Around the Globe 10.02.2013

U.S. Government Shutdown Threatening Housing Recovery – Bloomberg.

New Home Sales

Just a few weeks ago, the so-called housing recovery couldn’t be stopped, but now the shutdown is threatening to stop it in its tracks.  New activity will fall a bit due to the technical factors surrounding the shutdown, and then the economy will make this up in future months.  All in all, housing activity should remain around where it is now, as indicated by the red circle, unless incomes move sharply upwards.

Draghi Says ECB to Act If Needed to Control Money Markets – Bloomberg.

ECB says all options open to temper market rates | Reuters.

ECB Benchmark Rate Through October 2013

Draghi offered nothing new in today’s press conference.  ECB will maintain low rates and will consider cuts as the “recovery” progresses.  A rate cut will do little to assist the peripheral countries as their rates will not change relative to Germany’s, but that won’t stop any post-cut rally.

Gross Says Market Mispricing Eventual Fed Target Rate Increase – Bloomberg.

Pimco’s Gross says low interest rates may persist for decades | Reuters.

Japanese Benchmark Interest Rate From 1981

Japanese GDP Performance From 1981

Bill Gross is correct.  Rates will stay low for years.  If you do not believe that this is possible without stoking inflation, I present Japan.  The BoJ has maintained a near zero rate interest policy for seventeen years without any inflation.  While inflation may be avoided, there are other negative consequences.  To see for yourself, examine the charts above.  Compare Japan’s GDP performance on the left and right sides of the red line and consider what this will mean for the stock market for the next decade.

Berlusconi U-turn secures Italian government’s survival | Reuters.

Berlusconi Backs Down on Threat to Topple Government –


Italian political crisis #1,047 since WWII officially ended with Letta’s successful confidence vote.  You can start buying Italian government bonds again.  Unlike the U.S., Italy had a political broker, Giorgio Napolitano, President of the Republic who was able to move among the various factions to broker a deal.  Acrimony runs so high in Congress that there is no obvious deal maker.  When a group steps forward, things will get moving quickly and Congress will do its job.

Bad-Loan Revival Unburdens Banks –

Fed Holdings of MBS

There is no such thing as a free lunch.  The Fed’s action have inflated real estate prices and bailed out the nation’s banks from many poor lending decisions.  The problem with this policy is apparent from the anecdote within the article.

The bank was able to sell a foreclosed property for $1.1mm rather than the initial estimate of $972k on a $1.2mm loan.  Sure, the banks losses were lowered, but this money came from someone, in this case factory-owner Mr. Hong.  What do you think he would do with that extra $128k? Maybe, he would have hired more workers, invested in a new machine to increase productivity or increased his marketing budget.  Each of these activities would have increased GDP.  Instead, the wealth is being transferred to the banksters where it will line fat cat pockets but will do little to spur GDP growth.


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