Posts filed under “Fixed Income/Interest Rates”
Forget, for the moment, the specifics of the May 10 Fed Minutes. Instead, consider the decision making process the FOMC goes through.
When making complex decisions with serious ramifications, it is useful to understand what is at risk if you are wrong. That one factor impacts various outcomes dramatically.
Its a given that the future is unknowable. The complexity of the economy, random events, unexpected interactions, dumb luck — force all forecasters to recognize the inherent possibility, and indeed, high likelihood of error. Typically, that recognition colors policy making. (Consider recent examples where expectancy analysis was ignored in the policy making process — with dire results).
Once you get through that process of error expectancy, then play out the various decision tree possibilities: The results are why the Fed tendency to overtighten is all but a fait accompli.
And, we like it that way.
Why? What is the worst case scenario if the Fed Overtightens? The economy slows, maybe we even have a recession. Not to make light of what is always a painful situation, but — so what? Recessions are a normal part of the business cycle. The U.S. economy is flexible, multi-faceted and resilient enough that a mild recession — or even a strong one — is a minor inconvenience in the grand economic scheme of things.
Consider: A recession reprices overvalued assets; It creates a cathartic cleansing that forces efficiencies where there were none before. It removes excesses that have developed.
Has the U.S. ever not bounced back from a recession? Of course not. Over the next century, we will have a dozen or more recessions, and an equal number of recoveries.
But consider the alternative error: What happens if Inflation is no longer contained — if it gets away from them?
That is a far, far worse outcome than a recession. I am old enough to remember the nightmare of the 1970s. I have no desire to live through THAT again (and I’m not referring to Disco, Bell bottoms or Nixon). It was FUGLY:
Once inflation is no longer contained, it becomes a runaway wildfire. The Fed — indeed, central bankers everywhere — find it difficult to play catch-up. Inflation is self-reinforcing — it forces everyone in the system to raise prices, pass along increases, demand higher wages. It feeds upon itself.
The response? The Fed goes Volcker (now, a verb) on the economy: They force
an even more severe recession. The medicine to recover from this is a brutal, economic chemotherapy. It can take a decade to recover from uncontained inflation — or the cure.
That’s the dilemma confronting the Fed. What is the worst case scenario if they are wrong and overtighten? We get some unpleasantness — but nothing fatal. No one likes recessions, but they are a natural part of the business cycle. (We don’t care for death either, but its a part of life). After the Recession, comes the Recovery.
This is why the Fed tends to overtighten. We always
– ALWAYS — rebound from a recession. Relatively quickly, also. But 1970s-style inflation is a spectre that haunts the dreams of all economists — especially those
who sit on the Fed.
Given this choice of potential negative outcomes, what would you do?
Sales of existing homes surprised to the upside yesterday. But one data point does not make a trend. This is the first rise (sequential monthly change) after 5 straight months of falling Home Sales. And that’s before we examine the data.
Before you declare the end of the housing slow down, consider:
- Existing Home sales actually slipped vs. last year by -0.7%; The reported gain was over last month’s data;
- the Inventory of unsold homes soared 7 percent in March, hittting an all-time record; There are now 3.19 million existing homes for sale, or 5.5 months’ supply; That’s the largest inventory since July 1998
- Existing homes edged up 0.3% last month to a seasonally adjusted annual rate of
6.92 million units; (we know that seasonally adjusted data is not always accurate)
- Year over year, the Northeast and Midwest gained, while the previously hot housing markets in the South and the West slipped;
- median home prices are still rising, albeit nmore slowly — up 7.4% year over year, to $218,000.
Here’s a data point that has me scratching my head: Why are there different numbers for the year-over-year changes for seasonally and not seasonally adjusted? Was this March somehow in a different season than last year’s March? I am perplexed.
Note that data for existing home sales comes from National Association of Realtors, a group that is certainly an interested party; Of course, as a homeowner, investor, and someone with a public bearish tilt for the second half, I’m hardly objective myself (hey, I try). But this oddity — down -0.5% for the not seasonally adjusted year over year versus down -0.7% for the seasonally adjusted year over year — is beyond my comprehension.
So much for the hard data on existing sales; Today, we get New Home Sales. Recall our prior admonishments that monthly New Home Sales Data are unreliable; look instead to a moving average.
Let’s move onto some anecdotal evidence. A friend writes:
"Flop! Wow, KB running blue light specials in California. Not surprising,
Chico area was rated one of the most overvalued markets in the country. Houses
in the $200k space. When was the last time you saw that in California? "
Here’s the sales pitch:
"Oak Knoll Place in Live Oak is located in a beautiful
community near the majestic Sutter Buttes. With easy access to Highway 99, it is
ideally located for easy access to Sacramento, Lake Tahoe, Reno and a wide
variety of recreational opportunities. Yuba City and Marysville are
approximately 10 minutes south, Chico is approximately 35 miles north and the
Gray Lodge Wildlife area is approximately 10 minutes west. Live Oak has a
quaint, small-town atmosphere with many nearby recreational water activities,
including the Feather River, Yuba River and Sacramento River. Prices starting
from the High $200′s."
I don’t know Live Oak, but houses like that in California are hard to imgaine . . .
More after the jump.
Existing-Home Sales Rise Again in March
NATIONAL ASSOCIATION OF REALTORS
WASHINGTON (April 25, 2006)
Existing Home Sales data
NATIONAL ASSOCIATION OF REALTORS