NEW YORK (Reuters) - Warren Buffett, whose Berkshire Hathaway Inc sits on $25.54 billion of cash, said worried investors are making a costly mistake by buying up U.S. Treasuries that yield almost nothing.
In his widely read annual letter to Berkshire shareholders, the man many consider the world's most revered investor said investors are engulfed by a "paralyzing fear" stemming from the credit crisis and falling housing and stock prices. Treasury prices have benefited as investors flocked to the perceived safety of the "triple-A" rated debt.
But Buffett said that with the U.S. Federal Reserve and Treasury Department going "all in" to jump-start an economy shrinking at the fastest pace since 1982, "once-unthinkable dosages" of stimulus will likely spur an "onslaught" of inflation, an enemy of fixed-income investors."
Note: As investors jump into Treasuries, their prices rise, pushing yields down, as they go in opposite directions.
The yield on these bonds is practically zero and Warren reports.
What he and others foresee is that as Trillions of bonds issued by the government and the Fed as bailout funds, loans etc. their prices will fall dramatically as the supply far outstrips the demand for them.
As the prices fall, not only will current investors, who bought at Bubble levels, take huge losses, the interest rates on these bonds will soar, driving the cost of money for mortgages and other financial instruments whose rates are tied to bond up dramatically. This will be a huge blow to the already comatose real estate market and will be a substantial drag on commerce in general as the cost of their funds go up.
Showing posts with label Treasury Bonds. Show all posts
Showing posts with label Treasury Bonds. Show all posts
Wednesday, June 3, 2009
Sunday, December 28, 2008
Home prices to fall and fall and fall...
I just read an article forecasting more trouble for real estate in 2009.
The author seemed to be incredulous about that possibility, saying that some markets were even approaching Pre-Bubble price levels as though that was an organic impossibility.
If you check you will see that the last 2 real estate booms in the 70's and 80's resulted in prices dropping back to pre-boom levels before they took off again.
That is what statisticians refer to as a "regression to the mean," falling back to the historic trend line.
There are even more significant troubles for real estate in 2009 and beyond than are perceived by many real estate experts.
These troubles will continue to drive prices down even further. Although some markets are in fact approaching pre-boom prices, the pendulum may not stop at mid point and may actually swing all the way past pre-boom prices. Have you ever known a pendulum to stop mid way through its swing?
Here are some additional factors to consider:
The credit crisis is forcing banks to husband what little capital they have which is why they will restrict lending to the Very qualified.
How many prospective home buyers have 750+ FICO or Credit scores And 30% in cash for down payment, closing costs and bank mandated cash reserves? Especially since the US savings rate has been hovering around zero for the past decade.
Fewer buyers equal lower demand which means lower prices.
Also, how many more homes will be deserted by home owners who are Underwater, owing more than they owe? It is estimated that nearly 16% of owners with mortgages or about 8 Million home owners are in this situation. These desertions will add greatly to the bloated inventory of homes weighing down the market.
Finally, the only bright spot in housing will probably be extinguished in 2009 as interest rates will skyrocket once China is forced to stop buying our debt because of our dwindling purchases from them.
One report I read said that rental of a typical space on a freighter delivering goods to the US from China, fell from $236,000 for the trans Pacific crossing to $5,000!
Once China stops buying our Treasury Bonds, we will have to lower prices on them to attract other buyers, which will jack up their yields or interest rates as they move inversely to prices.
Our mortgage rates will then soar because they are pegged to the 10 year Treasury Bond yield.
So, despite the optimistic predictions of many rose tinted, shade wearing real estate "professionals" the likelihood of a rebound in housing is probably further away in 2009 than at any time since the real estate bubble burst.
Copyright 2008 Bill Young. Bill is offering a free, one year course for people who want to know how to quit living pay check to pay check and how to become financially free developing multiple streams of income from real estate and home based business assets. Register here: http://HowtoSolveYourMoneyProblems.Com
Article Source: http://EzineArticles.com/?expert=Bill_Young http://EzineArticles.com/?Home-Prices-to-Fall-and-Fall-and-Fall&id=1819502
,
The author seemed to be incredulous about that possibility, saying that some markets were even approaching Pre-Bubble price levels as though that was an organic impossibility.
If you check you will see that the last 2 real estate booms in the 70's and 80's resulted in prices dropping back to pre-boom levels before they took off again.
That is what statisticians refer to as a "regression to the mean," falling back to the historic trend line.
There are even more significant troubles for real estate in 2009 and beyond than are perceived by many real estate experts.
These troubles will continue to drive prices down even further. Although some markets are in fact approaching pre-boom prices, the pendulum may not stop at mid point and may actually swing all the way past pre-boom prices. Have you ever known a pendulum to stop mid way through its swing?
Here are some additional factors to consider:
The credit crisis is forcing banks to husband what little capital they have which is why they will restrict lending to the Very qualified.
How many prospective home buyers have 750+ FICO or Credit scores And 30% in cash for down payment, closing costs and bank mandated cash reserves? Especially since the US savings rate has been hovering around zero for the past decade.
Fewer buyers equal lower demand which means lower prices.
Also, how many more homes will be deserted by home owners who are Underwater, owing more than they owe? It is estimated that nearly 16% of owners with mortgages or about 8 Million home owners are in this situation. These desertions will add greatly to the bloated inventory of homes weighing down the market.
Finally, the only bright spot in housing will probably be extinguished in 2009 as interest rates will skyrocket once China is forced to stop buying our debt because of our dwindling purchases from them.
One report I read said that rental of a typical space on a freighter delivering goods to the US from China, fell from $236,000 for the trans Pacific crossing to $5,000!
Once China stops buying our Treasury Bonds, we will have to lower prices on them to attract other buyers, which will jack up their yields or interest rates as they move inversely to prices.
Our mortgage rates will then soar because they are pegged to the 10 year Treasury Bond yield.
So, despite the optimistic predictions of many rose tinted, shade wearing real estate "professionals" the likelihood of a rebound in housing is probably further away in 2009 than at any time since the real estate bubble burst.
Copyright 2008 Bill Young. Bill is offering a free, one year course for people who want to know how to quit living pay check to pay check and how to become financially free developing multiple streams of income from real estate and home based business assets. Register here: http://HowtoSolveYourMoneyProblems.Com
Article Source: http://EzineArticles.com/?expert=Bill_Young http://EzineArticles.com/?Home-Prices-to-Fall-and-Fall-and-Fall&id=1819502
,
Subscribe to:
Posts (Atom)
Posts
