Written By Steven C. Conners
What does AC/DC stand for? Alternating current / Direct current. How about a.m./p.m.?
Ante Meridian and Post Meridian. Maybe now I have your attention! Read on…
The United States has triumphed once again. The mastery of our capitalistic roots has produced an economic rebound that is as profound as the economic disaster itself. Risks remain and how we deal with them from here is still essential. The U.S. consumer has most assets concentrated in the top ten domestic banks. Control at the money center and super-regional banks will make it obviously less competitive which will necessitate more governance by the Federal Reserve Bank to ensure consumer fairness is maintained. The following excerpt from the New York Times spells out the
concentration of assets held here in the United States.
“In 1995, the assets of the six largest banks totaled 17 percent of the nation’s gross domestic product. Now they have assets amounting to 63 percent of G.D.P. Measured another way, the share of all banking industry assets held by the top 10 banks rose to 58 percent last year, from 44 percent in 2000 and 24 percent in 1990”. Wednesday, April 21, 2010, 1:50 am EDT . New York Times.
Consumers will face higher interest rates once the Fed begins their series of interest rate hikes. Neutral monetary policy is key to allow the Fed to have the tools to use monetary policy to speed-up or slow-down the domestic economy. The intention of the Federal Reserve Bank has always been to have steady non-inflationary long-term growth of the U.S. economy. The inflation hawks still do not seem to understand the global economy. Inflation is long gone, and commoditization is in. The sooner every company understands this the better their value proposition or ingenuity will impact their results in a meaningful way.
The banks cash hoard will erode in my view when rates are higher. The defaults and the ensuing credit crisis has them afraid to put their toes in the water. The U.S. Banks will lend again once interest rates are at the target rate that is consistent with the rate of growth we are currently experiencing. Higher interest rates- (which is the banks product that they sell), will allow for profitability, and their net interest margins to improve. This will happen later on this year in my view. Why would any company lend money when the rate they receive is the lowest in history? The banks know rates will be higher so why should they lend now? Patience by the banks and the sting of defaults is enough keep them restrained with their lending activities.
This current time frame,(as history often repeats itself), reminds me of the New Deal after the Great Depression. Franklin D. Roosevelt was President, and this is what he wrote:
The programs were responses to the Great Depression, and focused on what historians call the 3 Rs: relief, recovery and reform. That is, relief for the unemployed and poor, recovery of the economy to normal levels, and reform of the financial system to prevent a repeat depression. The New Deal produced a political realignment, making the Democratic Party the majority, with its base in liberal ideas, big city machines, and newly empowered labor unions. The Republicans were split, either opposing the entire New Deal as an enemy of business and growth, or accepting some of it and
promising to make it more efficient. Sounds a bit like now- not entirely but certainly similar. (Wikipedia.com)
First quarter earnings for 2010 were outstanding. The stock market has certainly taken notice as it has advanced briskly along with the stunning earning reports. Bonds are dangerous at these levels, even though the Fed has said that interest rates will remain low for awhile. Inflation is tame and will stay that way in this new global commerce community. But interest rates will need to be brought up to more normalized rates to allow for the Fed to be able to have flexibility to change rates based on economic conditions in the future. This flexibility lets the Fed use one of the most influential tools relating to economic growth that they have at their disposal. I believe they are not sure exactly when and at what pace they should raise rates at this time. It is certainly a topic to deliberate on as it is so critical to a sound monetary policy.
I addition to Ben Bernanke and his colleagues at the Federal Reserve and the concerns about addressing how to normalize the Federal Funds Rate from zero-1/4% are other issues. There is a need now that we are truly a global economy for one set of accounting standards. In the past, I have only trusted U.S. GAAP, Generally Accepted Accounting Principles. Now that the international stock markets are more relevant or the foreign companies that trade here on one of our exchanges, how do we trust their accounting? The International Accounting Standards Board, IASB is issuing standards called iGAAP. No- this is not a new version of the iPhone from Apple. This acronym stands for International Generally Accepted Accounting Principles. This new standard needs to be in place so that annual reports and 10Q and 10K SEC filings can be trusted, or foreign material from a particular country can be read with trust in the reported numbers. In China a survey revealed that less than 10% of Chinese investors had complete confidence in the financial reports inside the Annual Report of a particular Chinese company.
Let the good news keep coming! I believe this new bull market will indeed have its moments when investors will question its sustainability, especially during corrections. This is to be expected. The country has been through the second worst recession in history. It is over now. Enjoy the times ahead as the pieces of the puzzle are being reattached.
Disclosure: No specific companies mentioned in article.