It's hard to tell what to make of all this. A return to pre-August crisis interest rates in the sixes for the long bond could be interpreted as a sign of health in the global economy (less of a rush to hoard dollar demoninated instruments).
The yield curve looks pretty healthy these days, a nice typical "contango" starting in the high 4's for the short term yields and moving up to the mid-5's. That's actually a "positive" sign for the world economy, in the sense that the reverse or flat yield curve (as we saw when the 30 year fell to 4.8) is more typical of a crisis situation. The commodity futures market especially oil, to the extent that it reflects everyone's anticipation of demand more than it reflects cartelistic manipulation of supply, is also to a normal level. I think (I don't memorize these numbers) there was some backwardation at the tail end of gasoline (prices lower than today's) reflecting antipated "normal" declines of gasoline prices in the winter of next year.
Futures contracts on stock indexes as of the weekend looked pretty flat, indicating no anticipation of increase or decrease. But I attach less significnace to these than to intrerest rate futures (which also are pretty flat; they correctly forecast Fed moves int he fall) and commodity futures.
I don't think Greenspan will need to tamper with rates if the long rate is rising without him pushing it. Normally spreads would go up along with the long bond.
I follow mortgage rates, which within an 1/8th or so are pretty much the same all over, at www.homeowners.com . I prefer to follow the 30 year zero point loan as opposed to the nationally reported "average mortgage" which includes mortgages sold with points as well as zero point and negative point loans. In any case, the reported rate in the Bay area for a 30 year conventional zero point fixed is 7.125, up one eighth over the past few weeeks. That means the prevailing rates here in Albany are probably 7.25 (areas with cheaper houses have smaller loans which pay smaller commissions so lenders charge higher rates). That compares with my refinance "lock-in" decision made in October for 30 years zero points at 6.625%.
To sum, the long rate available to consumers for real estate has risen by 0.625% in about six months, a significant move which by itself will cause some slack in the housing market and which will also push up the spread demanded for home based lines of credit.
This means to me that Greenspan might be able to sit tight and let the bondholders kill the economy for him.
What it does to the stock market is an open question. I don't understand the stock market. Usually rising interest rates lessens the appeal of stocks and causes some selling. But the stock market has climbed some 3000 points in the face of a de facto increase in interest rates.
A possible explanation is that with the diminishing of "panic demand" for dollar instruments stockholders are anticipating an increase of US sales in some portion of export related markets. You hold panic investments only so long as you and others are panicked. Since oil people and others see "some loosening" in Asia the increasing rate of interest could be seen as a sign of returning health to the world economic scene. This explanation implies that there is some kind of "rational basis" in stock valuations, such as we no reason to expect.
While those of us who are deeply pessimistic see 1929 (the bubble which brought equities up almost to precrash levels after the October crash) and deficient aggregate demand (worldwide) the financial markets are rocking ahead on the paradigm of 1907, which was a brief crisis. If we were *exactly* replaying the 1929 pattern the market would nevere have broken 10,000, much less 11,000.
All of this merely illustrates that no single wisdom (interest rates go down, stocks up, or vice versa) offers us a predictor of the behavior of the capitalist system.
-gn.
-- Gregory P. Nowell Associate Professor Department of Political Science, Milne 100 State University of New York 135 Western Ave. Albany, New York 12222
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