"An Analysis of Real Estate and Economic Trends"
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The Bernanke Dollar Put and Interest Rate Call
Obviously, everyone knows the The Fed cut rates by 50 bps this week AND the discount rate another 50 bps. Until yesterday I thought "Helicopter Ben" was doing a good job to try and clean up the mess Greenputz left him. The aggressive rate cuts yesterday have changed my opinion of The Fed Chairman because of the impact this reckless policy is creating for our economy. I know many of you are feeling good because of the stock market reaction after the cut. This euphoria in the market will not last forever with some of the existing problems related to leverage and easy credit.
Ben Bernanke is called "Helicopter Ben" for the following reason:
In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation. In that speech, he mentioned that the government in a fiat moneysystem owns the physical means of creating money. Control of the means of productionfor money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedmanabout using a "helicopter drop" of money into the economy to fight deflation.) Bernanke's critics have since referred to him as "Helicopter Ben" or to his "helicopter printing press". In a footnote to his speech, Bernanke noted that "people know that inflationerodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."
If you want to see "Helicopter Ben" actually fly his helicopter click here: He is VERY talented!
Here are some quick definitions so you understand the title of this article. A put option is used for an investor who feels bearish and wants to short or hedge a stock or portofio. So if you think Countrywide, for example, will drop over the next few months you can buy a put instead of shorting the stock. If you think Countrywide will rise over the next few months you can buy a call instead of going long on the stock. Buying puts and calls during certain periods based on where the stock market is positioned is often an excellent risk management strategy for qualified investors and it is cheaper to use options versus buying or shorting the stock outright.
Put option
An option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned.
Call option
An option contract that gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
So now you have the basics of Puts and Calls so let me
explain what the title of this article means and how it impacts you, Mr. and
Mrs.
The 50 bp rate cut will now put even more pressure on the US
Dollar to the downside. The dollar,
which used to be strong a couple of years ago, has been pummelled over the past
few years to the downside. The Fed who
has been so concerned about inflation in recent meetings SUDDENLY applies an
inflationary rate cut that probably will devalue the US Dollar even
further. Below is a Point & Figure chart that shows the US Dollar has
depreciated from $120 in 2002 to around $80 at the present time. This is
a 33% drop in just 5 years! What this means is that if you travel to
Interest Rate Call?
Just recently,
The Saudi central bank said today that it would take "appropriate measures" to halt huge capital inflows into the country, but analysts say this policy is unsustainable and will inevitably lead to the collapse of the dollar peg.
There is now a growing danger that global investors will start
to shun the
The danger is that this could now accelerate as the yield
gap between the
The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, driving the property market into even deeper crisis. So if the dollar and bond market collapse "Helicopter Ben" has opened up another can of worms for the entire economy.
Back in August 2007 the Chinese government began a
concerted campaign of economic threats against the
Source:Telegraph.co.uk
When we take a look at the 10 year yield (TNX) we see a very interesting picture. Clearly a base has been formed and interest rates have stayed relatively stable after a signifacant decline after the dot com bust. The recent action on the TNX also shows a recent break in the rising trend. In my opinion this downward action on rates presents a very unique opportunity for long term home buyers in Interest Only ARMs that are going to reset in the next couple of years a window to refinance into a less risky mortgage. If there is a selloff in the near future among various Central Banks in China and Saudi Arabia you will see this chart spike back up and really throw the real estate market into a worst case scenario. The effect of this scenario would place more downward pressure on home prices around the country as financing becomes more expensive IF YOU GET A LOAN IN THE FIRST PLACE.
In order for The Fed to ditch the inflation argument/fight and drop rates they must be analyzing some worrisome data on the economy and a potential recession. So now inflation is contained? BS!!!
Gold is taking off. What a beautiful chart IF you are long!
The commodities index (CRB) is moving up and just broke the trend line.
Here are just some recent examples of price rises since the first of the year …
- The price of oil is up
- The average price of a gallon of unleaded gas is up
- Soybean prices are up
- Wheat prices are up
- Corn is up
- Copper prices are up
- And lumber prices are up
According to the latest CPI Report the "core" inflation rate only rose 0.2% in August. The kicker is this "core" inflation rate excludes inflationary items such as food and energy. What a worthless economic indicator! The last time I checked when my gas and grocery bill goes up that is inflationary and hurts my wallet. How about you?
So there you go. Our dollar will soon be used as toilet paper around the world and increasing rates via a potential Worldwide Central Bank selloff could be the final straw that breaks the real estate/economy back and accelerate downward pressure on home/condo prices in heavy real estate inventory areas around the country.
I hope I am wrong but this scenario is a possibility.
I will end with this quote from Paul Volcker:
"What I'm really talking about boils down to the oldest lesson of financial policy in Central Banking: A strong sense of monetary and fiscal discipline."
I SAY: "HOW DO WE IMPLEMENT DISCIPLINE IN A NATION ADDICTED TO CREDIT AND BAILOUTS. THIS ADDICTION IS VERY PROBLEMATIC AND OUR FEARLESS GOVERNMENT LEADERS DEMONSTRATE POOR LEADERSHIP ON THIS ISSUE."
THE CURRENT US DEFICIT IS:
U.S. NATIONAL DEBT CLOCK
The Outstanding Public Debt as of 20 Sep 2007 at 05:58:13 PM GMT is:
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The estimated population
of the United States is 303,037,971
so each citizen's share of this debt is $29,740.81.
The National Debt has
continued to increase an average of
$1.42 billion per day since September 29, 2006!
Concerned? Then tell Congress and the White House!
Good Luck!
Brad Rundbaken
Principal
Diversified Resource Group, LLC
(843) 297-2701 (Direct)
1-866-904-9650 (Direct Fax)
brundbaken@comcast.net
www.charlestonmarketreport.com
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