It was like
watching a game of telephone where one child speaks into another child’s ear
and that child speaks into another child’s ear and, by the time the last child
repeats the original statement, it has transformed into something completely
different.
Chairman Ben
Bernanke stepped up to the microphone at the press conference after the Federal
Open Market Committee’s policy meeting and said:
“As I mentioned,
the current level of the federal funds rate target is likely to remain
appropriate for a considerable period after asset purchases are concluded. To
return to the driving analogy, if the incoming data support the view that the
economy is able to sustain a reasonable cruising speed, we will ease the
pressure on the accelerator by gradually reducing the pace of (bond) purchases.
However, any need to consider applying the brakes by raising short-term rates
is still far in the future. In any case, no matter how conditions may evolve,
the Federal Reserve remains committed to fostering substantial improvement in
the outlook for the labor market in a context of price stability.”
His statements filtered through analysts and
managers, through blogs and media outlets and, by the time it reached
investors, they heard this: sell.
The message rippled through stock, bond, and other markets around the world. As
markets fell, interest rates rose, particularly in countries like Indonesia,
Brazil, Mexico, Turkey, Russia, and Poland. A Bloomberg report cited in the Washington
Post stated the People’s Bank of China injected about $8.2 billion into China’s
financial system in an effort to keep interest rates low.
Investors’ fears were reflected in the CBOE
Volatility Index (VIX), which is also known as the investor fear gauge. It
measures the market's expectations for volatility during the next 30-day
period. It started the week at 10.2 percent and finished the week at 19. According
to a Citigroup equity strategist who was quoted in The Wall Street Journal, “…there are much higher probabilities for
market gains when the VIX is sitting between 10 and 15 than when it is in the
20-25 range...” Will markets settle? Or, will volatility continue? Time will
tell.
there’s Another
housing bubble? really? The housing market in the United States isn’t just
recovering – it’s RECOVERING. Tight inventories, fewer foreclosures, low
mortgage rates, and rising demand have helped push home prices significantly
higher. Year-over-year sales data shows home prices increased by about 15
percent through the end of May, according to the National Association of
Realtors (NAR). That’s the strongest year-over-year improvement since October
2005, and it marks the 15th month of gains in a row. In many cases, cities that
had experienced the biggest declines in prices during the housing crisis realized
some of the biggest gains.
Double digit price
gains have some believing the housing market is getting frothy and a new
housing bubble may be forming. Fitch, a ratings service, recently said home
price gains in some markets are outpacing improvements in underlying
fundamentals, which could cause prices to stagnate or fall again.
So, is it a
bubble? It depends on who you ask, but credible sources suggest otherwise.
According to an article in an early June issue of The Economist:
“To qualify as a
bubble, an asset must not simply appreciate; it must decouple from its
intrinsic value. For houses, The
Economist each quarter compares the ratio of prices to household income and
rents against their long-run average in 20 countries. We have now done the same
for the 20 metropolitan areas in the Case-Shiller index. The verdict: in most
markets, houses are at or near their long-run values, but none looks bubbly.”
One thing that’s
keeping home prices high is limited supply. The Chief Economist for the NAR recently
said one way to moderate future price growth is to create additional supply by
building more new homes.
It seems clear
from the markets’ response to the Fed Chairman’s comments during last week’s
press conference and speculation about bubbles – investors are feeling a lot of
fear and uncertainty.
Weekly Focus – Think
About It
“It
is evident that skepticism, while it makes no actual change in man, always
makes him feel better.”
--Ambrose Bierce, American Journalist
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