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With advanced degrees in both economics and finance, I place great deal of importance upon macreconomic developments and fundamental analyses of industries and individual companies In typical markets, I seek out investment themes which offer compelling reasons to invest in a group of like... More
  • From Sea to Shing Sea: Liquidity

    Federal Reserve Chairman Ben Bernanke said today (Sept. 15) that the recession is probably over. Stock market averages hit their 2009 highs. Actually, a day earlier, Janet Yellen, president of the San Francisco Fed, said the same thing: the recession has probably "run its course," she said. However, she warned that the recovery will be tepid, the financial system is not back to normal and is vulnerable to shocks, more credit losses lie ahead, and consumers may be in a new era of lower spending and more saving. Actually, Bernanke stated that the recovery would be weak, but that was hardly reported.

    If the recession is over, what accounts for it? Liquidity. Oceans of it. David Rosenberg, former economist with Merrill Lynch, now works for Canada's Gluskin, Sheff. Unlike Bernanke and almost all so-called experts in the Fed and government, Rosenberg foresaw the present recession and financial industry collapse. (That's probably why he is no longer with Merrill Lynch, now part of Bank of America, but I have received no confirmation of that.) Rosenberg said today that "rampant fiscal stimulus" accounts for all of this year's growth and 80% of next year's. In the second quarter of this year, the total economy purportedly contracted by a 1% annual rate; Rosenberg said it would have plunged by 6% without that stimulus. The consensus is for 2 to 3% growth this quarter. Rosenberg says it would be zero without all that money pouring out of Washington.

    Liquidity is also fueling stock markets all around the world. (Other governments are flooding their economies, too.) Rosenberg thinks the U.S. market is already overpriced. Most think the rally will continue, and I believe it has further to go, because it is pushed by liquidity, not economic fundamentals.

    But here is a frightening thought: Wall Street WANTS a tepid recovery. It is delighted that the employment picture is still grim and consumers ailing, for two reasons: 1. A rapid recovery will lead to inflation, and 2. As long as Main Street is sick, the Fed will keep interest rates at these low rates (U.S. short rates are almost zero, and long rates are artificially low.) One reason for the current rally is the prospect that the recovery will be very fragile, and the government will continue spending and the Fed printing money, thus keeping stocks up. This could create ugly social unrest.

    Sep 16 8:30 PM | Link | Comment!
  • US Money Supply and Bank Lending: Hardly a Picture of Growth

    Curiously absent from MSM reporting are some interesting, if not disturbing, trends in monetary aggregates and credit caught by Yves Smith of Naked Capitalism. These trends are all the more important when examined in conjuction with falling money multipliers, which together suggest the possibility of a deflationary environment is more than an academic curiosity and not out of the question. From Yves:

    Team Obama has taken to trumpeting the idea that the recession is over. As Ed Harrison likes to point out, the fact that we will see inventory restocking will produce a statistical recovery, at least in reported GDP. But the US in 1931 and Japan after its bubbles burst both featured a period in which the economy stabilized, and pundits for the most part concluded the worst was over. And in both cases, the economy resumed its slide.

    The data have moved from bad to mixed, which is a relative but not absolute improvement. But one of the negative developments, highlighted by Ambrose Evans-Pritchard, is ugly indeed. Despite massive bailouts and liquidity supports, credit is contracting, and at a very rapid clip. If we are lucky, this may be a short-lived aberration. But if this pattern persists for any length of time, the prospects are not good at all.

    From the Telegraph:

    Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

    “There has been nothing like this in the USA since the 1930s,” he said. “The rapid destruction of money balances is madness.”

    The M3 “broad” money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

    Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an “epic” 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc….

    Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

    “The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances,” he said. “It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010.”

    Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: “The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous.”

    US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

    Yves here. Note that the “reducing loans” takes place not only via tougher lending standards, but also pricing. Look at how banks have jacked up rates on credit cards. Now admittedly, many consumers are trying to cut back, but now it is becoming too costly not to.

    William White, of the BIS, one of first to warn of the dangers of leverage, today said that he saw a strong recovery as particularly unlikely. But the true believers are not deterred.

    Sep 15 5:13 PM | Link | Comment!
  • ACORN Update
    Sep 15 2:11 PM | Link | 5 Comments
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