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Fed Funds Rate Down to 3% in 2008?

According to Larry Kudlow writing in his most recent column:

“The Fed also must undo the inverted Treasury yield curve whereby the 4.5% Fed Funds rate remains well above the 4% 10-year Treasury rate. This situation has prevailed for 18 months (see shaded area in chart above); unless it’s fixed immediately, it represents an illiquidity threat that increases the odds of recession. A 3-month Treasury bill around 3% is pointing the way for the fed funds rate.”

Over the last half century, the Fed Funds rate has been below the 10-year Treasury yield by an average of 0.87%. Assuming that the 10-year Treasury rate remains at about 4%, that would mean that the Fed Funds target rate would have to get down to somewhere between 3% and 3.25% to restore the historical relationship between the two benchmark interest rates (see chart above). In that case, a 50 basis point rate cut in the target Fed Funds rate today to 4% would be a good start, and additional rate cuts next year could be expected.

Interestingly, the Fed Funds futures contracts for December 2008 are predicting a Fed Funds rate of about 3.4% a year from now.

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100% Chance of a Fed Rate Cut

From the Chicago Mercantile Exchange Group Fed Watch:

Based upon today’s (December 10) market close, the 30-Day Federal Funds futures contract for the December 2007 expiration is currently pricing in a 100% probability that the FOMC will decrease the target rate by at least 25 basis points from 4.5% to 4.25% at tomorrow’s FOMC meeting.

In addition, the 30-Day Federal Funds futures contract is pricing in a 42% probability of a further 25-basis point decrease in the target rate to 4% (versus a 58% probability of just a 25-basis point rate decrease).

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A Very Inconvenient Peer-Reviewed Climate Study

Canada Free Press: Climate warming is naturally caused and shows no human influence, according to an inconvenient new peer-reviewed study published in the December 2007 issue of the International Journal of Climatology.

Climate scientists at the University of Rochester, the University of Alabama, and the University of Virginia report that observed patterns of temperature changes (‘fingerprints’) over the last thirty years are not in accord with what greenhouse models predict and can better be explained by natural factors, such as solar variability. Therefore, climate change is ‘unstoppable’ and cannot be affected or modified by controlling the emission of greenhouse gases, such as CO2, as is proposed in current legislation.

These results are in conflict with the conclusions of the United Nations Intergovernmental Panel on Climate Change (IPCC) and also with some recent research publications based on essentially the same data. However, they are supported by the results of the US-sponsored Climate Change Science Program (CCSP).

Meanwhile, Al Gore said today in Norway, “We, the human species, are confronting a planetary emergency, a threat to the survival of our civilization that is gathering ominous and destructive potential even as we gather here.”

(HT: Tom Hemphill)

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2 Consecutive Mo. Increases in Pending Home Sales

A Glimmer of Hope for Housing?

WASHINGTONExisting-home sales are projected to trend up in 2008, with pending home sales showing a slight near-term rise, according to the latest forecast by the National Association of Realtors®. The Pending Home Sales Index, a forward-looking indicator based on contracts signed in October, increased 0.6% to an index of 87.2 from an upwardly revised reading of 86.7 in September. It was the second consecutive monthly gain, but remained 18.4% below the October 2006 index of 106.8 (see chart above, click to enlarge).

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Mortgage Rates Lowest Since 2005, Increase in Mortgage Applications Highest Since 2004

Dec. 5 (Bloomberg)Mortgage applications in the U.S. jumped last week by the most in more than three years, led by a surge in refinancing as long-term interests rates dropped to two-year lows, according to this press release from the Mortgage Bankers Association (see chart above, 30-year fixed rates are the lowest since mid-October 2005).

The Mortgage Bankers Association’s index of applications to buy a home or refinance a loan increased 22.5% to 791.8, the highest level since July 2005. Refinancing surged 32 percent and purchases rose 15 percent.

The biggest drop in 30-year fixed mortgage rates since 2003 may have convinced owners it was a good time to refinance, at a time when outstanding adjustable loans are resetting higher.

Bottom Line: Despite all of the gloom and doom we hear about the mortgage and credit markets (for example, see today’s front page WSJ article “U.S. Mortgage Crisis Rivals S&L Meltdown”), reality and the data paint a much brighter picture.

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Everyday Low Prices, U.S. Is A Giant Wal-Mart

From, “Canada’s Dollar Craze“:

When I was a kid growing up in Detroit, my mother once said that she loved to visit Canada, right across the river, because “everything there is on sale.” It certainly seemed that way when the Canadian dollar traded at a fraction of the value of the U.S. dollar.

The United States is now benefiting from a flood of Canadians crossing the border to do their holiday shopping. The two neighbors have traded places: America is now the country where “everything is on sale.”

The chart above (click to enlarge) shows the 40% decline in the value of the U.S. dollar since 2002 vs. the Canadian dollar, transforming the entire U.S. economy into a giant Wal-Mart for Canadians, with “everyday low prices.”
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The War on Gambling: Cops Raid VFW Poker Game

In his latest video for, Drew Carey reports on how Dallas cops carried out a paramilitary-style raid on a poker game at the VFW Post #1837, which has now been forced to close its doors.
The raid is part of a broader move by local police to shut down poker games, arrest players, and seize property – even in low stakes games benefiting charity, like at the VFW. And it’s emblematic of the government’s misguided war on gambling, such as the recently enacted federal ban on Internet wagering.

In most jurisdictions throughout the country, consenting adults are banned from gambling — unless of course they want to bet on low-odds games run by the government. State lotteries, that is.