As we have been discussing
for some time, Real Estate remains the most robust sector of the economy.
reveals the reason why the Fed
faces a Hobson’s choice is between a rock and a hard place: Either keep raising rates, in order to cool off
what is obviously a hot sector, which, while not quite a bubble yet, is at risk for becoming, one. The Fed missed the opportunity to let some air gently out of the tech stock bubble in 1999; surely, they do not want to (once again) miss yet opportunity to avoid a bloodletting.
Ahhh, but here’s the rub: doing so risks smothering the
most vigorous source of U.S. growth — the Real Estate complex of builders, contractors, mortgage underwriters, etc.
Let’s add another element into the mix, just to complicate things: Inflation. Here’s the rub — I’m not sure the Fed can do much to stop this present flavor of inflation. This is a non-monetary inflation, one with zero wage based pressures. Health care, education costs, oil, copper, concrete, aluminium, dairy products, meat chicken — how much impact will another half dozen or so 1/4 point increases have on any of these prices? Most of these are rising independent of monetary policy.
It may be that the only way the Fed can slow these price increases is to induce a Recession. Is that what they are thinking — cause a recession to slow price increases? (I hope not).
While they attempt to walk the razor’s edge, we should remain cognizant that inflation is also a natural response to healthy growth. Demand for raw materials rise, Targetting inflation by removing the "accomodation" has some pretty foreseeable effects: reducing finance driven manufacturing, auto sales, and of course, real estate.
The one peculiarly disconcerting issue is why interest long rates have not gone up, assuming that 1) trhis is a healthy expansion, and b)the demand for Capital is as robust as some economists claim.
While we are discussing Real Estate, I would be remiss if I did not point to a pair of posts from Calculated Risk on new home sales in the US:
click for larger graphic
For more on this subject, see:
Update: May 3, 2005 12:03pm
The WSJ’s Steve Liesman asks a similar question: "Is the Fed trying to pop the housing bubble?"
"[E]ither Mr. Kohn is clueing us in to a change in thinking by
the chairman, or he is parting with the chairman in some significant areas.
Everywhere Mr. Kohn looks, he sees imbalances in the economy. The
trade deficit is too large, as is the federal budget deficit. The savings rate
is too low, as are long-term interest rates. And the housing market looks
clearly to be the focus of speculation. "The climate of low interest rates has
in turn bolstered asset markets in some countries, especially residential real
estate markets,” he says. He also notes, more ominously, that "recent reports
from professionals in the housing market suggest an increasing volume of
transactions by investors …”
At times in the speech, the Fed governor is optimistic about how
these imbalances work themselves out, as long as the FOMC sets the right
"Ideally, the transition would be made without disturbing the
relatively tranquil macroeconomic environment that we now enjoy,” he said. This
is sort of the party line. Yet in the next sentence, Mr. Kohn says, "But the
size and persistence of the current imbalances pose a risk that the transition
may prove more disruptive."
The Fed Beyond Inflation
Steve Liesman’s Macro Investor
A Governor’s Remarks On Economic Wrinkles Could Signal Shift at Fed
April 29, 2005
"Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."
– John Maynard Keynes, Tract on Monetary Reform
- Economists and fundamental analysts often miss cycle turns.
- There’s always another recession — and expansion — coming (eventually).
- Learn to separate hand-wringing permabears from credible commentators.
If you have been listening to the financial press recently, you might be shocked (shocked!) to learn that inflation has been increasing and the economy is slowing.
You don’t say?
Of course, readers aren’t just now discovering that this economy has been suffering from inflationary pressures for more than two years, as a chart of the CRB shows.
It’s the same with GDP. Follow the numbers: The third-quarter 2003 number was 7.8% (originally reported as almost 9%), the next quarter’s was 4.2% (originally 6%+) and 2004′s quarterly data came in at 4.5%, 3.3%, 4.0% and 3.8%.
This week, we learned the first quarter of 2005′s number of 3.1% was way below consensus expectations. While some will tell you that 3%+ GDP growth is pretty decent, it’s the trend of waning momentum that is the issue. An early mentor of mine used to admonish traders to not look at the photo, but to watch the full movie instead.
So much for the idea of kinda-sorta-eventually-efficient markets hypothesis.
Slowing GDP and rising inflation have been discussed on this site for over a year now. The investing issue with macroeconomic concerns is not the actual data, but how — and when — that data affects psychology. It’s a question of timing. The commentators who are first now discovering weak GDP and inflationary pressures are not much help to you once the ocean is flat again.