March 14, 2009
Fed eased liquidity, why's the economy still a basket case? This
article concludes that the Federal Reserve has had success in restoring
liquidity and security to the financial markets, enticing private capital back
into the commercial paper markets, laying to rest worries about the solvency of
money market funds, lowering mortgage rates, and other beneficial liquidity
On the flip side, "Deepening
fault lines in the U.S. economic landscape mean the Fed programs have only gone
so far in dealing with the broader problems.
larger question -- has this prevented a collapse in real activity such as in
consumer spending and employment -- then no, all those things are going down,' Mueller
said. 'The Fed can create liquidity, they can't create solvency," Mueller
said. 'They can't take a bad loan and make it into a good loan.'"
In my opinion, this article does a good job of explaining
that the Fed has had many successes so far in thawing the credit markets since
they seized up last fall. Also, it seems to me that the Fed's rescue of the $3
trillion money market funds with "only" $50 billion set aside to pay
indemnify money market investors against loss is an example of how a relatively
small amount of money can restore normal functioning to a far larger pool of
the Fed Hasn't Yet Been Able to Reach
On the other hand, money market funds are entirely sound
except for a minute amount of money around the fringes. Last fall's threat of a
stampede was basically a failure of trust. By contrast, toxic loans and credit
default swaps (insurance policies paying off if the debtor defaults) are real
threats, and their monetary value is huge. Also, the appetite for credit that
characterized the last few years depended upon consumers borrowing money to
consume more, and industry borrowing money to expand its capacity to serve these
high-rolling consumers. Now the consumers have switched from spending more than
were earning to saving a small part of what they are earning because, I think,
of fear of unemployment and/or an uncertain economic future, and because of a
recognition of their need to save for retirement. Industry has lost its appetite
for credit (other than for short-term commercial paper) because it now has
surplus capacity, given the decline in (debt-fueled) demand. Furthermore, many
of the consumers and companies that now seek to borrow do so because they're in
a financial hole. And banks avoid like the plague loaning to any person or
corporation that needs the money, since they're the ones that are in the
greatest danger of defaulting.
do those who called the downturn think now? presents the predictions of
four financial experts who predicted the current market debacle.
predicts the housing prices have somewhat farther to fall before they stabilize.
He doesn't expect this current recession to end until at least early 2010.
He thinks that the S&P
might bottom this summer at around 600
below last Monday's close of 677
or 10% below last Friday's intra-day low of 667),
with a long, slow recovery.
Specialist Larry McMillan
is waiting for the VIX
to shoot up into the 60's
and then fall back, as a signal that capitulation has occurred.
Analyst Sandy Jadeja
expects the Dow to retest the 6,400
level. If it falls through, then 5,300
would be his probable low, occurring in 2010,
or even 2011
analysis may point toward 3,700-3,800
as the ultimate bottom.
Chartist" publisher Dan Sullivan
sees a retest of Monday's close at 676
occurring sometime this summer, with either a market bottom or a new buy signal.
All four of these prognosticators agree that the current
market rally doesn't represent a major market bottom.
The first and last of the four (Gary Schilling and Dan
Sullivan) see the stock market registering a major bottom sometime this summer.
Gary Schilling suggests the same 600
level on the S&P
that Minyanville's Todd Harrison is anticipating. (Todd Harrison will commit 25%
of his money to the stock market if the S&P hits 600.)
The second of the four (Larry McMillan) isn't setting any
time scales but is looking for the panicky capitulation of the bulls, with a VIX
that marks a major market bottom (But not necessarily the bottom of this bear
market... witness the spiking of the VIX
last October.) (The VIX
has reached 53
twice within the past month.)
The third of the four (Sandy Jajeda) suggests a bottom for
this multi-year bear market this year if the Dow successfully retests its
low, and in 2010,
if the Dow falls through its 6,400
low. In the latter case, he anticipates a low of about 5,300,
although a low of 3,700-3,800
might be in the offing.
Facing the Free Fall
In this article, Fed Chairman Bernanke in his recent
testimony before Congress announced that the Federal Reserve now thinks that GDP
will fall 0.5%
unemployment will peak at between 8.5%
and inflation will run between 0.25%
O-o-o-oh K. Let's crunch some numbers.
First, let's note that the stock market, if it bottoms in
March, would be pointing toward a turnaround in the economy in August, with a
recovery of some sort underway the last four months of the year.
The unemployment rate, which ran 681,000
in December, 655,000
in January, and 651,000
in February will total
for the rest of the year. (It seems improbable that employment would pick up
before the end of the year, even if, in retrospect, the economy flattens out
and, in retrospect, were to start a slow recovery in the last quarter of this
The GDP decline, which is estimated to run 1.25%
this first quarter, will be as much as, or more than we'll see for the year as a
whole (with a fourth-quarter rise in GDP offsetting any further fall in GDP
after the first quarter).
But if this is the case, then the recovery is already baked
into the cake. There's no need for a $770
billion fiscal stimulus package that won't have a significant effect before next
year. And why is Lawrence Summers warning of the dire impact of an additional
drop in GDP on the national debt? Why has the risk premium on U. S. Treasury
bonds seven-folded over the past year? Why has the World Bank warned just a few
days ago that the global economy will contract (for the first time in 80
years--since 1929) 5%
this year, with a 15%
drop in industrial production?
I don't believe these numbers, and I don't think Chairman
Bernanke believes them, either. I believe these numbers are designed for public
consumption. At the same time, I'm getting a faint scent of panic in the air...
that the anxiety level among the congnoscenti might be far higher than most of
us are aware. (Senator Arlen Specter's warning last Monday that, "Our
economic problems are enormously serious _ more serious than is publicly
disclosed. And I think we're on the brink of a depression.'"
there been no stimulus, I think we'd have gone right off the edge,' he said. 'I
think we're pretty close to the edge anyway, to be very brutally blunt about
it." comes to mind.) This is no more than a filmy premonition and it
may be wrong. I'll be watching closely for other spoor.
There are some excellent charts in the above article.
One factor to consider in assessing commodity prices is the
exchange rate for the dollar. Since mid-2008, the dollar has appreciated by
about 20% against a basket of other currencies. This has contributed a little to
the falling price of commodities (denominated in dollars). The nosedive in
commodity prices has far outpaced the 20% improvement in the dollar, but
nonetheless, this has contributed about 20% to the lowering of commodity
The markets eked out another gain today. The NASDAQ
and the S&P
to end the day at 751.
One of the most significant news items today (March 13, 2009)
was a public statement by Chinese Premier Biggest
holder of U.S. debt.
that China is "worried" about its investments in the United States and
wants assurances that they are safe. (Is this associated with the fact
that the risk premium for U. S. Treasury bonds has seven-folded over the past
sovereign-credit spreads jump?) China has invested $696 billion in U. S.
Treasury bonds as of December 31, 2008. (China has $1.95 trillion in foreign
reserves.) Another article explores the Limits
to U.S. borrowing. To get an idea where the U. S. stands with regard to its
national debt, the national debt at the moment I'm writing this (08:46:57 GNT--5:46
p. m., EDT-- on March 14, 2009) is $10,990,803,332,734.77... in other words, $11
trillion. This is approximately 77% of the estimated 2008 U. S. GDP of $14.58
- The World Factbook -- United States). The highest ratio of national
debt-to-GDP of which I'm aware occurred in 1946, when it reached about 1.2 (120%
of GDP). Today, 120% of our $14.58 trillion GDP would be about $17.5 trillion,
or about $6.5 trillion above where it is at this moment. However, the
"recession" is reducing the GDP, so far by about 2% (about $300
billion), reducing our distance to the ceiling to $6.2 trillion: Not
a Depression, but signs are grim. White House economic advisor Lawrence
Summers gave a speech today in which he said,
would need more borrowing if deflation sets in: Summers "If
deflation sets in, if the GDP (gross domestic product) collapses further, if the
consequences of that collapse for the financial system and even just the insured
parts of the financial system, if that happens, the magnitude of the federal
borrowing as large as it is today will be dwarfed, will be far, far larger,"
he said at the Brookings Institution.
How Today Is -- and Isn't -- Like the Great Depression
by the Bull?, Minyanite Bennett Sedacca says, "I
rarely watch financial
TV shows, but I tuned in today, and one thing I've noticed today is the extreme
bullishness about credit. This is very alarming to me."
Since the first of this year, with all of the administration's new borrowing,
combined with the drop in GDP, "credit
about to sail towards 400%.
much for deleveraging. In fact, the economy is getting more
leveraged." "Once again, macro trumps technicals."
Todd Harrison seems remarkably prescient to me in this
Address From Vail: Minyanville, he gave on August 16, 2006.
The article, Milestones
in global crisis, affords a snapshot of the various stages of awareness of
the gravity of this crisis that attended the onset of this economic storm.
Another article, Global
trade collapsing, quantifies the attenuation of global trade that has
accompanied this economic crisis.
The article, Silver's
discount to gold sticks out like a sore thumb, gives reasons why silver is
selling at an unusually low discount to gold right now.