This is an excellent post written by Robert Ashby. I don't reblog too many posts, but when they are spot on, such as this one, people need to read about it. You don't hear about this that much, because in many ways it's negative. It doesn't help consumer confidence. The gov't and media like to portray good news, to make us all happy and warm inside. But when the ball drops, then what? How about knowing some of this stuff before it happens, hence why I wrote this blog a few days ago.
Mortgage Interest Rates will go LOWER !!! Interest rates will go lower !!!
Thanks, Jeff Belonger "Mortgage Knowledge at its Best...."
On Friday, we saw the release of the CPI (Consumer Price Index) and it showed inflation to be tame overall, actually falling into Bernanke's concerns, deflation. Even when you look at the Core CPI, removing volatile food and energy from the equation, you still only see a small inflationary rate over the last year, just 1.7%. But is the inflation rate really that low, or is it that the CPI is not showing reality, at least not yet?
First off, CPI can be manipulated somewhat, so let's just look at what we buy in the supermarkets everyday. Everywhere you look, if you look closely enough, you can see "hidden inflation." You can see it in the packaging of the products we buy, as the prices have not changed while the packaging has actually shrunk. You may not even notice it, but look again and you will see that a half gallon of ice cream is no longer a half gallon. A jar of peanut butter may have a larger dome in the bottom to hide the fact it is smaller as well. Just take a look at a lot of the products you buy daily and you may very well see that inflation is being hidden right in front of your eyes.
Now, what is inflation in reality? In a post I did a while back, When Lethargic Rabbits Start Running, I discussed inflation in detail along with the real problem today, which is the velocity of money. Please read that post, or even re-read it, before you continue as its key points will be brought up again.
While Bernanke and his buddies keep bringing up deflation, etc. to justify their positions (and desires), reality lurks in the darkness. Bernanke stated in his 2002 speech that he wants nothing more than to debase the dollar in order to create inflation. Evidence shows that the broad money supply (M3) is back on the rise, including growth in the required reserves at depository institutions, hinting that the velocity of money is rising again (aka lethargic rabbits start running), with some believing that double digit inflation may be seen later this year.
Adding to the problem is the fact the Federal Reserve may begin monetizing Treasury debt due to the likely drop off of foreign demand in US Treasuries, which we are already seeing. With the Treasury needing to increase fundings to cover the stimulus package and the additional relief/bailout efforts, the Feds may be buying up Treasuries and will assist in reigniting inflationary pressures. Wonder the truth of that, just read the Fed's last FOMC statement where they outlined it...
"The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets."
With the government printing presses running full-time around the clock, the debasing of the dollar as commanded by Bernanke is in full swing. The only saving grace we have right now is that the US dollar is still the best of the worst paper out there and that is keeping the dollar's value alive, which is keeping much of the commodity prices in check as well. Gold is not taking the bait, though, as it is back over $1,000, so gold traders are signaling inflation is alive and well.
What does this mean for mortgage rates? Mortgage bond traders, you know those mortgage backed securities that I told you are the driving force of mortgage rates, are already signaling their concerns about inflation by preventing mortgage rates from dropping further. As chart patterns solidify, all signs are indicating that mortgage rates will be climbing again and may very well do so even if the Feds buy all the MBS. Of course, that all makes sense since inflation is the arch enemy of bonds, mortgage bonds included, and as their prices drop, yields rise and that translates to higher mortgage rates.
Now, all of you sitting on your butts waiting for those government promised lower mortgage rates should stop laying your faith in our government and just buy that home or refinance before it costs you too much to do so. Those promised lower mortgage rates may very well never be seen!!!
Jeff,
Such wisdom!
You do realize that many don't care and many more have been bought and paid foe with COLAS*!
Please keep preaching. Robert is an excellent source of wisdom.
We must remember"God helps those tha help themselves."
Bill
*COLA, cost of living adjustment, a system for buying votes where you isolate the voter from the consequences of foolish voting. A way to profit from inflation.
When the ball drops? That's when the finger-pointing starts. Or maybe it just increases. I have a question though. Why would Bernanke want to "debase the dollar in order to create inflation"?
I am shocked we haven't seen a major move in the bond market pricing in all the new debt that is going to have to be issued to pay for the bailouts and stimulus. Almost none of this debt has been issued YET, and the we literally playing with fire at this point. That's a massive amount of supply of long term debt but where's the demand going to come from? There is a very real potential for a 1930's style bond market crash where you see interest rates go from where they are now to double digits literally within months, and there would be nothing the gov. or FED could do to stop it.
Another good article I saw on inflation:
http://farmlandforecast.colvin-co.com/2009/02/21/the-stimulus-plan-inflation-expectations-and-what-it-means-for-farmland.aspx