The Great Disconnect

December 24, 2012

Several recent events indicate that financial companies may be, once again, coming into favor. But remember, caution and hedging are required in our noise driven, centrally planned world.     

1. A week ago, the Federal Reserve increased the amount of money they are creating from $40 billion a month to $85 billion a month. That's $1trillion more dollars going into the banking system over the next year. This will enable the banks to get rid of a lot of toxic assets and allow them to reclassify assets which will increase their excessive reserves (they have over $1.4 trillion now) and reduce reserve requirements (think bank profits).
2. At the same time, the Central Banks have a coordinated, multi-national Central Bank lending/currency program to help shore up sovereign debt.
3. Last week, Greek sovereign debt was upgraded and their credit rating moved up to stable (they did get part of the $16 billion they need to pay bankers). Result: Greek bond spreads narrowed and Europe equities rallied.
4. A few days ago, Meredith Whitney (a key bank analyst) put a buy on BAC and Citi. She stated that after the next stress tests, BAC should be able to buy back stock, raise its dividend and add billions in capital. One of her reasons is that they have worked off a lot of bad assets.
5. Also, the market thinks a deal will be made on the Fiscal Cliff in that taxes will be raised and spending cuts will be done with smoke and mirrors so there will not be any real cuts (i.e. $350 billion saved in reduced interest costs over the next 10 years, $180 billion saved from Chained CPI numbers for Social Security increases, etc.). Therefore, no immediate cuts and more spending (Sandy relief, a $3.5 trillion budget, $1 trillion in new money by the Fed, etc.) implying that we will not have a recession (negative GDP) in 2013.  

 Net: Thanks to Ben's money, the economy and the markets are on different trajectories. Or to put it another way, the status quo will be maintained at any cost until we meet the black swan.   

Are We Headed For A Recession Or Another Money Bounce?

May 16, 2012 As I have been saying for some time now, the U.S. economy is headed toward “another” recession within the next few months, maybe June or July. The only thing that will temporarily stop and reverse this trend is another huge stimulus package or more money printing by the Federal Reserve. Printing and spending more money will not solve our economic problems, it will only make matters worse in the long-term because the money will be gone and the debt will be even higher (Thanks Grandpa!) BUT, it will produce some hopium to lift the economic numbers and the market. This seems to be the politicians’ only solution to the problem. But, even this is getting more difficult to accomplish. In the first three months of this year, over $300 billion was “printed and pumped into the economy” yet GDP only increased a little over $150 billion. There are a lot of reasons for the view described above including: 1.Money Supply. With QE’s done and the “Twist” program about to end, the pace of money coming into the economy has been slowing down for a couple of months. The pace of money injection is as important as the amount and has about six month lag time. 2.Credit. The yield curve (the price of credit over time) is being artificially held down by the Federal Reserve forcing savers and investors to take on more risk to get any yield. However, for the past few weeks, the credit markets have been telling us that an economic slowdown is coming. For, example, the yield on the 10 year Treasury is down to 1.75% and on the other side of the coin, the price of high yield instruments have been selling off (pricing in recession risk.) 3.Economic Indicators. The forty some economic indicators that come out each month have been showing many negatives, regardless of the “Headline Spin” being used to make it sound like things are improving. For example, for the past month, the weekly “Unemployment Claims” have carried headlines stating that the numbers of claims are down from the previous week. Yet, each week, they report that the claims the prior week were adjusted upward resulting in the current week’s claims being less. Net result is claims were up for the month but they were reported down each week. Shouldn’t random adjustment go in each direction? 4.There are also a lot of headwinds to be resolved like the deficit ceiling (estimate we will have to raise it again in October), 2013 budget (September), the “Doc Fix” for Medicare (December), the “Bush Tax Cuts” (December), and lots more. Did I mention it’s an election year? Back to paragraph one. This economy is headed for another recession and the only way politicians know how to change that trajectory is by printing more money. Therefore, I expect to see some form of QE3 or Stimulus soon; maybe at the June Fed meeting.