Thursday, May 21, 2015

That looks like overheating to me.

"Wall street investors and the Federal Reserve are both dismissing the possibility of the U.S. economy "overheating," Jim Paulsen said Thursday. "Overheating is not about growing fast; it's about demand growing faster than weak supply," Well Capital Management's chief investment strategist said in a CNBC " Squawk on the Street" interview. "We can grow at 2 percent supply-side, but I think that Wall Street is making a big mistake, including the Fed, in assuming that we can't overheat because we're growing so slowly." Source.

Today I was able to find a mortgage rate back down in the 3.50% range. Which is not surprising because this weeks mortgage app numbers were not good. I laugh every time someone suggests we raise rates because I know where I refinanced both my houses. I understand where the pain line is. And it's between 4%-4.5%. If things were going so swimmingly, banks would be raising rates on their own without the Fed like they did a year or two ago. It was a surprise to all of us who were waiting to refi, that the banks could just raise rates to around 4.5% without the Fed.

I think it made a lot of panic. We didn't know that could happen. But it did, and so all this talk about raising rates is just theater. The banks don't have to wait for the Fed to raise rates if they are doing well. The fact that rates have even touched 3.5 again suggests they are not. At a 4% rate, refi's had fallen to .03% growth. And you can see what is happening to mortgage apps under the higher rates. They've been promising they wold raise rates so long, they can't even scare a few people into getting into lower mortgages before they vanish.

I bring this up because every day everyone is freaking about raising rates. Should they be higher. Absolutely. I've just never heard of a government raising rates before inflation even exists. Or barely exists. Especially since we are importing deflation from other countries. Their economies are very weak. To be sure, the world is awash in money. And one day that is going to be a fire, but I think inflation will have to run hot before the economy is healthy enough to hike.

It's also really notable that food inflation is really tame right now. Outside of livestock. By this time last year the drought was putting a ton of pressure on that.

I personally feel there is a lot of pent of demand. I just doubt it will be released under this administration. More companies are still dying than being created. This is all setting up for a very uncomfortable situation in the future. Deflationary pressures are exceedingly rare. The Fed likes to call them transitory and they are right. Inflation is the norm. Just take a trek through the misery index. You've got 2015, 2009, and then you have to go all the way back to 1954 and 1949!

I'd like to see where he thinks we are overheating? Retail sales? Construction? Home sales? I mean,these make up a large part of the economy. So where? Because the misery index seems to think inflation vanished in January.

So, I think we are all actually aware of the dangers, we just think the economy isn't strong enough to handle a rate increase. It's probably why people aren't spending. We all know this is going to go tits up. You just don't know the day.

I think the Fed is fucked. If they don't raise in the next month or two, then what - they are going to raise rates right before Christmas?!? Then we have election season.

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