I [my friend Dennis] was reading your blog and had a few thoughts I though I might share with you.
Our increasing government debt and unbridled spending with the resultant cost of financing has to raise interest rates it isn't a question of "if", it is just when and how much. Rising interest rates (7%-8% long bond) combined with declining purchasing power and rising prices will grind growth to a halt. Recession will follow.
Two stalwarts of inflation are the reduction of consumer purchasing power, the engine that drives the American economy as we have become a nation of consumers. And product price increases without a corresponding increase in quality. Purchasing power is being reduced on a daily basis by the cost of energy, fuel and its corresponding effects on the basic necessities. Huge equity credit lines have spurred a consumer spending level and euphoria that is not sustainable nor by and large affordable.
I predict real estate will not have a soft landing. A multitude of factors come to mind, declining values multiplied by imbedded leverage, increased inventory for sale, increased time from listing to sale, adjustable rate mortgages ratcheting up, interest only mortgages converting, ever increasing vacancies in commercial rentals, residential overbuilding, prohibitive real estate taxes, massive territorial insurance increases, real estate speculation, defaulting and unaffordable equity loans, and the resultant reduction of disposable income will mimic the markets of the mid eighties. All propaganda to the contrary by home builders, National Association of Realtors, mortgage originators and packagers constitutes I believe is self-serving rhetoric.
I also predict American gasoline prices will reach and sustain $5.00 per gallon. Production of crude is at maximum levels contrary to estimates of excess capabilities. China is using much more fuel on a daily basis and subsidizing the cost to its consumers to encourage usage. Middle eastern oil flows will continue to be interrupted regularly, either by strife, politics or greed, it is a given. South American fuel sources are becoming more fragile on a daily basis. Crude producers are not going to sell us something at $70 dollars if we will pay $100 dollars for the same thing.
I also believe a huge area of concern and probable catastrophe exists in the amount of dollars invested in "hedge funds." This represents a recipe for disaster. I do not believe these myriad of funds can or do have sufficient safeguards in place to deal with a significant interest rate shift. I deal with and interact with these managers on a daily basis and find them not to be as astute as they would have you believe. The proliferation of incestuous investing from fund to fund with the CDO's. CBO's, and WhoKnowsO's create a leveraged failure factor that can not be measured. With the amounts represented it could make the "Long Term Capital Management" look like a non-event.
Just a few ramblings of an old used bond salesman :>)
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