Tuesday, 22 February 2011 12:38

The Inevitable Has Finally Been Admitted In Europe: The Macro Experiment Has Ignited Inflation Without Commensurate Growth & Rates Will Spike

Last week I posted a comprehensive piece, The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess. The goal was to outline the literal mess that those who decided to drag us through this “Great Global Macro Experiment”have left us in. Since then, in merely one week's time, we have bore witness to:

What we set out to do was to adjust the pathways of apparent pure financial contagion with several, real world factors.

How likely is it that we can have 20 more years of housing price declines?

If you think about it, that is a lot of activity for just one week. The ECB is thinking about it was well. From Bloomberg, Mersch Says ECB May Warn of Upside Inflation Risks Next Week

European Central Bank council member Yves Mersch said officials may toughen their language on inflation next week, indicating a readiness to raise interest rates in coming months.

“I would not be surprised at most colleagues concluding that we have upside risks to price stability,” Mersch said in an interview in Luxembourg yesterday. With the economy strengthening and inflation in breach of the ECB’s 2 percent limit, policy makers will “inevitably” have to “rebalance our monetary policy stance,” Mersch said, without giving a timeframe.

The ECB, which has kept its benchmark interest rate at a record low of 1 percent for almost two years, is growing more concerned that soaring energy and food prices will drive up wages and entrench faster inflation. At the same time, raising borrowing costs too soon could exacerbate Europe’s sovereign debt crisis by increasing pressure on stressed banking systems in countries such as Greece and Ireland.

The euro rose more than half a cent $1.3643 after Mersch’s comments were published. Euribor futures extended a decline, with the implied yield on the contract expiring in December increasing seven basis points to 1.97 percent, as traders added to bets on higher ECB rates. German two-year government notes fell, sending the yield up six basis points to 1.44 percent.

In the subscriber document, File Icon Potential Spillover Effects from the Middle East to the EU we detailed the transmission mechanism that is the high correlations in the FICC markets.

With most of the developed nations choking on NPAs and excess supply in their residential and commercial real estate markets, much of which served as a reflexive impetus for recession, the last thing anybody really needs is a spike in interest rates. Cap rate expansion, anybody???

The US residential...

The US commercial...

Japanese residential

Japan All Urban Land index, in the face of improving GDP!

I explained where all this will most likely end up in New Amsterdam a couple of weeks ago...

[youtube MukxtjCVc5o]

I will go in depth in Amsterdam in a little more than a month...

See www.seminar.ingref.com.

Last modified on Thursday, 14 July 2011 09:05