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Western Asset Mortgage Capital Corporation Message Board

  • jackhilr jackhilr Aug 22, 2014 11:43 AM Flag

    Fed speak to scare off the carry trade

    and "dangerously high" leveraging. However, raising rates would hurt the economy real bad:

    1.Servicing the nearly $18 T fed gov debt, that is still growing, would require raising tax rates and/or monetizing faster and risking hyperinflation;

    2. Raise the value of the dollar for the carry trade, but a higher dollar invites greater levels of importing, and makes exporting less competitive, so jobs and the economy suffer.

    The central banks of all of the major economies are working to lower the value of their currencies-- there is a currency war underway, led by Japan, that the media ignores, but the fixed income community plays. Fact is, the ECC (including Germany), Japan, and now China all have receding economies, while ours is flat, and apt to go down with the rest of the world- the ten year note has trended down in response. Economic stagnation is being driven hard by longer term structural problems
    a. High and growing government debt, which requires high taxes to service;

    b. Over-indebted consumers who cannot buy much goods or afford to buy houses/furnishings, especially as with the new jobs that are low wage (mentioned by Yellen);

    c. Aging populations worldwide, so that Demand is reducing with retirements, and creating potential oversupply-- threatening continuing recession and deflation.

    The market pros are playing the retail traders using Fed-speak scare talk about raising rates.

    Sentiment: Strong Buy

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    • At some point in time, interest rates will rise. How much of a rise can mREITS absorb without the somewhat catastrophic consequences of the last springs rise?

      • 2 Replies to ifearyeti
      • It is rate of change that is important, not the change of the rate.

      • You really need to understand how mREITs make most of their earnings. The use their equity (Book Value) to borrow at the short rates as a cost, plus a cost for hedging against sudden unexpected interest rate increases to leverage their buying of mortgage based securities (MBS). TH Fed will only raise the short rates when the economy is definitely improving, at which inflation becomes an issue, so mortgages rates woul then be rising from market action Wen the long rates rise, that puts downward pressure on BV, but that's where the hedging comes Ii play to reduce BV loss. The Fed has said it will move the short rates up in small increments very slowly. Higher short rates translate directly to higher borrowing costs. Now here is where it gets very interesting. The mortgage rates in a healthy economy will proportionally move up higher and faster than the Fed is moving up he short rates. That means the mREITs could actually increase earnings when the Fed starts to move the over night bank borrowing rate higher.

        By the way, the economy will be flat or receding over the next two years, so the Fed will not be moving short term interest rates higher for years.

        Sentiment: Strong Buy

    • jack i usually agree with u but the sentence:
      "a. High and growing government debt, which requires high taxes to service;" is very imprecise.
      By taxes do u mean tax revenues or tax rates? If the former then i agree but if the latter then its a terrible idea as it will reduce incentive and may actually decrease revenues. The best way to raise tax REVENUES is by increasing employment i.e. number of tax payers and consequently less numbers on govt. handouts. A lower tax RATE is more likely to achieve this by increasing incentive to work. It has been estimated that a tax rate in the mid-high teens is the optimal rate. Higher rates tend to decrease revenues and increase unemployment.

      • 1 Reply to lenloc
      • Len, your analysis of the harm of increasing tax rates is right, but I was not advocating that, only describing how governments typically respond to the immediate need for increased revenue. Further, the Fed would anticipate that the need for increased gov income to meet a higher debt servicing cost would motivate the gov to try to increase tax income-- which would hurt the economy, making bad worse. In other words, the Fed is smart enough to anticipate that raising interest rates would hurt business and the consumer directly, create stress on tax income and force increased monetization with the threat of hyperinflation. The point is that raising interest rates while the gov and consumers are over-indebted is irrational. Yellen and a few Fed members warn about raising rates --not because they intend to, but to keep speculators from becoming over-confident and leveraging too high.

        Sentiment: Strong Buy

    • Actually agree with this

    • nickspinner Aug 22, 2014 11:48 AM Flag

      The problem with your analysis is that the Fed has consistently demonstrated malfeasance of the most glaring and destructive kind.

      Sentiment: Strong Sell

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