Convergence of pecularities

There is a real estate bubble that refuses to collapse. We have the Fed raising interest rates (16 times) while the prime rate for home loans has jumped a whopping 1/2 a percent. The stock market is acting rather funky. The spread between high risk and low risk, in the bond market, more or less indicates that the risk of default is just about non existent. It kind of like putting a skunk, a dog and a cat in a burlap bag and tying it shut. You're not sure what you will end up with, but you can bet your bottom dollar that it will smell bad.

We also have an inverted yield curve for interest rates. It costs more to borrow short term that it does to borrow long term. This would suggest that most of the bond activity is in the short term market. Nobody wants a 30 year bond paying 5%. If the interest rate jumps to 10% that bond will take a 50 percent haircut.

Right now, people are sweating the next Fed interest rate hike saying its bad for the economy. Just to exaggerate, say Berneke doubles the interest rate, it would probably do nothing to the banks or their prime interest rates. The apparent disconnect might spook the bond investor, because there is an expected correlation.

If there is a shortage of financial funds, raising the Fed interest rates would have a definite effect, the real interest rate would rise. When there is an oversupply of money, looking for a haven to invest in, the Federal Reserve is a third leg. The Fed in the current market is pushing on a string. Until the surplus cash reserves dry up, it matters very little, what the Fed does.

The housing market is not going away, its just getting bigger. Many people have bought way beyond their means. Money problems and a plethora of divorces could speed up the downturn. How do you inflict enough pain on the real estate market for it to collapse? Double the current interest rate? Berneke can't do that, this will be driven by a lack of monetary reserves . What could cause this? A contraction of the real money supply---like the failure of a very big bank. As for banks to put on that list, I would mention Fannie Mae(walks like a bank), Bank of Japan, and China.

The first indication of a problem will be when the interest rates jump, and Berneke is not the attributed cause. An increase of two or three percentage points would indicate a shortage of investors unwilling to loan capital at non rewarding rates.