Are Interest Rates Caught in a Catch 22?

Are interest rates caught in a Catch-22? What if the Fed is waiting to raise rates until the economy is growing stronger but the economy won’t grow stronger until rates go up?

10 year Treasury Rates June 2014 - May 2015

For three years everyone has ‘known’ that interest rates were going up but other than during the Taper Tantrum of June 2013 which affected loan rates more than Treasuries, the T10 only moved up to the 2.75% area which was just picking itself off the floor of 1.66 where it got down to in May that year.

The Fed would like to raise rates, if for no other reason than to prove they aren’t turning Japanese by leaving rates low for two and a half ‘Lost Decades’. They’d also like to have room to lower them again if the economy dips back into recession (Note Q1 GDP was just revised down to -.7% that’s Continue reading Are Interest Rates Caught in a Catch 22?

Apartment Building Loan Rates Fall as Spreads Narrow

Back on June 24th I wrote a post Analysis on Tapering QE3 talking about how traders fears about the end of the Fed’s money printing spree made the interest rate on the 10 year Treasury jump. And as I mentioned in a follow up post Update on the 10yr Treasury rate we care about the 10yr Treasury (or T10) because it’s the benchmark most lenders base long term loan rates on. But there is one more component of apartment loan rates (and lending rates in general) that I want to draw your attention to. First an updated chart:

Treasury Rates and Apartment Building Loans

I’ve updated the chart with the latest rates and also added the rate for an apartment loan with a fixed rate for 10 years from one of our lenders (details on the loan terms below). The other thing I added was the spread, or difference, between the two rates (on the Right Hand Scale).  So far in 2013 the spread has averaged 2.65% or 265 basis points (bp) but it’s not a fixed amount that the lender adds to the T10. You can see that back in the beginning of May when the Treasury rate got as low as 1.66% the spread widened to 280bp because the loan rate was left at 4.5%. Then the spread narrowed back towards the average even while interest rates went up from there.

Then the Fed meeting notes came out in the middle of June and the T10 shot up but we got a double dose because the spread jumped up too. The Treasury went from 2.19% on the 17th to 2.57% on the 24th, and the spread jumped from 262pb to 283. It makes sense that in the uncertainty of a sudden rise in rates that lenders would widen their spreads to create a little breathing room but since then things have gotten quite interesting… in a good way. The good news is that since then the spread has Continue reading Apartment Building Loan Rates Fall as Spreads Narrow

Economists Prove Einstein’s Theory About Repeating Behavior And Expecting Different Results.

Mainstream economic theory (MsET) has two fundamental tenets that most thoughtful people (even economists) realize are wrong and yet economic decisions and importantly even Fed policy is still based on this flawed model. We know what Einstein said this defines and it’s true.

Problem #1 is the Efficient Market Theory (EMT) or Theory of Rational Expectations says that economic information is widely distributed and that we as individuals and collectively as a market of decision makers and consumers consistently make our choices based on what will give us the most benefit. This has been scientifically proven to be not the case way more often than we like to think. For more on this see “Predictably Irrational” by Dan Ariely and “Thinking, Fast and Slow” by Kahneman in the ‘On Our eReaders Now’ box in the far right column of this page.

The second problem is that MsET is built on the idea that the economy tends to be stable and that dislocations are temporary and tend to correct themselves back to stability somewhat like a train running down the tracks that gets thrown off from time to time. History teaches us that is not the case either. Most often we are moving away from or back towards stability and occasionally pass through stability but typically overshoot. It doesn’t take much imagination to see how these two errors cause problems for economists (and us) and leads to a dismal reputation for them.

I’ve been reading a lot on economics lately searching for a new improved model and have just found a number of articles that tackle those issues. They are lengthy but well worth the reads. The first two were posted by John Mauldin in his ‘Outside The Box’ (OTB) series where others write about and discuss their sometimes opposing views from John’s. Mauldin will begin each piece with an intro about the author and where he might differ from that point of view. His guests are typically people who deal at the highest levels and their insights are Continue reading Economists Prove Einstein’s Theory About Repeating Behavior And Expecting Different Results.