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Federal Reserve official Fisher dropped a bombshell today by announcing the Fed had room to tighten 'a little bit further' and saying that the Fed was in the 'eighth inning' of the rate cycle to use a baseball euphemism.

when asked if there was a housing bubble he answred 'i hope it continues a bit longer in DC so i can sell my house and move back to Dallas'

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Federal Reserve official Fisher dropped a bombshell today by announcing the Fed had room to tighten 'a little bit further' and saying that the Fed was in the 'eighth inning' of the rate cycle to use a baseball euphemism.

when asked if there was a housing bubble he answred 'i hope it continues a bit longer in DC so i can sell my house and move back to Dallas'

Good informative research Spoon...keep it coming..... :)

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I think spoon’s point is that if what Fisher says is true, then the Fed’s tightening cycle is coming to an end much earlier than previous Fed rhetoric had led everyone to believe.

We don’t appear to be anywhere near a neutral rate, with a real interest rate that is close to 0%, or maybe even negative.

We’ll have to see of course, but if we’re close to the cycle peak then the market called Greenspan’s bluff and he blinked first. Long term rates are still heading downwards, making mortgages cheaper despite the Fed’s so-called 'tightening'.

If 3.25% is the cycle TOP for rates, then how much ammo has the Fed got left?

The market is taking this sign of peaking rates as a huge positive, but I seriously doubt whether this is a good thing. The deflationary pressures that scared the Fed so much in 2001 seem more powerful than ever now, and I wonder how healthy company profits are going to look in a year's time if we have a worldwide slump in demand. Couple this with energy prices which are staying high despite a manufacturing downturn, and it’s easy to imagine how troublesome things could be by the end of the year.

[For one of the best arguments yet for the flattening of the yield curve in the US, read Richard Duncan’s views on the subject:

What's worrying Greenspan?]

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Greenspan calls this closing of the yield curve a ‘conundrum’. My take on the relative position of short and long rates is that the market believes that there will be little in the way of inflationary pressure in the US economy over the next decade, every time the Fed ups rates long rates fall. If a credit crunch follows the tidal wave of foreclosures and the narrowing of the yield curve, what next, I still think deflation is a strong possibility, have a look at this article on the Hong Kong property crash of 2000 and subsequent deflation.

Hong Kong 2000

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Factors that may trigger deflation?

Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:

In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:

(a) All were set off by a deflation of excess credit. This was the one factor in common.

(B) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.

© Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.

(d) None was ever quite like the last, so that the public was always fooled thereby.

(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

(f) Credit is credit, whether non-self-liquidating or self-liquidating.

(g) Deflation of non-self-liquidating credit usually produces the greater slumps.

Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan - for business start-up or expansion, for example - generates the financial return that makes repayment possible. The full transaction adds value to the economy.

Edited by Duplex
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Guest muttley
...... and saying that the Fed was in the 'eighth inning' of the rate cycle to use a baseball euphemism.

Can somebody translate this into English for me? I don't get baseball euphemisms.I might understand it in football (soccer) terms.

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Greenspan calls this closing of the yield curve a ‘conundrum’.  My take on the relative position of short and long rates is that the market believes that there will be little in the way of inflationary pressure in the US economy over the next decade, every time the Fed ups rates long rates fall.  If a credit crunch follows the tidal wave of foreclosures and the narrowing of the yield curve, what next, I still think deflation is a strong possibility

That's my view as well. I think a major reason for the falling yields at the long end is that the smart money is betting on a credit bust and a consequent long period of deflation as the excesses of the past decade or more are purged from the system.

If the US ends up with a slump a la Japan then a return of 4% or even less might be looking tremendous in a couple of years time. I know there are many out there who believe that the Fed will see us in hell with a hyperinflationary meltdown before we ever see deflation, but I'm now finding it really hard to buy into this. It's simply too difficult to inflate via the banking system once credit implosion is underway.

I'll also go as far to say that I think the actions of Gordon Brown and the BoE will be a sideshow as far as the fate of the UK economy is concerned. This is the major difference between now and the housing slump of the end 80s/early 90s. This time our destiny is very much in the hands of global events, in particular the interaction of the China/US imbalance. I can't really see how we're going to escape the fallout from the resolution of that imbalance as it occurs.

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Fisher should have a word with his FOMC colleague, Don Kohn, who reckons there's a good way yet to go in this Fed tightening cycle:

http://afr.com/articles/2005/05/17/1116095962779.html

Fed governor hints at more rate rises in America

May 18

Craig Torres  |  Bloomberg  |  Washington

US inflation should be "well contained" provided the central bank raised interest rates "at a measured pace", Federal Reserve governor Donald Kohn said.

The Fed had no target for its main lending rate, and the quarter-percentage-point rate increases the Fed had pursued helped policymakers learn about the effect of previous rate rises, Mr Kohn said yesterday in a speech delivered to the Australian Business Economists Conference via videoconference from Washington.

He noted that interest rates still needed to rise, adding: "But how far they have to rise is anybody's guess."

Prices might still rise further and inflation risks "look a little more to the upside".

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My take on the relative position of short and long rates is that the market believes that there will be little in the way of inflationary pressure in the US economy over the next decade, every time the Fed ups rates long rates fall.

I thought a lot of US bond purchases were part of the 'carry trade' (i.e. borrow money at 2%, buy bonds that pay 4%, sit back and soak up the interest)? You may be giving bond buyers too much credit.

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We're in the 80th minute of a football game, no extra time to be played.

Well in baseball, if after 9 innings the scores are level, they play until one team has more runs at the end of an innings ... or they play extra time until someone wins.

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I thought a lot of US bond purchases were part of the 'carry trade' (i.e. borrow money at 2%, buy bonds that pay 4%, sit back and soak up the interest)? You may be giving bond buyers too much credit.

That was certainly the case when the Fed had rates down at 1% and showed no signs of upping them. It doesn't make so much sense though when the Fed is tightening - that was why Greenspan made his 'desirous of losing money' comment, in effect giving the carry traders fair warning that they needed to unwind their positions.

Of course there's still a potentially winning carry for Japanese investors borrowing at close to 0%, but they run a currency risk.

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Well in baseball, if after 9 innings the scores are level, they play until one team has more runs at the end of an innings ... or they play extra time until someone wins.

I KNEW someone would write this.

I was just trying to be precise in getting the meaning of the original analogy across, i.e. the guy was implying we were 8/9 of the way through the cycle!

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research suggests that a large amount of the mortgage equity extraction in the US has actually been saved and not spent. i.e. higher short term rates as set by the Fed are not the disaster for homeowners one might think.

mortgages in the US are also of the long-term fixed variety and as such depend more on long term bond yields. fears of a housing crash among other things have contributed to the flattening of the US yield curve. paradoxically the consequent lower long yields make the bust less likely.

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I KNEW someone would write this.

I was just trying to be precise in getting the meaning of the original analogy across, i.e. the guy was implying we were 8/9 of the way through the cycle!

I was quite surprised when I read the article, interpreting it the same way. It appears to contrast with all the other FOMC hints. Jeff Guynn said on 25/5 that the Fed must raise rates further now to ensure that the Fed does not have to take "a more painful path of steep hikes" later. A number of members have also raised concerns about the housing market.

With 1st quarter growth at 3.5%, the market is expecting rates to 4% by the end of the year.

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research suggests that a large amount of the mortgage equity extraction in the US has actually been saved and not spent

Huh? Why would you MEW and _not_ spend the money? Surely you're going to get far less interest from sticking it in a bank account than you'll be paying on the mortgage?

I guess it might make sense if you had a really low-rate fixed mortgage, but I'm still far from convinced that you could get a safe return after tax of more than the interest you have to pay.

mortgages in the US are also of the long-term fixed variety

I thought most new US mortgages were adjustable rates?

Edited by MarkG
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Why would you MEW and not spend it?

Having cash (even borrowed) gives you a buffer in terms of cash flow.

It makes sense to borrow this while you can..if you do get into problems its not as easy to borrow and it always costs more.

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research suggests that a large amount of the mortgage equity extraction in the US has actually been saved and not spent.

There was some Bank of England paper that came out and said the same thing for the UK (that most of MEW had been translated into "financial assets", or some such phrase). It doesn't appear to have stopped the consumer slowdown, does it? (also, I found it hard to believe in the first place, as the anecdotal evidence of people MEW'ing and spending it on BMW X5's and skiing holidays is ubiquitous).

mortgages in the US are also of the long-term fixed variety

They used to be. This is no longer the case.

Adjustable-rate mortgages (ARM's) now make up almost 50% of US mortgages, even though 30-year rates are at all-time lows (source: Federal Housing Finance Board). Remember when Greenspan (crazily) told homeowners to take out ARM's? Looks like they took his advice.

Edited by zzg113
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http://news.ft.com/cms/s/da99fccc-d34f-11d...000e2511c8.html

Dollar-longs positions may have been trimmed after Richard Fisher, a new member of the US Federal Reserve said: “We’re clearly in the eighth inning of a tightening cycle” and “we have the ninth inning coming up at the end of June,” using a baseball analogy to suggest a pause in Fed tightening after a likely ninth straight rate hike later this month.

Not everyone was convinced, however. “It is widely doubted that Mr Fisher’s words are the views of the whole FOMC,” said Chris Gothard, currencies strategist at Brown Brothers Harriman. “This new Fed member has probably also been a little naive.”

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  • 439 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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