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Because commodities are priced in U.S. dollars, a devaluation of the dollar causes commodity prices to rise.  Business can choose to absorb this higher cost, or pass it on to consumers. 

At least one company is passing them on, creating inflationary pressures on the economy.  As we talk about a lot, inflation generally leads to higher mortgage rates.

This morning, Proctor & Gamble CFO Clayton Daley, Jr was on CNBC saying that higher commodity prices have forced P&G to raise its retail prices for consumer.

Commodities are basic "ingredients" that are produced by many different companies and are indistinguishable from one company to the next. 

Commodities include:

• Oil and Gasoline for heating, cooling, and production
• Wheat, Cocoa, Sugar and Cattle for food
• Lumber, Copper, Aluminum, Nickel and Zinc for construction

Proctor & Gamble makes over 100 products and higher commodity prices is forcing its production costs higher.  According to Clayton, therefore, P&G is raising consumer prices to help remain profitable.  P&G is just one of many companies following this path, I am sure.

As the dollar continues to weaken, commodity prices should continue to rise, as should production costs for U.S. businesses.  In the end, this creates inflation which further devalues the dollar and keeps the spiral twisting downward. 

For homeowners, inflation devalues mortgage bonds which pushes mortgage rates higher.

LIBOR (Lie'-boor): 1. The variable in most people's "What's my mortgage adjusting to" mortgage rate formula; 2. Media darling now that writers are wondering from where the next big mortgage problem will originate.

Despite what you may hear in the news, LIBOR's rapid ascent will not have a major bearing on your adjustable-rate mortgage and your ability to repay your lender-- at least not this year.  That's because all adjustable-rate mortgages have very clear rules by which they can adjust.  Those rules can provide you with protection against market conditions just like the ones we're facing now.

For an ARM, the formula to determine the new, adjusted mortgage rate is (LIBOR) + (some constant) = (New Mortgage Rate) where some constant is equal to any one of the following:

• Conforming loan: 2.250-2.750%
• Alt-A or Portfolio loan: 1.500-3.500%
• Sub-prime loan: 4.999-8.999%

But, not that it matters.

The press is talking a lot about LIBOR right now and you may be getting nervous.  There's no need to because most articles are leaving out the most important condition of an ARM's adjustment calculation -- the Adjustment Cap. 

The Adjustment Cap defines the rate by which your mortgage can move up or down when annual (or semi-annual) adjustment is calculated.

Stated differently:  Your mortgage rate doesn't just change willy-nilly -- it follows very clearly defined rules.  Your rate cannot adjust too high too fast, or move too low too fast.  We can presume that this was put in place to protect the bank in the event of falling rates, but when rates rise, homeowners like you get the benefit.

So, what it is your adjustment?  If you have your old loan papers, dig them up and you'll find out.  If you can't understand your closing papers (or don't want to), scan and email them to me and I'll take a look at it for you.

If you don't have your papers (or don't feel like looking it up), you can assume that your Adjustment Cap is 2.000%.  That's because for many conforming and Alt-A 5-year ARMs originated in 2002, the rate adjustment cap was set to be 2.000% at the point of first adjustment; for 3-year ARMs originated in 2004, the adjustment cap was set to be 2.000%. 

During the fixed rate portion of those 5- and 3-year ARMs, LIBOR is up roughly 4.000%.  But, like I said -- it doesn't really matter.

The most that the ARM can adjust is 2.000%, regardless of LIBOR. 

In a real life example:

• Current ARM: 4.250% 3-year LIBOR ARM, adjusts 09/2007
• Adjustment Formula: LIBOR (5.750%) + CONSTANT (2.250%) = 8.000%
• Actual Adjustment: 6.250% because 8.000% exceeds the 2.000% cap

So, no need to panic about LIBOR.  Despite what the newspapers say.  As always, the news talks in broad terms and isn't specifically addressing you.

Source
1 Year LIBOR -- Rate, Definitions, & Historical Graph
MoneyCafe.com

Man, is there a lot of chatter about the Fed this afternoon.  What does it all mean?

It's hard to sift through what's important in the commentary and what's just fluff because of the heavy doses of Economist Spin and Hyperbole.

It reminds me of the old joke:

A mathematician, an accountant and an economist each apply for the same job.

The interviewer calls in the mathematician and asks "What does two plus two equal?" The mathematician replies "Four."  The interviewer asks "Four, exactly?" The mathematician looks at the interviewer and says "Yes, four.  Exactly."

Next, the interviewer calls in the accountant and asks the same question.   "What does two plus two equal?" The accountant says "On average, four -- give or take ten percent, but, on average, four."

Lastly, the interviewer calls in the economist and asks him.  "What does two plus two equal?"  Swiftly, the economist bolts up out of his chair, locks the door, closes the window shade.  He sits down next to the interviewer and says, "What do you want it to equal?"

It's funny 'cause it's true.

I'll talk more about the Fed tomorrow.  For now, though, hop on over to the Holden Lewis' always-excellent take on Winners & Losers in the wake of the Fed's announcement.