gaining the rank of the world’s fourth-largest economy.”

And here’s an amazing statement:

Zhou Xiaochuan, governor of the central bank, said this week: “The figures we used in the past have all been changed.”

Can you imagine if Greenspan or Bernanke had done this? Bedlam would ensue in the financial markets.

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Greenspanspeak Nears Peak: Fed Moves Toward Neutral On Rates

December 14, 2005 | 12:01 am | |
Source: WSJ

The Fed increased the Federal Funds rate to 4.25% [WSJ], the 13th increased since June 2004. However, for the first time since 2002, it omitted the word “accommodative” which means that rates are nearing the point where they neither stimulate or deter economic growth. The less restrictive wording will give Bernanke. Greenspan’s replacement, a little more flexibility.

For housing: If inflation is in check, then mortgage rates may be less likely to move a whole lot higher making the transition to a less frenzied housing market more attainable.

However, its not clear whether inflation really is in check. Barry Ritholtz of the Maxim Group and webmaster of Big Picture clearly disagrees with this assessment:

“Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained.” Quite frankly, we do not believe them. We know that beyond the rises in food and energy prices, nearly everything — from healthcare to building materials to education costs to insurance to commodities — costs more. And gold, the world’s best inflation indicator, is well over $500 per ounce. Where ever we look, we see evidence that prices have limited stability and an upward bias.”

Barry adds in a comment:

Microeconomics concerns things that economists are specifically wrong about, while macroeconomics concerns things economists are wrong about generally.” – P.J. O’Rourke

The WSJ summarizes:

“Overall inflation recently topped 4%, at an annual rate, because of soaring energy prices. Excluding food and energy, it is only about 2%, but Fed officials worry that higher energy prices will eventually lead to higher wage demands and prices for other goods and services. Although gasoline prices have fallen back from their levels reached just after Hurricane Katrina struck the Gulf Coast, natural-gas prices have climbed, hitting a record yesterday as cold weather blanketed the Northeast.”

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We Wish You A Merry…And A Neutral New Year

December 12, 2005 | 12:01 am | |

In Jennifer Ablan’s article A Shift to Neutral in ’06 [Barrons] “The real conundrum for investors and economists is to figure out when the Federal Reserve has reached a “neutral” interest rate. That is, a level that neither stimulates nor slows economic growth.”

Right now we seem to be firmly ensconced in a flat yield curve economy. I get worried this could lead to a recession if the Fed doesn’t stop soon.

Source: Barrons

“But among the eclectic group of 15 economists, strategists and traders Barron’s surveyed, more than half believe the Fed isn’t too far from reaching the magic level.”

“All our panelists say the Fed’s policy-setting Open Market Committee will boost its fed-funds target rate by 25 basis points (a quarter-percentage point), its 13th consecutive hike, to 4¼% when it meets on Tuesday. And according to the average estimate of those polled, the Fed will then raise short-term interest rates two more times, to 4¾%, by the end of June. But a majority of our group sees the monetary authorities cutting them once by 25 basis points in the second half, to 4½% by year’s end.”

“Last week, Greenspan wrote to Rep. Saxton that “a flattening of the yield curve is not a foolproof indicator of future economic weakness.” Earlier this year, Greenspan dismissed the argument that slowing growth was bringing down long-term interest rates. “I didn’t want to leave the implication with respect to the yield curve as though I’m concerned that the potential tilting of the yield curve is precursing a significant economic weakness,” he said, adding that low rates could be due to “new forces” in the international marketplace.”

It seems to me that the Fed during Greenspan’s tenure goes at least 2 rate increases too far and within the following year and a half returns to rate cuts…which could mean rising mortgage rates for the next year but not at a rapid clip. Possible mortgage rate reductions in 2007?


A Category 12: Fuel Costs Signal More Measured Hikes From Fed Down The Road

November 1, 2005 | 10:44 pm | |

The Fed continued its “measured” rate increases showing continued concern over inflation [FOMC] even though core inflation was very low. The drop in fuel prices in recent weeks was not enough assurance that inflation was contained [Marketwatch]. They signaled more rate increases to come. At this pace, there could be as many as 2 more increases before Greenspan steps down on January 31st.

This is the highest rate level since June 2001 when the economy at that time began to slip into a recession. There is some speculation that the Fed may not stop until the discount rate reaches 5%.

The St. Louis Fed has a composite of key economic indicators [PDF] that shows inflation remains a concern (CPI). GDP which has been flat with a recent gain, adjusted for the hurricane effects [WSJ], employment levels show bigger gains than last year, the unemployment rate is down, but hourly wages are up but only at about the same rate as last year.

In other words, the economy seems to be generally better yet inflation remains a concern. The rising Federal defecit and concern about energy costs this winter are keeping the pressure on bond yields and long term rates. As a result, mortgage rates continue to trend upward.

If there is a silver lining in all this, fuel prices appear to be cooperating and much of the inflationary numbers the Fed has been looking at were hurricane related and could ease after the first of the year. Lets hope the Fed does not go too far with this measured increase strategy and choke off consumer spending as they did prior to the last recession (June 2001).

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Fed Chair Nominee Says There’s No Housing Bubble to Go Bust

October 30, 2005 | 7:04 pm |

The Fed Chair nominee doesn’t think there is a looming bust in the housing bubble [Washington Post]

“U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.”

This is likely to be one of the key topics of the senate hearings for his nomination.

He has maintained the the “cooling” of the housing market won’t hurt the economy. This is an interesting position since housing has been so closely tied to current consumer activity, which accounts for 2/3 of the economy.

If housing markets fall, Bernanke appears to be unwilling to use short term rates as a tool to prop them back up. The overall economy takes precedence over individual homeowners. Of course, with Greenspan, there has recently been a disconnect between mortgage rates and short term rates so it is not clear whether this subtle change in policy will result in any difference in the housing market.

Other Links

Bernanke sees no housing bubble in U.S. [UPI]
Ben Bernanke has a tough act to follow as Fed chairman [Newsweek]
So long Alan and ‘measured?'[CNN]
What if the Fed Chief Speaks Plainly? [NYT]

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Hawaiian Shirts and Bermuda Shorts: Bush Names Bernanke To Replace Greenspan

October 25, 2005 | 7:56 am | |

As the Greenspan era comes to a close, I am going to miss the new phrases that would enter our vocabulary from time to time such as “frothy”, “irrational exuberance”, “conundrum”, “speculative excesses, “Greenspan-speak” and others. Most of all I am going to miss the confidence the markets placed in his policies. Replacing him is a tough act to follow although the financial markets appear relatively happy [Marketwatch] with the choice as the Dow and S&P had their biggest increase in 6 months after the announcement [Marketwatch].

Yesterday President Bush nominated Ben S. Bernanke, a former Federal Reserve Board member and Princeton professor who currently chair’s the President’s Council of Economic Advisors to be the next Chairman of the Federal reserve [NYT]. He is considered a “first, among equals” to his peers but his political views are largely unknown [NYT]. He actually penned a story in 2000 on the topic of replacing Greenspan [WSJ].

On a lighter note, there is some hope to fill the vocabulary void that I so enjoyed with Greenspan. He appears to have a sense of humor.

My proposal is that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded.

“Until he joined the Council of Economic Advisers, Mr. Bernanke had little contact with Mr. Bush [WSJ], and indeed in many ways is the antithesis of the power-suited business executives that Mr. Bush has preferred for top economic policy posts. But he appears to have earned Mr. Bush’s trust. Earlier this year, Mr. Bush gently chided Mr. Bernanke for showing up at an Oval Office meeting wearing a dark suit with tan socks, according to several people familiar with the incident.

A few days later, Mr. Bernanke showed up early for another meeting with Mr. Bush and distributed tan socks to the meeting’s other participants. When Mr. Bush arrived, all, including Vice President Dick Cheney, were wearing tan socks. Mr. Bush laughed.”

One of the more notable differences between Greenspan and Bernanke is how they handle inflation. Bernanke subscribes to the theory of setting a formal “Inflation Target” [WSJ]. which would demonstrate the Fed’s commitment to low inflation. Opponents of the strategy say that it will limit the central bank’s flexibility.

The WSJ has a series of charts that show the economic success of the Greenspan era.





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The Conundrum: A riddle in a mystery in an enigma in a boom

October 13, 2005 | 11:17 am | |

Greenspan’s conundrum has been the fact that [Financial Times] bond yields have remained low. We are expecting to see some upward movement as more inflationary data comes out over the next few months.

Two sides are presented as to why the bond market yields have remained low, which has extended the housing boom and has been counter to historical patterns:

Why is the bond market right? Investors are buying bond yields at low rates because they believe the economy will slip. A flat yield curve often pre-dates a recession. Also, the bond market is not concerned about growth right now, only inflation. With central banks keeping rates low as well as heated competition from Asia. Also, demographics may be keeping yields low. The 25-44 year old age group is shrinking so consumption growth should shrink as well keep rates low in the long term.

Why is the bond market wrong? A recession is not in the forecast and the equity (stock) markets are not worried about one. Also, there may be a global savings surplus – and we hear this a lot – there is so much capital out there, seeking out limited opportunities for investment. A potential revaluation in the Yuan, high US budget deficit and further inflationary economic data would cause yields to re-adjust to proper levels. There was an article today in the Wall Street Journal that suggests that global inflation may return.

The sharp rise in energy costs and economic damage caused by the 2 recent hurricanes has added to the pressure.

In other words, no one really knows what the long term outlook is for bond yields. Yet it is critical to the housing market since mortgage rates are usually tied to bond yields.

On the other hand, the NAR’s Home Sales Forecast is rising [RisMedia]

[NAR’s 10-2005 US Economic Outlook] [PDF]

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