12/22/09 Baltimore, Maryland – Rob Parenteau, editor of The Richebächer Letter, sees inflation rearing its head in 2010. Yes, Rob still sees a host of numbers that indicate weak economic growth. Nevertheless, he observes that “nonfood materials prices, excluding energy, are up over 20% from a year ago.”
In theory, producers should have to eat rising wholesale prices when the economy is sluggish. In theory, producers can’t pass on those rising prices to consumers who are still losing jobs and servicing high debts. “But that is not what we are observing at the moment,” says Rob. “Pass-through of those price increases to wholesale finished goods prices is no less than it was just two years ago when the unemployment rate was half of the current rate and capacity utilization was closer to 80%… Inflation took only a brief vacation.
“The Fed can pretend that inflation poses no problem whatsoever. But if GDP in the fourth quarter of 2009 comes in around 4% or higher, as now appears highly likely, interest rates could start climbing rapidly. My concern is that Q1 2010 could see a backup in Treasury bond yields, with the 10-year breaching 4%… If the new housing market is barely stable now, imagine what higher mortgage rates might add to the picture.”
Higher mortgage rates sure won’t do much for the high end of the residential real estate market. Homeowners with mortgages of $1 million or more are now defaulting at nearly double the national average.
That 12% figure compares with less than 5% a year ago. Ouch.
In large part, that’s a function of the fact that Fannie Mae and Freddie Mac can’t buy “jumbo” loans of more than $729,750. In other words, once you reach the high six figures, you don’t have Fannie and Freddie propping up the market with artificially low interest rates. So prices can fall more quickly to a more natural level…and high-end homeowners can find themselves way underwater.
Addison Wiggin
Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He’s the creator and editorial director of Agora Financial’s daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar… and Why it’s Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.
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