Inflation Scare Over

the fear is mostly deflation, not inflation. This is bernake's reasoning for QE I and II and possibly III. RE a deflation hedge???? not a good idea, actually a bad idea. RE Estate will deflate too. Deflate assets mean that you will be able to buy an asset at a lower px in the future. Cash would be the best investment.. and this is what is currently happening on a personal and a corp level.

So where is the "hedge"? If inflation is at 3%, money market funds 1%, Treasuries (< 10 years) in the decimal range, and the stock market too volatile for the faint of heart - where do you park those extra shekels?

bernanke would blow you for 3% inflation

>> "bernanke would ___ ___ for 3% inflation"-- true..
inflation will help the US get out of it's huge deficit problem. He(bernanke) what's to inflate the US out of all its problems.. ie. if your credit card debt was $1,000 20 years ago that might have been a big burden for you. Today that debt might not be as big of a burden(not the best example because inflation has been very tame over the last 10 years).

I did not read the link. RE is a good Inflation hedge, bad deflation hedge. It you want to hedge against deflation, putting your hard earned $$'s with Grannies under the mattress is the best idea. ie, the $1mm apt today will be $900k 6m from now. So you will make money by not losing 10%. borrowing(shorting) $$, is bad too, you want to be long $$. This is the reason why Bernanke is saying he will keep int rates low for 2 years. To try to move them to more risky assets.. ie more investment then more growth.

The US tips market is pricing in like 0.7% inflation in the US over the next five year.

Fed buying of Treasuries along with risk off trade has made the tips calculations irrelevant.

The treasury market has offered real negative returns for some time. The market is not buying tresuries and expecting a real rate of return.

'Fed buying of Treasuries along with risk off trade has made the tips calculations irrelevant"

The Fed is no longer buying them. Fail.

Operation twist may be next.

This means they(the govt- fed) will sell short term tsy and buy longer term tsy(or MBS) this will flatten the yield curve or in layman's terms, reduce longer rates and bring down mortgage rates. This, it is hoped will stimulate the economy by enabling home owners to refinance at a lower rate thus lowering their monthly payments. The problem is burnout.. or the home owners who are qualified to refinance already did when rates were lower in 09'.

Furthermore, Bloomberg has a monthly survey of economists...which shows they expect inflation to be under 2% for the next two years.

No inflation is great reason to do 5/1 arm (below 3% JUMBO) on your rates so that you can lock in even lower rates by refinancing (assuming strong financials) should the economic conditions worsen. If the rates go up due to better economic conditions, real estate is likely to go up. However, this strategy only works if you have enough liquidity and financial security.

300 mercer - the idea of doing anything other than a plain vanilla 30 or 15 year fixed just sounds ridiculous to me. These are the lowest rates in OVER 40 YEARS.

Why not just lock them in? Talk of doing anything more exotic is what got us into this RE mess once before. I know people who were talked into getting an interest only mortgage (because they were thinking of selling in 5 years) only now it's the 5 years are almost up and they can't get a seller.

Must be the same economists who predicted the 2008 housing bubble...These guys are never right. All an economist can do is build a model that responds to what if's. The profession has been terrible at predicting future events

"No inflation is great reason to do 5/1 arm (below 3% JUMBO) on your rates so that you can lock in even lower rates by refinancing (assuming strong financials) should the economic conditions worsen."

Mercer, where exactly do you think rates will go? We are already at 0%. Do you think the banks will start saying, "fuck it, we don't even want a spread to cover credit risk & costs & profit"?

"If the rates go up due to better economic conditions, real estate is likely to go up."

You claim that 3% rates played a big part in your decision to buy, both in terms of lending and how you value your own capital. From your own calculations, this represents around 60% of the cost of ownership.

So suppose economic conditions improve to the point where it no longer takes 0% rates to stoke inflation towards the desired 2%. Let's say something that puts 5-year rates at 2.88% instead of 0.88%. Nothing indicative of "hot" economic conditions, just more normal. At this point, the cost of ownership for Mercer has shot up 40%.

Now you think Mercer II is likely to come along and pay a premium on top of that 40% because of "better economic conditions"?

Inflation isn't the only problem; real price levels are current the problem. Until the oil / commodities bubble created by QEII is burst, real incomes - which are falling - will be insufficient to grow our way out of this Monetarist Mess. Oil should be at $60 a barrel, where it was before QEII, not $88.

The price of Treasuries, TIPS, etc., are meaningless right now, due to massive government intervention. No one knows the current price of money - all I know is that $0 isn't a good price for anything.

And no - real estate is neither a hedge against inflation, nor against deflation. There is no such thing.

When financial assets returns 10% annum it's really smart to be in gold/re!!!!!!!!

Yay! I got my MBA from deVry!

>>>"If the rates go up due to better economic conditions, real estate is likely to go up.

Not sure if I can get my arms around this statement... If Interest go up, it will cost more to borrow. What will your monthly payment be if you have a 10% mortgage?(rhetorical)-

QE2 did not create increased commodity demand in China and India. The price of commodities in SWISS FRANCS is through the roof.

The Fed is no longer buying them. Fail.

---
No this is wrong.

QE2 reduced the available supply of treasuries and the Fed is not unwinding this anytime soon. Couple that with the chaos in Europe with banks over there in a massive flight to safety(translation: U.S. treasuries) and you have a market full of buyers that is not concerned with inflation adjusted returns. Every group of buyers has different motivations and needs. Long story short, when buyers are not focused on inflation adjusted returns , to try and use market prices from those same instruments to deduce inflation expectations is misleading.

People are PAYING banks to hold their deposits, a negative return if ever there was one. Banks won't lend the money back out again, so they're sitting on huge stockpiles.

And the Fed is paying the banks 25 basis points to not lend. A rate you and I could not achieve in the Treasury market without going out over two years.

I hate to say I agree with RS on this one.

http://www.calculatedriskblog.com/2011/09/key-measures-of-inflation-increase-in.html

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in August on a seasonally adjusted basis ... The gasoline index rose for the 12th time in the last 14 months and led to a 1.2 percent increase in the energy index, while the food index rose 0.5 percent, its largest increase since March. ... The index for all items less food and energy increased 0.2 percent in August, the same increase as the previous month.

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.6% annualized rate) in August. The 16% trimmed-mean Consumer Price Index increased 0.3% (4.0% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.4% (4.6% annualized rate) in August. The CPI less food and energy increased 0.2% (3.0% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 2.0%, the trimmed-mean CPI rose 2.4%, the CPI rose 3.8%, and the CPI less food and energy rose 2.0%