Wednesday, January 23, 2008

They still don't get it

The chattering fools on the MSM were rather orgasmic yesterday. An "unexpected" rate cut. Woo hoo. Recession over. Housing crash over. It's gonna be party like it's 1999 time. I heard it said a few times that this rate cut will ease the ARM resets coming.

For the 18,881,258th thime: ARMs have nothing to do with what Benny B does in his secret money printing lab. ARMs reset based on LIBOR rates. Man, you'd think a financial journalist or better yet a housing "expert" would know this most very basic fact. And 30 year mortgage rates again, do not get set based on what Benny does either. They are set based on bond yields.

Now it often is the case that LIBOR and bond yields and Benny B's magic printing press have similar trends. But it is not always the case. For a long time, Fed Fund rates were going up while yields were going down or staying steady. The opposite could easily happen again.

And this is interesting from Yahoo Finance discussing who wins and who loses from the rate cut. It's a moot point really since EVERYONE loses from the rate cut. When hyperinflation and/or stagflation appears everyone loses. Again, this concept is way over the head of the mindless robot MSM reporter. Here is what Yahoo has to say

Loser: Borrowers with bad credit

Falling mortgage rates are great for home buyers and homeowners looking to refinance. But if you've had credit problems in the past, tightening lending standards means you're less likely to be approved for a loan, Duncan says.

Hey good luck with all that subprime borrowers looking to refinance when your teaser rate triples to 12%.

Loser: Home equity loan borrowers

Home equity loan rates have remained frustratingly static throughout the Fed's most recent series of rate cuts. Sometimes they move up a bit, other times they tick down a hair. But overall, rates have hovered around 8 percent for more than six months. Bob Walters, chief economist at Quicken Loans, says growing lender reluctance to offer these loans has stifled the type of competition necessary to drive rates down.

Hmm, again I see defaults in the future. Is anyone seeing a theme developing? Those slime ball subprime borrowers are going to be even more fucked than before. It is primarily the subprime crowd who took out the HELOCs so they could buy that H2 or Escalade while holding down a $35K a year job. Once again, good luck with all that.

So who are the "winners" from this inflation triggering insanity Mr. Yahoo Expert?

Winner: Credit card debtor

In a surprise move, the Federal Open Market Committee reduced the federal funds target rate. It cut the target rate by 75 basis points, which brings the federal funds rate down from 4.25 percent to 3.5 percent. This reduction will trigger the prime, which is usually 3 percentage points higher, to drop from 7.25 percent to 6.5 percent.

Sweet. So the 23.99% card goes down to 23.24%. Boy oh boy. I smell shopping spree coming. Instead of paying off the balance in 17 years, now Mr. and Mrs. Middle Class American will pay it off in only 16.2 years. What a deal. Thanks Benny B. You saved the world.

Here's the part the "expert" omits from the equation. Sure your interest rate will be a little lower. But the price of everything you buy will be higher, much higher due to the inflation lower rates bring. The higher price will offset your interest savings and then some.

Here is a simple example

Buy something for $10,000 over 5 years at 10% vs. buy the same thing for $11,000 at 9.25%.

Option 1: total cost is $12,748
Option 2: total cost is $12,780

Not only that but everything is more expensive, even the things you don't borrow. Things like gas, food, utilities. So go ahead Mr. and Mrs. Middle Class America, celebrate your new found hero in Benny B. You will no doubt see him as a god just like you say Alan Greenspan as a god.

But no need to worry about any of this. I hear some actor overdosed on drugs (quel surprise) and it's 24/7 coverage on CNN, Fox, MSNBC. Sorry to bore you with pesky things like the economic collapse of our society. You may now return to your Heath Ledger week of mourning.

1 comment:

Back in OC 2012 said...

Again, another good post.

I cannot explain all of the ins and outs as well as you can, but I try to explain to others what all of this means. Sometimes they get it and sometimes they do not.

Things haven't hit too hard here in San Antonio, but it is not as cheap as people say it is.

BTW, I was the tax guy post and have assumed the nickname of Back in OC 2012.

Its early, forgive the grammer errors.