Interest rates set to rise

[mairteenpak]

his net worth must be in the billions.
but seriously i would imagine SW didnt capitalise on the housing bubble - even though im sure he will tell you he was far too clever to get involved in mass hysteria - in reality he didnt have much more of a clue what was happening next.
same as us all really.
im making this guess from a pyschological point of view.
throwing insults around and calling people stupid is a sign of insecurity - so obviously stone broke - no mortgage though , so not too bad.
am i right SW?

Quite a few people on this site held the opinion that property was/is overvalued in Ireland since 2003 (or earlier). This was based on a sound analysis of rent vs. price or P/E ratio, one of the best statistics to use if comparing investments.

Property is the least liquid of all investments, if the market has tanked it could take years to sell. So calling the peak or trough of the market is extremely difficult. Capitalising on a housing bubble has more to do with luck than almost any other factor.

I myself work in an IT related industry and that had experienced a boom/bust at the start of this decade, which would explain why Sidey and many other IT types were quick to spot, and avoid, a subsequent boom/bust in another area.

Yield is not the parameter to use to determine if property is overvalued, though it is some indication.

The income multiple is a huge indicator, as is the ratio of the market cost to the construction cost.

The Government wasted and squandered the European gift of cheap money that might have been prudently used to fund investment in wealth production, but instead was poured into re-numerating landowners, through higher development land values.

Taxing unused development land on an annual basis, levying a property tax on certain residential properties, as well levying a tax on indulgent use of cheap finance would have kept the property market under control.

This type of policy would have involved eliminating mortgage interest relief.

We don't allow a free market to operate in development land. Instead we create an artificial scarcity, through zoning laws, which tend to create scarcity, and facilitate a government taking a tax wedge.

Compare the tax take of two people acquiring a home.

Case 1: Joe and Mary build a home on Mary's fathers farm in Kildare, and Case 2: Simon and Rachael buy a New Oportment in Dublin 6

The opportunity for a tax take is much reduced in case 1

[rockyracoon]

The liquidity is gone, Sidewinder, and it ain't coming back any time soon.

See the following articles from the Torygraph, for example:-

http://www.telegraph.co.uk/money/main.j ... ney111.xml

http://blogs.telegraph.co.uk/ambrose_ev ... er_a_cliff


To be fair to you, 90% of what you say on economic issues is well-researched and true.

It's a pity the other 10% is pure b.ull************************

Talk of 8% or 9% interest rates being necessary to squeeze liquidity from the system would be in the pure b.ull************************ category, IMHO.

Given the data available in 2007, SW's prediction isn't out of line with prevailing economic thought in 7/2007. What were your predictions? We didn't know the full extent of the CDO debacle, and we still don't. Re: Freddie Mac, Fannie Mae and MBAC, UBS, HBOS and on and on. The articles you cite are only bringing to light a topic which until last week the vast majority of people hadn't given a thought to. Deflation only began to surface as some EU leaders began to question Trichet's and the ECB's interest rate policies imo.

The big debate these days in the markets is really centred on the "true" price of oil. Is there a speculative level of price inclusion warping the overall supply and demand factors? Imho, if it wasn't an election year in the US and if the EU top pols hadn't become so bolshy in the last several weeks, US and EU rates might have been set higher to answer the oil question.

As it stands, the severe interest rates cuts in the US and the new found hesitancy of the ECB have only added to the problem. As of this moment, we are experiencing real negative interest rates, adjusted for inflation, in the US and near if not negative interest rates in the EU. (I profoundly question all official inflation figures.) This means that the cost of money is now even cheaper than when we were creating our property bubbles.

With regard to deflation, there is a fine line between fighting inflation and deflating the entire economy. We actually want to deflate commodity prices but we view it as unacceptable to deflate the cost base of the whole economy. Right now, as I've written before, the CBs are between a rock and a hard place. The credit crunch created by cheap money (low interest rates) and greed has been very slow to play out. This may be due to the level of market complexity and the layering of risk onto so many different instituions and investors. Yet there is billions if not trillions in investment capital looking for above inflation returns in any market in which they can invest. Commodities seem to be a market that the investors are looking to make above average returns. This is, if the analysis is correct, leading to inflation which calls for higher interest rates.

My amatuer guess is that the Fed will do nothing as it's an election year. The ECB is a bit more problematical. Trichet's sole remit is to fight inflation. Hence the .25% rise this month. He's still making anti-inflation noises but the politicos along with industrialists are going to put severe pressure on the ECB, and I believe the decision making board is taking on two new, replacement members who have sympathy with the politicos. So I think the ECB will hold off on more interest rate hikes in the near term. They are going to hope that the underlying slow growth in the economies allied with a possible credit contraction will eventually drive down the prices of commodities due to falling demand.

If the ECB follow this line and they are wrong, then all bets are off the table. We will be seeing real inflation and slower growth i.e. stagflation. Then we'll be in a world of real economic pain. If the BRIC nations in particular continue to grow and increase demand for commodities, the ECB will have no choice but the rise interest rates. There is a school of thought that all BRIC nations, but China in particular, may not be as healthy as previously believed. While they are certainly positioned for economic growth, they are not without the problems of inflation either. They may have to make some gut wrenching adjustments to their own growth forecasts, interest rates and subsidies. I'm waiting until after the Olympics to see if China starts to make these adjustments which will lead to lower growth and may moderate the demand for basic commodities.

[Conor]

He's still making anti-inflation noises but the politicos along with industrialists are going to put severe pressure on the ECB, and I believe the decision making board is taking on two new, replacement members who have sympathy with the politicos. So I think the ECB will hold off on more interest rate hikes in the near term.

You mentioned this before.
Which two members are leaving over the summer?