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russiangambit (29.91)

The FED is already behind the ball

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February 07, 2011 – Comments (5)

 

I was listening this morning on Bloomberg radio to a conversation about revival of commercial real estate thanks to the very low interest rates, which push people to look for opportunities in commercial real estate in search or return and how the mortgage rates are so low and favorable. Even GS didn’t expect such a recovery

 

http://seekingalpha.com/currents/post/68025

 

And it struck me how similar this is to the beginning of our housing bubble, - people are becoming very cognizant o artificially low interest rates and they are taking them for granted. I also hear all the time how current market P/E of 13 is low for where the interest rates are. Plus, I also keep hearing people are being pushed into stocks in search of yields or grandmas completely lost in this new brave world where they get 1% on their 5 years CDs.

 

Yet nobody seems to give a second thought that these low interest rates are ARTIFICIAL. We have already a beginning of the next bubble on our hands and FED is already behind the ball. When you have all mainstream financial world no longer fighting for survival and actually doing well enough to start building models based prolonged 0% interest rates you know something is wrong, you know FED is behind the ball. The 0% interest rates were set when the financial industry and the economy was on the brink of collapse. They are no longer for at least a year. It is time to remove them from life support even though it is already late and increase in interest rates will probably cause a mini-stock market crash. I am pretty sure though it will stabilize pretty quickly in view of saner monetary policy.  Low interest rates are like a drug for the economy, the dependency builds up pretty fast and it gets impossible to give up.

5 Comments – Post Your Own

#1) On February 07, 2011 at 1:22 PM, checklist34 (99.78) wrote:

it doesn't change the point you were making, I fully realize that.  but 5 year CD rates are about 2.5%, I just looked at bankrate.com

the negative/bearish view would be so much better served if it didn't veer into hyperbole and just remained factual. someone, kdakota I think, had a thread wondering why people didn't like Peter Schiff.  Thats why, he veers far from facts when talking, but always presents them as fact itself, concrete.  

Also, this time around low interest rates are accompanied by paranoid banks, not drunken bankers loaded up on cocaine stumbling around begging homeless people to borrow 200 grand.  (joke).  Its not likely at all that we are heading back to a repeat of the real estate party of 5 years ago.

The penalty to savers is ...  truly a bad thing, and a negative economic stimulus literally.   AT&T is still yielding 6+% though, aren't they, and raise the divi every year? 

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#2) On February 07, 2011 at 2:10 PM, russiangambit (29.91) wrote:

#1 - I bank at citbank and I see the rates every time I login.

Currently on citibank website:

Featured ProductsAPYInterest rate18-month CD 0.60%0.60%3-year CD 1.01%1.00%5-year CD 1.50%1.49%

And why is any criticism of the status quo is considered "negative bearish" view? My criticism is usually constructive, in other words I criticize only because I see an issue that needs to be fixed or see how things could be done better. Something is wrong when society starts putting unflattering labels on healthy criticism.

> AT&T is still yielding 6+% though, aren't they, and raise the divi every year? 

Sure, there are a number of stocks yielding about 5-7%, but who is going to tell grandma that? And how is she going to figure out when to buy and when to sell and what to buy even if she is willing to consider that option after 2 recent bubbles. It actually further undescores my point of using monetary policy to influence asset allocation and push people into riskier assets. Who gives the FED the right to decide and pick winners and losers?

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#3) On February 07, 2011 at 5:22 PM, amassafortune (29.99) wrote:

5-yr CD rates will probably rise from here, but for Grandma, that doesn't much matter. If she's been in a 1% CD for the past year, she'll be in a 1% CD for another four years - maybe 30-50% of her remaining life in many cases.

If she's got a good laddered collection of CDs, maybe she'll still be rolling over 4% CDs at 2.5% this year. It doesn't matter much, many Grandmas will still need to cut back on bingo or cut pills in half because free market forces have been altered.

With Social Security in it's second year of 0% COL adjustments and a Fed inflation target of 2% that it hopes to blow out of the water, she'll be further squeezed.  

Sure, if rates go high enough to cover the penalties, she can cash them in, but who wants to put that much effort into what is supposed to be a safe, no-brainer investment? CDs, for many older customers, are intended to free up time and eliminate worry so one's remaining years can be spent meaningfully, rather than out-maneuvering the Fed. 

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#4) On February 07, 2011 at 11:35 PM, tekennedy (72.18) wrote:

"Yet nobody seems to give a second thought that these low interest rates are ARTIFICIAL." 

This may just be semantics, but because the government controls the supply of money they can essentially set whatever interest rate they want and any interest rate would be just as "artificial."  Temporary, yes; artificial, no more than normal.

Personally, as for the misfortune of retirees and those close to retirement I blame the financial industry as much as I blame the government.  People close to retirement should have locked in normal rates through annuities, treasuries and corporate debt and the current low rate environment (the market crash, etc.) should have had a minimal impact on them.  The government deserves blame for mismanaging social security but the financial industry has been a horrible financial steward and current/near retirees are paying for it.

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#5) On February 08, 2011 at 9:02 AM, russiangambit (29.91) wrote:

> This may just be semantics, but because the government controls the supply of money they can essentially set whatever interest rate they want and any interest rate would be just as "artificial."  Temporary, yes; artificial, no more than normal.

No doubt, ideally I would rather free market supply/ demand control  the cost of money (interest rates). That is what it was like in pre-Central Bank era. It had its own issues though because money was backed with gold and not elastic and accomodative enough.

However, being pragmatic you can easily enough estimate what the "natural" cost of money range it. it is definitely not 0%. If you look around at projects being done, the minimum ROI is around 15-20%, nobody is going to even bother for less. So, if you get 15%, how much would you be willing to pay for capital and how much you would be willing to lend at knowing that they guy you are lending to  will make about 20% on it? You'll probably want at least 5%, right? Somewhere between 5-7% is the realistic cost of capital, not 0%-2% .

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