Thursday, May 04, 2006

Can strong job growth burst the bubble?

From the NY Post:


TOMORROW could be the day of wreckoning for the financial markets.
Don't write, I know how to spell the word. It's the day of wreckoning because a strong employment report Friday morning could wreck any notion that the Federal Reserve will stop raising interest rates anytime soon. And the report is likely to be strong - too strong.

In case you've lost count, the Fed has raised interest rates 15 times over the past two years. That has resulted in a big jump in short-term interest rates - hurting adjustable-rate mortgage holders and the like - even though long-term borrowing costs haven't budged nearly as much as the Fed would have liked.
The jobless rate, as anyone with a brain stem knows, is a useless number because people who are chronically unemployed and who have given up looking for work aren't counted in the 4.7 percent.

But the tally of new jobs is watched by Wall Street to a fault. And, as you might already know, that's probably because the statistic is so faulty. This month's number is likely to come in over the expected 200,000 because of springtime assumptions that the Bureau of Labor Statistics makes.

These optimistic guesses probably have something to do with blooming cherry blossoms and bellowing politicians.
With inflation rearing its ugly head in the real world, interest rates could start rising even faster than they have been and make long-term mortgages so expensive that they would chill housing prices.

So it's entirely possible that there will be a delayed reaction to those 15 rate hikes. Interest rates might not only continue their rise - but quickly surge - even if it's against the Fed's wishes.


Blogger minutesfromNYC said...

So buying a house may still be out of reach for many..unless you have cash?

5/04/2006 06:56:00 AM  
Anonymous Anonymous said...

Unless you have cash?

The whole problem today is a bunch of morons who saved nada and are willing to bet the ranch with a nothing down creative loan are buying houses pricing out those that have saved and sacrificed for a down payment.


GSML inventory:

5/3/2006 28,110
5/4/2006 28,209

It is relentless everyday every week every month the housing inventories keep going up.


5/04/2006 07:00:00 AM  
Blogger grim said...

From Bloomberg:

U.S. 1st-Qtr Productivity Rises at 3.2% Rate; Costs Rise 2.5%

Worker productivity in the U.S. rebounded in the first quarter at the same time labor costs rose twice as much as forecast, pointing to a risk of higher inflation.

Productivity, a measure of how much an employee produces for each hour of work, increased at an annual rate of 3.2 percent after a 0.3 percent decline the previous three months, the Labor Department said today in Washington. Labor costs rose at a 2.5 percent pace, compared with economist forecasts for a 1.2 percent rise.

Limits on the ability to meet demand with existing workforces and equipment are prompting companies to hire more and consider pay raises, posing a threat of accelerating inflation that may require more interest-rate increases by Federal Reserve policy makers, economists said.

``As the labor market tightens, we're seeing signs of further wage increases, and that's certainly something the Fed will want to keep an eye on,'' Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said before the report.
``If resource utilization, whether it's capital or labor, continues to rise, would that raise red flags in my mind about potential price pressures?'' Fed Governor Kohn said. ``The answer to that is yes.''

5/04/2006 07:42:00 AM  
Blogger RentinginNJ said...

From the WSJ:
"Many retailers posted strong gains in April sales, as a late Easter and apparel-shopping surge outweighed concerns over gasoline prices and rising interest rates."

I don't think the Fed is done just yet.

5/04/2006 07:43:00 AM  
Blogger RentinginNJ said...

So buying a house may still be out of reach for many..unless you have cash?

Maybe for a while as RE tends to be “sticky” on the way down, but ultimately RE will revert to the mean. Economic imbalances in a free market tend to work themselves out over the longer-term. Homes can’t be “out of reach” for most people over the long term. After all, the laws of economics dictate that the price of “something” is based on what someone else is “willing and able” to pay for it. Over the last several years, the “willing” part has come from the notion that RE only goes up; it may be expensive, but it’s the road to riches. The “able” part has come from low interest rates, exotic loans and the disintegration of lending standards. These factors are both quickly disappearing.

People will sit on the sidelines for a while, but this won’t last forever. Either home prices must drop or the economy must catch up to home prices. In the alternative, people can seek lower cost areas.

5/04/2006 07:59:00 AM  
Blogger grim said...

From Bloomberg:

U.S. Treasuries Fall After Labor Costs Rise More Than Forecast

U.S. Treasuries fell after a government report showed labor costs rose twice as much as forecast, adding to concern that a strong jobs market will cause inflation to accelerate.

Ten-year note yields are the highest since May 2002 as traders and investors increase bets the Federal Reserve will raise interest rates twice by July to keep inflation in check. The $4.2 trillion Treasury market has lost 1.89 percent this year.

``The market is growing increasingly concerned with the potential for an upward move in inflation at the same time that the Fed seems more positioned to pause,'' said Kevin Cronin, who oversees $67 billion as chief investment officer for fixed income at Putnam Investments in Boston.

The yield on the benchmark 10-year note climbed 2 basis points to 5.17 percent at 8:51 a.m. in New York, according to bond broker Cantor Fitzgerald LP. Yields move inversely to bond prices. The price of the 4 1/2 percent security due February 2016 fell more than 1/8,or $1.25 per $1,00 face amount, to 94 15/16.

5/04/2006 08:02:00 AM  
Blogger Metroplexual said...

More dope, from the "money honey".

MAY 4, 2006

By Maria Bartiromo

Straight Talk from the Fed
New York Federal Reserve President Tim Geithner on housing prices, regulation, and the post-Greenspan era
A lot of ink has been spilled and hot air emitted over comments Fed Chairman Ben Bernanke made to me and two other guests at the Apr. 29 White House Correspondents Dinner in Washington. His point was that the markets and the media had misread his remarks to Congress the previous week: A more flexible approach to raising interest rates was interpreted as softness.

The larger point was that trying to be clearer about the central bank's goals is not always easy. But there is a new openness at the Fed. That was evident when I had a chance to visit with Tim Geithner, president of the influential Federal Reserve Bank of New York.

How worried are you about $70 oil cutting into economic growth?
The world has handled this energy price shock surprisingly well. But...future price moves could cause more damage than they have so far.

How worried should we be about the imbalances created by the twin deficits [budget and trade]?
The imbalances in the world economy -- they are not solely in the U. S. -- are too large and are clearly unsustainable. But...we will be living for the next decade with the shadow caused by these imbalances and also with the risk they present of occasional volatility of asset prices and perhaps periods of slower growth here and elsewhere.

Has real estate really slowed down?
A range of indicators suggest housing is cooling, but...the hard question is assessing the degree to which households might become more cautious in response to the end of the housing boom.... So far we haven't seen much evidence of higher savings or slower spending growth. But that doesn't mean we won't.

What regulation is appropriate for hedge funds?
Hedge make our markets more liquid, more efficient, better at matching capital to its highest return. But...there is some risk that they could exacerbate a crisis. The most effective way to mitigate this risk is...for major financial institutions to maintain an adequate cushion -- in terms of capital, margins, liquidity -- against a more adverse future and to make sure the infrastructure that supports our markets is robust. Our principal objective [is] to make sure the core is strong enough to withstand financial distress in the hedge fund sector.

Is there another LTCM [the Long-Term Capital Management crisis of 1998] lurking out there?
Even though the core institutions are strong in terms of capital, and risk is now spread more broadly, rapid growth in derivatives and hedge funds creates risk that future financial stress may be harder to manage.

How have things changed inside the Fed post-Greenspan?
This is an institution where the chairman has a big role, so of course there will be change. But as Ben [Bernanke] has said, his basic approach to thinking about monetary policy is very similar to Greenspan's. I suspect that even though the way the meetings are run will change, you will see continuity in policy.

Will the Fed be more transparent?
It's a sensitive question to answer. Ben is a champion of transparency in monetary policy, but he also recognizes that there are limits to what we know about the economic forecast and what that means to monetary policy. And he understands that we can't give the markets more clarity about the forecast or about future policy than we have ourselves.

Sarbanes-Oxley is controversial in the U.S. but even more so overseas. And international companies seem to be increasingly listing in London and Hong Kong as a result of the tight regulation. What is the risk to U.S. capital markets? And is SOX worth the enormous cost for U.S. companies?
It is important to try to preserve the basic benefits of sox and achieve the broad objectives that motivated it, but with a better ratio of cost to return. We do see some troubling signs...that some people [may be] less willing to raise capital in the U.S. [It's] important to watch this very carefully. Anything that creates a significant risk of making people less willing to raise capital in the U.S. or to invest in the U.S. should be a concern.

Maria Bartiromo is the host of CNBC's Closing Bell

5/04/2006 08:03:00 AM  
Blogger grim said...

For those that didn't hear.. Louis Rukeyser passed away yesterday.

Most know Mr. Rukeyser as host of the long-running television show, Wall Street Week.

We'll miss you Louis..

I think the folks over at Big Picture said it best..

A few words about Louis Rukeyser

In this age of shout TV, it is almost impossible to imagine a gentleman like Louis Rukeyser even getting on the air, no less getting his own show. He took the time to interview guests at length, to delve deeply into different areas and investment styles. Everything he did appeared to be the result of deep thought and quiet contemplation. You suspected he worked on his opening monologue all week – and it showed.

Lou was clearly of a different era, and I suspect he reveled in that fact. Could you picture him yelling Boo-Yah? (Me neither).

We have become victims of our own ever decreasing attention spans. In the place of that quiet contemplation, we get more noise than signal, more heat than light. There’s increasing less in the way of actual insight on financial TV, as we have opted instead for info-porn and entertainment.

His quiet solicitude will be greatly missed.

5/04/2006 08:11:00 AM  
Anonymous Anonymous said...

Bad news bubbleheads. just cash out refi your way to prosperity

The Washington Post. “A greater proportion of mortgage refinancers tapped their home equity for cash in the first three months of this year than in any other quarter in the past 15 years. About 88 percent of people refinancing their homes took out loans for at least 5 percent more than their original balances.”

“‘If you are watching and listening, the Fed is telling you interest rates are going to climb,’ said Amy Crews Cutts, deputy chief economist at Freddie Mac.”

“‘Our policy of using our homes as our banks is bad public policy, and we need to think of the long-term implications of the debt we have. It’s a homeownership economy where people don’t really own their homes,’ said Ira Rheingold, general counsel of the National Association of Consumer Advocates.”

“Mahesh Desai decided that because interest rates were about to rise, it was time to refinance his house in Darnestown. ‘I’m still going to have sticker shock in my next payment, but I’ve enjoyed lower rates for a while,’ Desai said. ‘Guess the party’s coming to an end.’”

“His new rate is 6.625 percent, and the monthly payment will jump 72 percent. It is an interest-only loan, but he will be pressed to afford the new payment, even without paying down the principal. ‘I’m going to work harder and sell more,’ he said. ‘I don’t have a choice.’”

5/04/2006 09:03:00 AM  
Anonymous Anonymous said...



Housing BUST!!!!!!!!!!!


5/04/2006 09:10:00 AM  
Blogger jhawk92 said...

Finally got a profile set up in Blogger...

Chicago, others, what do you think of the other countries & EU announcing rate hikes?

How will this impact the treasuries?

Looks like 10 yr is sitting at 5.14 today...


5/04/2006 09:23:00 AM  
Anonymous Anonymous said...

Maybe we should enter our credit card info to provide proof of age before we post. That way we can avoid useless posts from kids like Bob.

Mr. White

5/04/2006 09:40:00 AM  
Blogger RentinginNJ said...

I have a one-year CD that just matured this week. I plan on rolling it into 6-month T-bills. The question is whether I should do this before of after the May 10 FOMC meeting. Will it make a difference? While the expected May rate hike is already priced in, it’s the accompanying policy statement I’m more interested in. Any thoughts?

5/04/2006 09:46:00 AM  
Anonymous Anonymous said...

Mr. White,

This Boycott is for you.

Ba ba ba ba ba ba ba BOYCOTT HOUSES!



5/04/2006 09:58:00 AM  
Anonymous Anonymous said...

I'm interested in a reply also to rentinginnj's question.

I'm also renting in NJ and also looking to put $ into CDs or treasuries. Is it worth waiting until after May 10 as he asked?

5/04/2006 10:05:00 AM  
Anonymous Anonymous said...

Sorry, but people who are chronically unemployed are basically morons. Anyone with a college degree can get a reasonable job these days.

If these people can't find jobs, they should go back to school and get more education.

5/04/2006 10:22:00 AM  
Anonymous Mr Black said...

If you don't like Bob's posts, just scroll past 'em.

To me they're often funny.

5/04/2006 10:28:00 AM  
Anonymous Anonymous said...

what's funny is Mr. Black is obviously "Bob". you're the only moron here Bob Black.

Mr. White

5/04/2006 11:05:00 AM  
Anonymous Anonymous said...

Now this blog is getting to be fun. The sparring between Bob ("Mr. Black") and "Mr. White" reminds me of the scene from "Reservoir Dogs" when Lawrence Tierney is leading a session to help plan the jewelry store robbery.


5/04/2006 11:20:00 AM  
Blogger grim said...

Don't bother trying to time the treasury market. I did.. I lose every single time.

I realized that it makes more sense to set up repeat purchasing and forget about it.

I just ladder equal sums of 4, 13, and 26 week bills.

Repeat purchasing can be set up in weekly, bi-weekly, or monthly intervals.

So, for example, you could set up automatic weekly purchases of $1,000 in 4-week t-bills. Each week you automatically participate in the auction. You'll hit a point where your balance in 4-week t-bills stays constant.

You can do the same with the longer term t-bills. You can do it weekly if you have enough money to participate in 13 or 26 weeks of auctions at the minimum purchase, or just set up monthly puchases.


5/04/2006 11:26:00 AM  
Anonymous Mr Black said...

Actually, I am not Bob.

5/04/2006 11:46:00 AM  
Blogger chicagofinance said...

jhawk92 said...
Chicago, others, what do you think of the other countries & EU announcing rate hikes?

How will this impact the treasuries?
10:23 AM

A lot of the news in this area has already been anticiapted. To the extent that there is NEW information, it would tend to attract [to be clear - on the margin] foreign investors out of U.S. Treasuries, and also cause some U.S. investors to diversify away from Treasuries.

It also causes the "cost of carry" of borrowing in that currency to be higher so it introduces pressure on those countries financial markets as well as any market in which those foreign nationals invest [to be clear - on the margin].

It sounds crazy, but the Bank of Japan raising rates could actually have the effect of lowering U.S. bond and stock prices, and also drive down the value of the U.S. dollar as currency flees toward Japan/yen-denominated investments.

Ceteris parabus - meaning holding everything constant.

As we know, there is so much noise in the data that we observe, that it is virtually impossible to see these effects in isolation unless it is a massive dislocation. The effects are often overwhelmed by other current events of the day.

5/04/2006 11:57:00 AM  
Blogger chicagofinance said...

Just thought of this....

Observing these effects in the market - you don't see it - but it is like Ragu Spaghetti Sauce -

"it's in there"

5/04/2006 12:00:00 PM  
Anonymous Anonymous said...

to Anon 10:40am,

Tighty whitey lighten up, I enjoy Boooya Bob.

5/04/2006 05:22:00 PM  
Anonymous Anonymous said...

"So buying a house may still be out of reach for many..unless you have cash?"
Not true. Those with cash do not choose to "invest" in an asset that will likely decline in value by 20% over the next 2 years.

5/04/2006 08:38:00 PM  
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