Global Inflation Doom Scenario

OK, whenever I write about global economics, Transparent's real estate based readers disappear... try reading this though... There is a new economic reality today -
heated "global inflation" suddenly appeared last week - and it surprised traders and economists alike. The real estate community is directly affected by the shock - 30 year mortgage rates jumped 1/4% since Friday.

A month ago, I had been mystified by the continuing, almost harping Fed stance warning of US inflation risks while the markets were signaling that interest rates needed to drop to assist a faltering economy and housing market. My simple conspiracy theory idea was that the Fed was working in concert with the Asian Central Banks to keep them buying US Treasuries by promising not to drop the rates (which would devalue their massive portfolio of US Treasuries). It turns out that we're at the mercy of the global poker game, the Fed has no control over the fact that China's high inflation reports last week prompted this latest crisis...

There's one (among several) plausible reason why US Treasury prices are dropping - Asian Central Banks have retreated from buying bonds and are moving more money into equity based investments, as exhibited by the global stock market growth.

As I write this, the BBC News Blog publishes We're all Doomed?, in which Robert Peston posits that we, as in the global consumer, have all been treated to a feast of borrowing long term money at low interest rates. It's catalyzed a global boom in real estate and stock prices over the past five years. Now the low interest rate game seems over, and the gamblers (on a smaller scale, they are the subprime lenders and real estate speculators) are headed for the exits. China itself may be one of the gamblers... saddled with a huge bond portfolio that is losing value daily, it's plowing more money into higher risk / higher return equity investments in the same way a gambler will make riskier bets to cover losses. This kind of portfolio unwinding is inherently destabilizing and Peston points out that although stock markets may maintain their price levels in the short term as Asian money flows into them, higher inflation will eventually cut into profits and force a downturn, a global downturn... and that's where the doom comes in.

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  • 6/13/2007 10:01 AM Dan Green wrote:
    The "high stakes poker game" analogy is a frightening thought. Maybe a little bit too much conspiracy for my tastes, too. But, it's plausible.

    Bottom line: as long as the dollar keeps losing value, U.S. dollar-denominated MBS will be less attractive to global investors -- Japan, China and everyone else.
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  • 6/13/2007 6:18 PM Incredible Agent wrote:
    Your right Pat...BORING! My snooze alarm went off when I read the headline.(JK) None the less, the economy is obviously extremely important to RE. Now that we are building and participating in the global economy, we will have some hard lessons to learn with a lot less control. Can we blame this on Wal-Mart?
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    1. 1/15/2008 10:06 AM The Oracle wrote:
      Definitely! We have to blame someone. It would be hard to pin it on Iraq or North Korea, so it will have to be Wal Mart.

      Incredible Agent gets 8 points. I get the other 2 as commission.
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  • 6/14/2007 4:26 PM Karim Tahawi wrote:
    Nice post. Since I am in the predictions business, here goes: this is the beginning of a secular bear market in interest rates. We have had something like a 20 year bull market in bonds and now we will have a period of correction. Last I checked, there is a pretty strong inverse relationship between housing demand and cost of money. Recommendation: borrow 30 year money to pay rent
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