Why mortgage rates are climbing and why inflation is looming

15 June 2009 by Christopher Suleske

Courtesy of Rachel Beck @ the AP:

“If the meltdown continues in the bond market, then mortgage yields will soon be at levels that choke off refinancing activity,” said economist Ed Yardeni, who runs his own investment firm. “Even worse, they could abort any necessary recovery in home sales and prices.”

Yardeni coined the term “bond vigilantes” in 1983 to describe how traders took matters into their own hands when they felt the Fed wasn’t doing enough to fight inflation, which was running at an annual rate of more than 3 percent at that time.

So what has set off the vigilantes this spring, at a time when the consumer price index is down at an annual rate of 0.7 percent?
One explanation is that bond investors anticipate a greater supply of government debt being sold to fund federal spending. Investors are also increasingly fearful that the trillions of dollars the government will need to borrow in the coming years to finance the various stimulus programs will lead to a new bout of inflation.

The White House estimates that the government will rack up an unprecedented $1.8 trillion budget deficit this year – more than four times last year’s all-time high.

“The bond market is calling the Federal Reserve out,” said Mike Larson, a real estate analyst at Weiss Research Inc. in Jupiter, Fla. “Investors are saying that the Fed can’t just print money out of thin air to finance a massive deficit.”

Fed Chairman Ben Bernanke acknowledged Wednesday in congressional testimony that large budget deficits could threaten financial stability by eventually eroding investor confidence and endangering the economy’s prospects for long-term health.

Numbers lie

20 May 2008 by Christopher Suleske

ONE of the most important truths I’ve learned insofar as communication, that is, how we impart statistical information, is that raw numbers are meaningless out of context. Said another way, numbers lie. More accurately, liars lie… with numbers.

As I was driving to work last week, I heard twice over the span of 20 minutes that new housing construction was up over 8%, and said with glee. This was the extent of the story. Wow, so the housing market is really screaming, right?

I know better, as do you. My immediate suspicion was that something other than single family homes was accounting for the jump.

It’s worse than that:

The larger single-family sector suffered continued weakness, dropping 1.7% to an annual rate of 692,000 units.

So what’s driving the overall rate up, if single-family housing is down? Here’s the truth:

A big jump in apartment construction offset further weakness in single-family homes.

Apartments. Rental units. Temporary housing for most. No pride in ownership. The wake of previous homeowners who have divested their portfolios of such silly assets as homes.

Regardless of for whom, apartments are being built. And regardless of why, numbers out of context are lies in the making.

With so many fat ladies around, here’s hoping none of them can sing!

26 October 2007 by Christopher Suleske

WORD is one of the few financial minds I really respect, Jim Rogers, is so down on the dollar that he’s out of all dollar-denominated holdings. I’ll make a point of checking my retirement allocations again tomorrow. Quite a bit has been in gold and foreign equities and we have profited.

So why is the economy hitting the skids? I feel like a broken record, but it’s the spending, the borrowing, the spending, and the borrowing.

It’s over (perhaps).

22 October 2007 by Christopher Suleske

WHEN officials within the Federal Reserve Bank (a private institution, by the way) start saying things like

The Federal Reserve will continue to monitor developments in financial markets and act as needed to support the effective functioning of these markets and to foster sustainable economic growth and price stability,

well then, I believe they know they’re past the point of control. Witness what happened after the fed funds rate was lowered a half percent recently: foreign entities began dumping their dollars. Why invest in instruments delivering such little interest, particularly as the underlying principal of your investment is declining relative to any number of touchstones?

Lowering the interest rate further, to fuel credit will only see the value of the dollar decline… perhaps off a cliff.

In related news, it appears the woes are increasing for American banks, as problems with loans other than subprime mortgages (e.g. auto, credit cards) begin to surface.

A tangent, but an important one: Did anyone understand what Ron Paul meant in last night’s Republican Presidential candidates debate about the dollar being worth 4 cents what it used to be worth?

Here’s what he meant (Chart: CPI 1800-2007, Source: Wikipedia / Federal Reserve). The Consumer Price Index (CPI) is a pretty fair gauge of inflation. If you examine the chart just cursorily, you’ll notice the CPI was relatively flat, oscillating in a narrow range from 1800 to the 1940s. You’ll also notice a sharp increase beginning in the early 1970s and increasingly increasing. Harry Browne wrote a good piece on this in 2003, which covers the years 1949-2002 and touches on this early 1970s phenomenon.

So what’s the cause? The fed playing around with things? Yes, but not to the degree we experience. The biggest cause of the mess is the federal budget, deficit, and national debt, which Harry points out quite well.

So what’s the solution? Slash the federal budget, so we are collecting at least n% (I suggest 20%) more than we are spending and pay down the national debt. Do this immediately… and for a really long time.

An example budget

11 October 2007 by Christopher Suleske

Here’s a pretty decent example budget I found in the ether:

CATEGORY	MONTHLY BUDGET AMOUNT	MONTHLY ACTUAL AMOUNT	DIFFERENCE
INCOME:
Wages and Bonuses
Interest Income
Investment Income
Miscellaneous Income
Income Subtotal
INCOME TAXES WITHHELD:
Federal Income Tax
State and Local Income Tax
Social Security/Medicare Tax
Income Taxes Subtotal
Spendable Income
EXPENSES:
HOME:
Mortgage or Rent
Homeowners/Renters Insurance
Property Taxes
Home Repairs/Maintenance/HOA Dues
Home Improvements
UTILITIES:
Electricity
Water and Sewer
Natural Gas or Oil
Telephone (Land Line, Cell)
FOOD:
Groceries
Eating Out, Lunches, Snacks
FAMILY OBLIGATIONS:
Child Support
Alimony
Day Care, Babysitting
HEALTH AND MEDICAL:
Insurance (medical,dental,vision)
Unreimbursed Medical Expenses, Copays
Fitness (Yoga,Massage,Gym)
TRANSPORTATION:
Car Payments
Gasoline/Oil
Auto Repairs/Maintenance/Fees
Auto Insurance
Other Transportation (tolls, bus, subway, taxis)
DEBT PAYMENTS:
Credit Cards
Student Loans
Other Loans
ENTERTAINMENT/RECREATION:
Cable TV/Videos/Movies
Computer Expense
Hobbies
Subscriptions and Dues
Vacations
PETS:
Food
Grooming, Boarding, Vet
CLOTHING:
INVESTMENTS AND SAVINGS:
401(K)or IRA
Stocks/Bonds/Mutual Funds
College Fund
Savings
Emergency Fund
MISCELLANEOUS:
Toiletries, Household Products
Gifts/Donations
Grooming (Hair, Make-up, Other)
Miscellaneous Expense
Total Investments and Expenses
Surplus or Shortage (Spendable income minus total expenses and investments)

It’s called inflation

15 August 2007 by Christopher Suleske

THIS is called inflation – and it makes that 5% raise you just got more or less a moot point. Sorry. But you probably already knew that, what with the cost of gas in recent years. Fortunately, some items have decreased in price over the same time span, namely the 27″ LCD TV we just bought.

Keeping up with… yourself

6 August 2007 by Christopher Suleske

IF you aren’t keeping up with the proverbial Joneses, why not? Read this NYTimes piece and catch up, man! Does bring up a good point, one I’ve made a few times, that a million or two hardly makes one “rich”. My current expenses are such that 5% interest on $1million, after taxes, would likely not cut it. More realistic today for my family is $2million.

I think of wealth in terms of what investment guru / radio host Bob Brinker used to (still does?) call “critical mass”. This was the amount of $$ that would permit you to live off the interest while never touching the principal… and hopefully growing the principal just a bit as well.

But there are other forms of wealth: family, health, friendships, pace of life, recreations, freedom from crime, developing one’s creative endeavors. Which would you trade for “critical mass”?

Cramer blows his stack

6 August 2007 by Christopher Suleske

JIM Cramer loses it. Do you believe it’s as bad as he thinks it is? Is the Federal Reserve clueless?

UPDATE (2007.08.07 10:09) – My father in law and I discussed this and he is of the opinion that Cramer’s histrionics are largely rooted in his less than complete embrace of the free market system. It’s his contention that many talk glowingly about free markets until something goes against them or their friends, switching rapidly to more socialist / government-interventionist talk. You can hear that in Cramer’s “they’re losing their jobs” rhetoric. That said, it’s hard to stand by when a friend or several are caught up in a macroeconomic event or series of events, such as is occurring in the mortgage and banking industries.

The next big thing

1 August 2007 by Christopher Suleske

The FCC decided yesterday to experiment with governing the nation’s radio spectrum, the hugely valuable broadcast rights that enable TV and radio stations, cell carriers, and other wireless devices to operate without interfering with one another. The commission was setting the rules to auction a chunk of the spectrum that’s becoming available because TV stations are moving to more efficient, digital transmissions of HDTV and other programming.

I mentioned Google’s take on this the other day and that the greater story is the tech (and perhaps financial) story of the next 5-10 years. Follow it closely, make a few wise equities purchases along the way, and you may well do very well.

Taxed to death

31 July 2007 by Christopher Suleske

I have yet to decide whether “the Fair Tax” is the way to go in addressing our jumbled mess of a tax code – and the concomitant runaway spending. But encouraging is that 6 GOP Presidential candidates, including the uncandidate, Fred “The Fresident” Thompson, have signed a pledge to support the measure.

I rather like the notion of a single rate income tax with high personal exemption (i.e. the “flat tax”). It’s a misnomer that this tax is flat, as that would be a system wherein each person pays precisely the same total amount, say, $5000. A flat rate tax with high exemption would tax you, say, 20 percent on all income over perhaps $50,000. Then the “poor” pay no taxes whatsoever. But then, is that fair? Not really. If you’re an American, you should pay some taxes, don’t you think?

What do you think? Should interest and dividends be taxed? How do you encourage investment and saving? Should we encourage such things or take a more libertarian approach? How do we exempt or lessen the load on certain groups of people (the aged, e.g.) without showing favoritism? Should we?

I’d have a certain set of simple rules, were I to take over the issue. First up would be the principal that no tax is ever levied where income has previously been taxed. That is, if tax is paid on the production of an item via a corporate tax, that item cannot be taxed in its sale. There are many examples of such double and triple taxation, the most egregious of which is the estate or “death” tax. I am selling a used car sometime soon, a car for which I paid a sales tax and for which previous sales tax was paid. If the purchaser registers it in Virginia, he or she will again pay a sales tax. How is it ethical to continue to tax an item for which taxes have already been paid? Don’t get me started on property taxes!

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