It’s still bad to be a banker….
Things in the banking sector are still pretty awful and because of this, we have seen the FED drastically change its playbook from being the lender of last resort to one that is actively managing the banking system through this troubled time. It is doing this by extending credit to banks and brokers whose balance sheets are tied up with illiquid assets. By extending billions in credit, it enables banks and brokers to continue to lend. This, in turn, keeps money flowing and the economy afloat. It also gives banks time to pull themselves together. It gives them time to improve their balance sheets and continue reaping the benefit of garnering future wealth through earnings growth. In addition to extending loans to these banking institutions, the FED has given them 1 more year before they have to bring an estimated 5 trillion worth of assets back onto their balance sheet. This, as I said, gives them time to shore up the balance sheets and start earning money once again.
However, there is a brilliant strategy hidden between the lines that is not readily apparent to the casual observer.
So many say the FED is caught between a rock and a hard place. On the one hand it must remain hawkish in its stance on inflation. The FED has always said that the control of inflation is its number 1 priority. However, it must also keep the financial system afloat by offering more money to many more financial institutions during this crisis. This money has to come from somewhere. It can come from either the printing press or by flooding the economy with more dollars. Each choice would normally create more inflation- and we have seen this to a large degree this year. We have seen it with the decline or debasement of the US dollar and the subsequent rise in the price of oil, gold and other commodities.
There is the perception that by giving these institutions more money, the FED has had a “easy money” policy. “Easy” means flooding the economy with more dollars. The poster child for easy money is interest rates and now the Fed Funds rate target is at a very low 2%.
However in effect, money and credit growth have ground to a halt. According to Randall Forsyth of Barrons magazine, growth in the money-supply for the last 3 months has collapsed to a 0.5% annual rate through mid-July from a peak near 14% early this year.
In other words, according the Forsyth, the Fed is providing substantial liquidity to the financial markets while, at the same time, causing liquidity to dry up in the real economy. This is the goal of an anti-inflation policy. Fewer dollars chasing goods keeps inflation low. This may help to explain why the dollar has stopped falling and commodities, including oil, have stopped rising. This is the brilliant strategy I was referring to.
So how should you watch this? Watch the value of the dollar and the price of oil. These are leading indicators. They are leading indicators because they give a current view of the near-term future. For example, if oil prices drop, it’s easy to see that gas prices at the pump will fall too in the following months.
So in this scenario, the FED can watch the results of its actions to keep the money supply low, by watching these leading indicators, At the same time, Fed officials can talk of raising interest rates pointing to the consumer price index, as an example of rising inflation; knowing all the while, that the Consumer Price Index is a lagging indicator. This is a very clever strategy, and a clue that that we may be setting the stage for an improving economy in the next 6 to 12 months.
Stay tuned.
More stuff from Barrons this week. I guess they hit a nerve with me as I tried to make sense of the markets.
Michael Kahn, technical analyst for Barrons said, yes we are in a bear market. Forget 20% this or 20% that. A bear market can be identified when a market is trending down. Period. In other words, as the market falls, it falls lower, as it rallies; the rally high is lower than previous highs. It’s an obvious downward trend.
What about determining if we are at the bottom of the bear market? A clue to a bear market bottom is a decrease in trading volume. A sort of apathy takes over where stocks are of little interest. No one is talking about them and ratings decline on Financial TV shows. (Hopefully, not blogs or radio shows). This decrease in volume comes with smaller price swings and more and more general disinterest. In other words, apathy.
No one is apathetic today. Volume and investor emotion are high. Emotion is so high that we have seen days of a kind of investor panic-this is not apathy.
So what inning of the bear market does Michael Kahn think we are in?
The 7th inning with 2 innings to go—–unless we go into overtime.
Summing it up? The bad news…..more bad stuff to come. The good news……most of it is behind us
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It’s still bad to be a banker….
Things in the banking sector are still pretty awful and because of this, we have seen the FED drastically change its playbook from being the lender of last resort to one that is actively managing the banking system through this troubled time. It is doing this by extending credit to banks and brokers whose balance sheets are tied up with illiquid assets. By extending billions in credit, it enables banks and brokers to continue to lend. This, in turn, keeps money flowing and the economy afloat. It also gives banks time to pull themselves together. It gives them time to improve their balance sheets and continue reaping the benefit of garnering future wealth through earnings growth. In addition to extending loans to these banking institutions, the FED has given them 1 more year before they have to bring an estimated 5 trillion worth of assets back onto their balance sheet. This, as I said, gives them time to shore up the balance sheets and start earning money once again.
However, there is a brilliant strategy hidden between the lines that is not readily apparent to the casual observer.
So many say the FED is caught between a rock and a hard place. On the one hand it must remain hawkish in its stance on inflation. The FED has always said that the control of inflation is its number 1 priority. However, it must also keep the financial system afloat by offering more money to many more financial institutions during this crisis. This money has to come from somewhere. It can come from either the printing press or by flooding the economy with more dollars. Each choice would normally create more inflation- and we have seen this to a large degree this year. We have seen it with the decline or debasement of the US dollar and the subsequent rise in the price of oil, gold and other commodities.
There is the perception that by giving these institutions more money, the FED has had a “easy money” policy. “Easy” means flooding the economy with more dollars. The poster child for easy money is interest rates and now the Fed Funds rate target is at a very low 2%.
However in effect, money and credit growth have ground to a halt. According to Randall Forsyth of Barrons magazine, growth in the money-supply for the last 3 months has collapsed to a 0.5% annual rate through mid-July from a peak near 14% early this year.
In other words, according the Forsyth, the Fed is providing substantial liquidity to the financial markets while, at the same time, causing liquidity to dry up in the real economy. This is the goal of an anti-inflation policy. Fewer dollars chasing goods keeps inflation low. This may help to explain why the dollar has stopped falling and commodities, including oil, have stopped rising. This is the brilliant strategy I was referring to.
So how should you watch this? Watch the value of the dollar and the price of oil. These are leading indicators. They are leading indicators because they give a current view of the near-term future. For example, if oil prices drop, it’s easy to see that gas prices at the pump will fall too in the following months.
So in this scenario, the FED can watch the results of its actions to keep the money supply low, by watching these leading indicators, At the same time, Fed officials can talk of raising interest rates pointing to the consumer price index, as an example of rising inflation; knowing all the while, that the Consumer Price Index is a lagging indicator. This is a very clever strategy, and a clue that that we may be setting the stage for an improving economy in the next 6 to 12 months.
Stay tuned.
More stuff from Barrons this week. I guess they hit a nerve with me as I tried to make sense of the markets.
Michael Kahn, technical analyst for Barrons said, yes we are in a bear market. Forget 20% this or 20% that. A bear market can be identified when a market is trending down. Period. In other words, as the market falls, it falls lower, as it rallies; the rally high is lower than previous highs. It’s an obvious downward trend.
What about determining if we are at the bottom of the bear market? A clue to a bear market bottom is a decrease in trading volume. A sort of apathy takes over where stocks are of little interest. No one is talking about them and ratings decline on Financial TV shows. (Hopefully, not blogs or radio shows). This decrease in volume comes with smaller price swings and more and more general disinterest. In other words, apathy.
No one is apathetic today. Volume and investor emotion are high. Emotion is so high that we have seen days of a kind of investor panic-this is not apathy.
So what inning of the bear market does Michael Kahn think we are in?
The 7th inning with 2 innings to go—–unless we go into overtime.
Summing it up? The bad news…..more bad stuff to come. The good news……most of it is behind us
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Posted in On The Money! Commentary | Tags: banking, banks, bear market, commodities, inflation, interest rates, mmarket, oil