Repo market, what you don’t know…
“Doublethink means the power of holding two contradictory beliefs in one’s mind simultaneously and accepting both of them.”
Last week’s housing numbers helped remove some of the market’s recent fears about slower growth for the economy. Lower interest rates seemed to spur renewed demand for new and existing homes, a part of the economy that has been tepid for several quarters. Even home builder confidence was near recent highs.
But the optimism among buyers and builders may be short lived. Labor shortages in the home building sector and recent inflation data seems to indicate that tight labor markets may finally be exerting pressure on wages. With investment spending contacted there’s little hope for now that increased productivity will help offset the increases in hourly earnings and compensation. The pressure of wages on inflation is well noted and will eventually rates to rise. Mortgage rates will soon follow.
Digesting the mixed economic signals being generated by our economy makes forecasting difficult and futile. Economies are in perpetual transition oscillating above and below the growth formula. Changing technologies and governmental policies have become significant variables in how domestic and world growth performs. And domestically, with much talk of zero interest rates in light of tight labor markets and higher wages, the direction of fiscal and monetary policy seems to lack the clarity investors are looking for.
For a good read about the recent troubles in the repo market look at Christopher Whalen’s recent post “Eisenbeis: Repos and Reverse Repos”. This article came out September 28th and offers good insight into the workings of the repo market.
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