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Federal Reserve

Chairman Alan Greenspan was back on the lecture circuit Tuesday to talk about consumer debt and the housing market. Similar to his talk last Friday downplaying the impact of high oil prices, the chairman gave a relatively rosy view of real estate.

Taken together, the two speeches ought to dissuade anyone from thinking that the Fed is about to pause in its "measured" campaign to hike interest rates.

"Measures of household financial stress do not, at least to date, appear overly worrisome," Greenspan said. Significant declines in home prices or consumer incomes "appear unlikely in the quarters immediately ahead," he added.

The "at least to date" and "immediately ahead" qualifiers were reminiscent of his comment Friday that the near doubling of oil prices wouldn't seriously hurt the economy unless crude went "materially higher."

Futures markets have gotten the message and signaled an increasing chance of a December hike over the past three days; a November hike has long been forecast.

Lower Viscosity on Bond Yields

The yield on longer-term bonds hasn't risen appreciably despite the futures market's concerns about more tightening. To some degree, that reflects bond investors' disagreement with Greenspan over oil. Low bond yields are a sign that oil will significantly slow the economy; they could also reflect fears that the Fed is going to raise rates too much, a move that would slow the economy.

Arguments in favor of a pause in tightening have centered on the possibilities that high oil prices would slow the economy or even spark a recession. J.P. Morgan Chase cut its forecast for global growth on Monday, citing the impact of oil, and a couple of Morgan Stanley's top analysts are mentioning the R-word because of the continuing crude shock.

The Fed has also highlighted the importance of the housing market and its positive impact on consumer sentiment and spending over the past few years. In the most recently released

minutes of the Fed's August Open Market Committee meeting, strength in housing was cited as a key factor in the assessment that the economy was only in a temporary soft patch.

The two recent speeches suggest Greenspan isn't worried about either factor in the near term. And that's the key for investors: Don't expect a pause in tightening for the quarters immediately ahead.

While some analysts are concerned that consumers have run up almost $500 billion in home-equity lines of credit in order to keep buying more DVD players and high-definition television sets, Greenspan took the opposite view. A surge in cash-out mortgages, in which consumers borrowed more against the increased value of their homes, "likely improved rather than worsened the financial condition of the average homeowner," he said.

According to Greenspan, the money was used to pay off credit card debt or make purchases that otherwise would have gone on credit cards. But this fuel for consumer spending is on the wane. Even as mortgage rates remain at historically low levels, applications for home-equity loans declined 14% last week.

You Give Bad Debt a Good Name

Moreover, the Fed's own data belie Greenspan's contention that consumers responsibly paid down "bad" credit card debt with "good" mortgage debt. Total revolving credit (such as credit cards) debt owed by consumers is 11% higher now than it was at the end of 2000, and fixed-payment, non-mortgage, debtlike auto loans have increased 26%. The $2.04 trillion owed by consumers excluding mortgage debt at the end of July was the most ever and double the debt load of 10 years ago. And while most mortgages still carry fixed interest rates, most credit cards adjust quickly when rates rise.

Greenspan conceded that it was possible that the cooling of the super-hot housing market could hurt consumers. Such fears "cannot be readily dismissed" he said, before dismissing them.

No Housing Bubble Here

Recall that the price of the median home in the U.S. adjusted for inflation has risen at the highest rate over the past 10 years since 1980 and substantially faster than income. Consumer debt levels are at an all-time high, as are personal bankruptcy filings.

Home inventories are also at high levels; this is being obscured by the rapid rate of turnover in real estate. At the current pace of sales, nearly one in 10 homes in the U.S. will be sold this year, the highest turnover ratio ever, according to Morgan Stanley. The turnover is fueled by rapid price gains. If and when price appreciation slows, so will sales, and the huge inventory overhang will crunch prices in major markets.

Greenspan attacked that argument by knocking over a straw man. "Overall, while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity," he said.

That's going to be cold comfort to the millions of homeowners who are in imbalanced markets as well as the building companies with thousands of new units in the pipeline in those markets. This has already hit in Las Vegas, where homebuilder


(PHM) - Get Free Report

acknowledged earlier this month that it was dealing with 25% price reductions and massive cancellation rates.


M/I Homes

(MHO) - Get Free Report


William Lyon

( WLS) and

MDC Holdings

(MDC) - Get Free Report

have reported increased cancellations and dramatically fewer new orders in the hottest markets.

In addition to Las Vegas, newspapers in Dallas, New York, San Diego and Los Angeles have reported on slowing sales, falling prices and growing inventories.

Tuesday also brought a surprisingly steep 6% drop in housing starts. The decline occurred in all regions of the country and wasn't hurricane-related.

Pierre Ellis, an economist at Decision Economics, wrote that the decline ought to be a warning to the Fed that the "underlying firmness of the consumer may be melting away, and with no conspicuous pickup in business-side spending."

A Hint of Inflation

On the other side, though, another piece of data feeding the Fed's hikes arrived Tuesday on the inflation front. The consumer price index minus its volatile food and energy components -- so called core inflation -- ticked up a larger-than-expected 0.3% in September.

Signs of inflation were also evident in earnings reports from companies that have been hit by the huge run-up in materials costs.

Stanley Works

(SWK) - Get Free Report

said it had tempered cost increases with higher pricing, as did

Corn Products International

( CPO) and

Kraft Foods

( KFT).

Parker Hannifin

(PH) - Get Free Report

CEO Don Washkewicz said his main worries about the aerospace market are "inflationary pressures from oil and raw material shortages and the prospects for higher interest rates."

At this point, expect Greenspan to deliver the latter.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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