Calblog

Rates, Housing, Markets

A while back I wrote on rates and markets. I don't know if what I wrote will come to fruition. But tomorrow is a very big day. Here's the key, If CPI and PPI stay low, the connection between interest rates and inflation will be less talked about. (Something I've long been skeptical off as Japan showed with deflation with a 0% rate and under Carter we had sky high rates and sky high inflation, then lower interest rates under Reagan led to a reduction in the rate of inflation). If this happens rate pressure will unwind somewhat and perhaps the Board of Governors will rethink what the natural rate should be. If that happens rates may actually stay low indeterminately. Ultimately, the link between strong economic growth and low inflation will be established. This is somewhat counter-intuitive (at least based on what economic thought has long been), but deeper it may make sense, when economic growth is substantial there is a greater desire to invest in that market. The opposite happened in Japan, because the economy looked weak people pulled more and more money out. Finally, strong economic conditions keep prices low because competitive pressures keep prices down. I know Wal-Mart is the bane of many on the left in the US, but their pressure on prices is much of the reason inflation has stayed low. Companies can't raise their prices when someone else will undercut their prices. Commodity prices have risen substantially, but this is partially related to a high level of speculation in commodity markets by hedge funds. They may be in for a whip-saw if the dollar strengthens, Gold lost 3.5% today, and Silver lost more value in one day than it has in almost 10 years. Tomorrow holds an important number keep an eye out!