And Now Begins the Bull Market in Cash

It looks as if the Summer of 1929 has finally past. We are now experiencing "forced selling and unwinding of leverage on assets" that we stated would follow.

Fed Injections

On Monday, it was reported that the Fed has been injecting short term cash onto the balance sheet of Deutsche Bank (DB). Two days later, Citigroup (C), J.P. Morgan Chase (JPM), Bank of America (BAC) and Wachovia (WB) all said they had borrowed $500 million each.

According to Foundations of Financial Markets and Institutions by Fabozzi, Modigliani and Ferri; “Banks temporarily short of funds can borrow from the Fed at its discount window…Continual borrowing for long periods and in large amounts is thereby viewed as a sign of a bank’s weakness” because the Fed is “the bank of last resort.” Banks are borrowing from the Fed because they can’t get the money anywhere else, not as they claim: “it is important at this time to take a leadership role in demonstrating the potential value of the Fed's primary credit facility and to encourage its use by other financial institutions.”

As we warned last November as the credit boom comes to an end: “‘severe macroeconomic repercussions’ are highly likely and that ‘banking system capital’ will be impaired.” To think the Fed will save the day is to ignore the lessons of 1929: “the Federal Reserve can print money, but it cannot create credit or confidence. ‘Money’ is therefore hoarded, by either the public or the banks themselves (if they are concerned about an increase in redemptions).”

“The Whole Town’s Gone Crazy”

To see the fearful psychology that mortgage lenders, hedge funds, and now money market funds and banks have been dealing with start at the 51 minute marker of this movie. George Bailey goes from “Float away to happy land on the bubbles” to “look we’re still in business; we still got two bucks left.” The run for cash has just started; we have a long way to go before most assets are undervalued in historical terms.

Comments

[Bhakta:]

Who can say who is telling the truth? Who is cent per cent sure? I hear so many discussions and speculations and not one can be totally sure. Personally I like Dr Marc Faber's realizations which in essence the US Dollar is going weaker and gold, oil and farm land will be increasingly valuable because governments cannot print more of them.
The US has over drawn its accounts too long and too much and there is no way out that I can see.

2007 Aug 24 11:28 AM

[Sr. Pessimist:]

I agree with the above comment, and I agree with the above article. It's not practical the US keeps printing more US Dollars because they are depreciating to lower and lower values. They aren't pegged against anything, so there's no bottom limit. And last night I imagined the same thing in my head that the story referenced. If you gave a born-rich non-worker $10 million dollars and instructed him to give to the poor, he'd probably give only a little bit, like $500k. He'd justify keeping the rest for himself. The workers are suffering. The economy sucks because only now are the born-rich non-working in peril. Their money is tied up in the stock market. The stock market is unwinding. The workers have always had it really bad. So injecting money into banks just gives it to privately-owned public companies. The money mostly just goes to the born-rich non-working, and very little goes into the economy where working Americans are not being taken care of.

The greedy born-rich non-working heirs to the US Dollar have stagnated. There are too many people in this "upper" class that refuse to work for a living. There is not enough money for them to live at the expense of the working. At the same time, for the born-indebted working, there is not enough to keep us taken care of too. The stress of chasing the buck is too much. The US Dollar has depreciated to the point where the US itself MUST produce. We cannot import everything we devour. We consume twice what we produce. The world is enslaved by the US at the cost of depreciating US currency. This is unwinding because we're closing in on the value of the Canadian dollar, where they don't have 300 million people like us, but only 33 million. They're doing a better job. This means the US system is uncompetitive. We used to be oil-based, but that's over now with Bush's failed attempt to expand oil capitalism in Iraq.

If the Fed cuts interest rates like it must to support the new aristocracy, the US Dollar weakens relative to foreign currencies. If this occurs, where the US Dollar is already very weak among Europe ($100 for a simple lunch in England), this country will further lose its ability to import goods and services. Further, it will lose its competitive edge among European countries to import from China and India. This would force many domestic companies out of business because they depend on imports to cut the costs of doing business. A weak dollar forces an export economy and eliminates an import economy. The non-working don't produce. The working produce. The non-working would have to bow down to the working, and actually hire domestic workers. This empowers the workers too much, and further erodes the separation between classes that capitalism demands. If workers could earn a good living doing their jobs, capitalism would not be possible.

2007 Aug 24 12:33 PM

[DON PROVOST:]

tHE DOLLAR GROWS WEAKER BECAUSE THE FED DID AWAY WITH M3, THAT TOOK THE GOVEROR OFF THE MONEY PRESSES AND ALLOWED THE POLITICIANS TO SPEND, SPEND, SPEND. EVERYONE HAS FORGOTTEN WHAT HAPPEN IN GERMANY DURING THE 30S.

2007 Aug 24 12:45 PM

[tobott1:]

Don, you're right. Those of us who were taught History "back in the day" know it. If this country attacks Canada + Mexico though I'll try to cash out and find a hut in Costa Rica, if I can. All kidding aside, no one seems to care that we very well may be printing Monopoly Money pretty soon. The inmates have truly taken over the aslyum. I wish us all good luck, we need it.

2007 Aug 24 04:39 PM