The Fed has spoken. Interest rates are not going higher anytime soon. And the Fed announced no change to its $1.75 bond purchase program. Bonds sold off, suggesting that traders hoped the Fed would do more to put a floor under prices.
The Fed made it a point to say that "…inflation will remain subdued for some time." But the Fed also hasn’t made any comments about target levels of inflation, or what levels of inflation would make it uncomfortable. With the amount of money being pumped into the system, this is a concern to me. Especially with commodity prices rising and the spread between 10-year Treasuries and 10-year inflation adjusted bonds (TIPS) increasing over the last month.
*****Nothing will kill whatever recovery the Fed and others see coming faster than higher interest rates fueled by inflation fears.
Most signs point to an imminent economic recovery. No one thinks it will be strong. But two straight months of increase for Durable Goods orders has most convinced that recovery, and a small level of inflation, is here.
The Fed, in the other hand, is still fighting deflation. Unemployment is still on the rise, and modest improvement in the housing market doesn’t mean we’re anywhere close to working off the massive inventory of unsold homes.
Given the very low expectations for economic recovery, maybe 2% growth in 2010, how does the Fed hike interest rates and start sopping up liquidity? I believe inflation will have to become a concern before the Fed can act.
*****In case you missed last night’s special Internet Video Conference, called Inflation Busters: Discover the Stocks to Grow and Protect Your Wealth, I have a replay ready for you. You can access it HERE.
*****Reuter’s reported yesterday that Rep. Barney Frank and another Democrat wrote a letter to the CEOs of Freddie Mac and Fannie Mae asking them to relax their standards for condo loans.
Apparently Freddie Mac and Fannie Mae recently said they wouldn’t give loans to potential condo buyers if the condo development was less than 70% occupied. Makes sense, these days. But Frank and his friend are worried the tighter standards will impair the housing market and constrict future developments.
This is appalling. The only thing we need more than more condos is more Hummers.
If the government truly thinks we can simply reflate our way back to prosperity, they are sadly mistaken. This recession is new animal, one where both consumers and corporations took on way too much debt. That debt now sits in the form of unsold homes, many of which have been foreclosed upon.
These homes (and condos) must get sold. But they must get sold to people with the means to pay the loans. Simply lowering lending standards doesn’t do it and may well prolong the pain of this recession. Isn’t the lowering of lending standards much of what got us into this mess to begin with?
*****China’s still throwing its cash around, this time offering $7.2 billion for oil exploration company Addax Petroleum (LSE:AXC.L). It would be state-run Sinopec (NYSE:SNP) actually doing the deal. But after the attempt to buy a $19 billion stake in Rio Tinto (NYSE:RTP) it should be obvious that China is intent on securing the commodities it needs.
And in a world starved for cash, don’t be surprised when China gets what it wants.
*****Last year, travel group AAA reported that car travel over the 4th of July was down 10.5%. This year, it will fall another 1.9%. Airline travel is expected to be up nearly 5%.
That’s it for today.
P.S. Tomorrow’s Daily Profit will feature another video from TradeMaster technical analyst Jason Cimpl. Again he’ll tell you what happened in the market and why, and most importantly, what’s going to happen next week. So far he’s batting a thousand. Be sure to check your inbox for tomorrow’s Daily Profit to view Jason’s video.