Friday, June 26, 2009

Credit Crunch

Greenspan on the 90-91 recession. US is Still in a Credit Crunch

"However, this strong economic growth was not to last. As the 1980s came to an end, the US economy slowed dramatically, and by the early 1990s tipped into recession. To make matters worse, the banking system was in turmoil, with hundreds of small and medium-sized banks failing and giants like Citibank and Chase Manhatten in distress. Meanwhile, the real estate boom had collapsed, causing even more pain."

"The inevitable collapse of the real estate boom really shook the banks. Uncertainty about the value of the real estate collateral securing their loans made bankers unsure how much capital they actually had—leaving many of them paralyzed, frightened, and reluctant to lend further. Big businesses were able to tap other sources of funds, such as innovative debt markets that had sprung up on Wall Street—(note: this is likely to be securitization and shawdow banking)a phenomenon that helped keep the 1990 recession shallow. But small and midsize manufacturers and mer-chants all over America were finding it hard to get even routine business loans approved. And that, in turn, made the recession unusually difficult to snap out of. "

"Nothing we did at the Fed seemed to work. We'd begun easing interest rates well before the recession hit, but the economy had stopped responding. Even though we lowered the fed funds rate no fewer than 23 times in the three-year period between July 1989 and July 1992, the recovery was one of the most sluggish on record. I would see President George Bush every six or seven weeks, usually in the context of a meeting with others but sometimes one-on-one. Before long, the administration began blaming its troubles on the Fed. Supposedly we were choking the economy by keeping the money supply too tight."

"When the recession hit that fall, the friction only got worse. 'There has been too much pessimism,' President Bush declared in his 1991 State of the Union address. 'Sound banks should be making sound loans now, and interest rates should be lower, now.'"

So the last credit crunch the US has had was saved by a new high in the US credit bubble made through securitization and shadow banking. This time the game is up, the Fed Senion Loan Officer survey still shows bank loan standards are being tightned across the board a weak jobless recovery looks like a likely outcome. The unemployment rate went up almost 1% after the last 2 recessions were declared over. It looks likely the current one will see unemployment reach 11%

Monday, June 22, 2009

Stock Market Volume

US Stock Market Low Volume Argument Might be a Bad One

I'm as bearish as a number of other people in the US stock market however one of all the arguments for 'this is a bear market rally' I'm not sure the 'low volume in the rally' is a good one, the market just came from a period where everybody thought things were going to $0, the market was trading in a economic depression type enviroment so it was expected that volume would shoot at absurd levels. As the depression is priced off the market is natural that volume would decrease, there's nothing unhealthy about this, its only unhealhy if you are looking at volume moving averages that are still capturing the Lehman crisis Sep08-Mar09 volume levels

Its almost impossible to beat that kind of volume without another massive failure so some bears are creating an strawman in order to support their cases. The current volume levels is still right in line with the pre-lehman 2008 levels so it could be a more neutralish technical point than some realize

Thursday, June 18, 2009


Start of the XLF Crash of 2009?

This market has been looking weak ever since the huge green shoot payroll figure of ~300K failed to produce a rally. Rising volume yesterday

Friday, June 12, 2009

The Mailman Drop of Money - You've got Money

The Mailman Drop of Money Almost Guarantees The US Deflation Battle Can be Won

We hear a lot about helicopters dropping money from the sky in order to beat deflation, that kind of plan is not likely to be ever adopted since it would be unfair to all citizens not in the cities that is getting the cash rain, further more no government body(to my knowledge) has the authority to take such action. However the IRS has a paper check mailing authority that can and is likely to be used in the case deflation in the core CPI becomes a reality and is persistent.

Here's how it would work, the administration working with congress would receive a advice from the Fed chairman to go ahead and issue a tax cut to virtually all citizens for an gigantic amount(Say 50% of US consumer spending, $5T), the fed would stand behind the bond auctions and monetize to make sure the government would have no problem financing it. The US consumer would suffer an gitantic 'wealth effect' of receiving such windfall gains in networth and its very likely to spend a significant fraction of the tax cut(as the history of the wealth effect shows, people spend when they get big jumps in networth)

Immediately as those paper checks were deposited, the money supply would soar(checking accounts are a component of M1), total M1 as 04/2009 is $1.5T, that would jump to $6.5T(Which would be the largest jump in M1 in the history of the United States). Now keep in mind that no banking credit expansion would be necessary for this. To the extend that people spent some of that money(and there is no reason to expect that cash to have 0 velocity due the wealth effect and the fact that people spend some % of tax cuts) that would put A LOT of upward pressure on prices, we are talking an overnight huge jump in the money supply AND velocity, even if that didnt happen nothing prevents them from keep increasing the amount of money printed. They could print 1 quadrillion dollars if necessary, talk about wealth effect

In the meantime the banking system can be frozen and yet inflation on the moon. If you read the american central bank literature of the last decade there is simply no reason to expect Bernanke and Co to not go for these extreme plans in order to beat deflation, they already said they will if necessary.

Actually just the announcement of such intentions by the Fed chairmain is likely to send the dollar index plunging and everyone scared of inflation(therefore money velocity would rise), its possible that not a single check needs to be mailed

As of right now, there is no reason for the fed to take such action as the core inflation rate is in their comfort zone, inflation expectations are well anchored and the economy is showing signs of stabilization. But make no mistake, if those improvements reverse one of the easiest money fed chairman since Arthur Burns + politicians desire to spend without raising taxes(It shouldn't be too hard to convience congress and Obama that more stimulus is needed, specially with unemployment about 10%) and the IRS mailman drop of money(or direct deposits to bank accounts) virtually guarantees US deflation wont be here to stay(Or it would be cured naturally as the economy bottoms out)

That might not be the case in europe where deflation could be persistent as the ECB is not as extreme(plus they don't have a centralized mailman to send checks, they would have to pick a government and all sorts of problems could occur) they also have the German hyperinflation history which further creates political problems and criticism and certainly is not the case with the BOJ, which is run by incompetents who never tried extreme measures to reverse deflation and raise the money supply without depending on the banking system

Monday, June 8, 2009

Putting a price on the green lunch

How Much Is The 2nd Derivative Worth?

Well, according to the stock market more than $4T dollars. Market cap of the Whilshire 5000 in the march lows day $9.38T, market cap today $13.4T. Given the total US corporate profits(including non-publicly traded corporations) was $1.2T in 2008
, the market decided that when economic data stops accelerating the rate of contraction that is worth putting a additional 4x profit multiple over it. It was a about an 43% rally, did the green shoot story overshoot?It looks like so since a 2nd derivative doesnt tell you anything about WHEN a bottom is coming, it just tells you that there is one. The green shooters have a $4T gamble going on, time will tell whether they paid the right price for their optimism

Wednesday, June 3, 2009


Paul Krugman is a Deflationist Moron

Krugman seems to be in the camp that deflation is inevitable, there is nothing that can be done and people shouldn't be worried about inflation.
Here's how the fed can create tons of inflation. Working with the treasury they announce a broad tax cut of $20T for all US citizens, it would financed by creation of new money by the Federal Reserve, this would bypass the banking system need to expand credit.

If people save 80% of that, they would still spend $4T. US consumer spending would rise by about 40% very quickly and tons of new money would flood the economy. This wouldn't create just inflation, hyperinflation would likely to be the result. The fed is not going there just yet(and they shouldn't) since the core CPI and inflation expectations are still within the Fed's range but if things fell out of bed you can count on the fed to make everybody to pay more for goods and services.
And to the extend that markets are forward looking people SHOULD be worried about inflation at some point over the next years as the fed suffers from an asymmetrical dilemma, where inflation is bad but deflation much worse therefore they will like to err in the side of the former
To argue otherwise is to ignore most of the american central bank literature of the last few decades where they make it clear they wont tolerate deflation and a frozen financial system wont prevent them from meeting their objectives