(snip)As always logic tells us to understand why the “economy” has stabilized. Stabilization creates the psychology that everything is “back to normal”, when in fact the structure of the economy has rarely been this unstable.
20-25% of the collateral on the Fed's balance sheet is equities. It's not hard to figure out that a good chunk of that zero money lent to dealers is being used to buy stocks and repo them at a profit back to the fed. So that's sitting on the fed's balance sheet marked up at today's prices. No problem there!
Margin debt is back to $299 billion as it was before just September 2008. NYSE cash is negative $35 billion. Payroll taxes are being cut to spur consumer spending more, but that will probably be negated by increases in property taxes (which are highest in history at almost $500b per year despite a 30% drop in housing prices, which probably have another 20% to go as inventory is still at an all time high 80% or 3.7mm homes) and new layoffs in the public sector, which as you know is a disaster. NJ probably has a deficit of $175 billion despite what they say, so we probably have a trillion dollar problem at least. Not to mention public and private pension funds.
I looked at the balance sheet of IBM yesterday. The company is a serial buyer back of stock; this makes their per share earnings look better. But using all your cash to prop up your stock price leaves the balance sheet very risky. By my calculations, the company has negative $16 billion in net cash and $3 billion of negative net tangible equity. Revenues have been light for three quarters now while being supported by a good server cycle. Companies have a lot of cash but that is because they borrowed it.
The WSJ says consumer spending is growing again, which is marginally true. But why? Well, transfer payments now constitute the highest percent ever at 21% of disposable income and wages the lowest at 54%. Under-water homeowner are not being forced to pay or foreclosed on so they borrow again through credit cards. The government has made sure no one gets any interest at the bank, so savers just are banging their heads against a wall and marginally start spending. My guess though is that the average household balance sheet is deteriorating as a result, again.
Consumers have increased spending again but at what cost? They get no interest on their savings, so the savings rate has dipped somewhat. This has caused near euphoria in the media, but I view it as unsustainable. The average guy is still withdrawing money from stocks because he has too to live. That's being made up by HFTs at government urging/parking.
It also says jobs are growing, but we all know job postings on the internet (where they get their optimism) are not good jobs: wages are just not keeping up with the cost of living. U6 (this is how the government used to calculate it) unemployment is approaching 19%. The bill just passed extended unemployment benefits again to a maximum of three years. The previous record was 26 weeks. We are institutionalizing unemployment.
Total debt/credit in the U.S. is still at 380% or more of GDP, an artificially pumped up supply side GDP at that. Aggregate demand is gapping lower and if we viewed GDP in this manner it would look much worse.
Total debt to GDP is still 380%. The Fed and Government are transferring private debt, or at least keeping it the same, by increasing public debt. We are now at 95% gross government debt to GDP and rising fast. $14 trillion in gross public debt (including IOU's to social security) is growing not by the $1.2 trillion cash accounting gimmickry government uses, but by $2 trillion GAAP a year by my calculations, and if they started to recognize the true cost of healthcare and social security, it could be as high as $5 trillion. The U.S. treasury has a huge demand for dollars and that grows as government rates rise.
I believe the Fed can't print enough money to soak up the financing needs of the Treasury (which is creating a $2 trillion plus demand for dollars a year) unless they increase their balance sheet proportionately, which would be trillions a year. Everyone in the world is now convinced they will. Negative sentiment on the dollar is beyond all time highs and positive sentiment on stocks is the same. So where everyone else has thrown in the towel, I view the dollar weakness here as very susceptible to a 30% quick rally. Carry traders are short the dollar huge. We know how that usually ends.
In other words the whole thing is an artificial edifice.
Globally, we have a world where the bureaucrats of every major trading economy are trying to devalue their currency to spur exports and their economies. Currencies are strengthening not because economies are good, as in normal times, but because central banks are having a hard time printing money/creating debt in already over-burdened with debt countries. Growth has been a function of credit creation and that adds up over the decades. Relative currency rates are being driven by what stage of deflation a country is in.
Just look at the rally in the yen/dollar over the last several months: since April the yen has rallied against the dollar 16%. Japanese government debt is 225% of GDP versus 95% for the U.S. (UK 380% and China 96%, despite the claim by the IMF that it is only 22%), so they are just in a later "phase" of deflation: they already converted bank/private debt to public debt. So over the last few months they couldn't print enough yen while the U.S. was still able to through monetization of Treasury debt (U.S. total debt is much higher as a percent of GDP, but it seems we are just starting to convert private debt to public debt).
Now the Japanese economy is really falling apart and savers will have to start spending their savings just to live and the Japanese government will not be able to finance their growing debt burden internally anymore (don't know timing). As we enter a similar phase of deflation, the dollar I believe will rally against the yen as the BOJ turns to other countries to finance debt, thus selling debt/printing yen outside their country.
The Fed could counter-act and print as many dollars as the Federal government wants, but because our total debt is much larger, it would move rates up and even steepen an already steep yield curve more. All these huge debt levels are only tenable because of low rates. Imagine what even 100 bps up would do to interest costs.
Shiller P/E is almost 23%! The macro environment if the dollar rallies, which no one is expecting, could cut that in half. Profits are being squeezed as consumers are price sensitive and input prices are rising. Dividend yields at 2% are 100 bps lower than the government ten year, a dangerous situation(snip)
(snip)FASB 166/167 is still letting banks and pensions mismark their assets. Paying savers zero interest while lending to banks at zero interest is perhaps the greatest transfer of wealth in American history: from the masses to the very few rich that own bank stocks. That probably won't change, but banks won't increase lending dramatically because they can't afford more loan losses and consumer can't afford money down. So if perception changes from the new "good" to bad does it won't matter.
Risk is building here and now. My Christmas message is don't enjoy stuff, but your friends and family(snip)
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