*** Recent Richard Russell Ruminations ***
President Bush wants an "Ownership Society." Well, I've got news for him -- we already have an ownership society. Americans borrow and the banks own them. Today everybody (except a small segment of the very rich) is in debt. I've heard it said that the typical American family couldn't raise three thousand in cash if their life depended on it. Sounds about right to me.
So let's call it what it is. We live in the debt-society, and our current "prosperity" is based on debt, debt and more debt. Is it a plot? Is it some kind of diabolic "foreign" scheme? Not at all. It's part of the law of unintended consequences. You see, following the bull market top of 2000, instead of allowing the US economy to correct, the Greenspan Fed decided to fight the bear "tooth and nail" (doesn't that sound familiar to veteran subscribers?). It was a case of "Inflate or Die."
How do you fight deflation and a potential economic collapse? You do it with negative interest rates (rates below the inflation rate) plus easy, very easy, credit. How is credit created? It's created through borrowing. So the Fed and the Administration made it really sexy to borrow. The "carry trade" went into high gear, borrowing at low rates short term, while buying longer-term bonds paying higher yields. At the same time, US consumers plunged into the housing market. Instead of "a chicken in every pot," the modern slogan was "a mortgaged home for every family." And if you can't pay for the home, well get with it dummy, the government will even lend you the money for your down-payment.
So that's where we are today in the "ownership" society. Last Friday (taking in all three exchanges), 55 Finance stocks hit new highs, 25 building stocks hit new highs, and 13 banks hit new highs. Which can't be much of a surprise. Of course, with crude now just below 52 dollars a barrel, energy is the latest "hot area." Last Friday 141 assorted Energy stocks hit new highs. At this rate, it won't be long before the oil companies will own us here in the new "ownership society."
I've described how Alan Greenspan studied the 15-year deflationary Japanese bear market. That was the bear market where some Tokyo real estate dropped up to 90 percent from its 1989-peak. In Japan more than 80 percent of bank loans were tied to real estate, so the banks took huge losses and guess what -- the banks stopped lending. And today the Japanese are still trying to recover. After all, Japan's bull market high in 1990 was 40,000 and today the Nikkei is trading just over 11,000.
How about a bit of history? Greenspan made a careful study of the Japanese deflationary bear market, and he must have said to himself, "I failed to recognize the bubble, and that was (gulp) my fault. Now the stock market's caved in, and the US could be another Japan in the making. Well, damn it -- it isn't going to happen on my shift." Greenspan may also have read Richard Koo's informative book, "The Balance Sheet Recession." At any rate, Greenspan decided that it was time to fight the bear "tooth and nail." Next step, Greenspan drove short rates down to 1% and at the same time he flooded the system with liquidity. Meanwhile, the Bushies instituted two tax cuts. I mean, was this goosing the economy or what!
At around the same time, China and other Asian nations decided that they must keep the dollar strong versus their own currencies -- all in their intense battle to be able to export on advantageous terms. The result is described in this week's Economist magazine. In the meantime, with the dollar sliding (oil is traded in dollars) and with China and India becoming major oil competitors, the price of oil was heading north.
Here are some quotes from the article in this week's Economist --
"Saturated. The world's giant money printing machine. How loose is the world's monetary policy? One gauge is that real interest in America and other countries are still negative. Another is that global liquidity has been expanding at its fastest pace for at least 30 years. This deluge largely reflects the combined effect of American and Asian monetary policies.
"One measure of 'global liquidity' consists of the sum of America's monetary base (notes and coins plus bank's reserves held at the Federal Reserve) and foreign-exchange reserves held by the central banks around the world. In both 2003 and 2004 this rose at annual rates of more than 20 percent. In no other two-year period since 1975 has liquidity increased so much.
"America's easy money policy of recent years has spilled abroad. Low American interest rates have encourage large inflows of capital into emerging economies, especially those of Asia, as investors have sought higher returns.
"Central banks are supposedly the guardians of money. Yet between them they have created the biggest liquidity bubble in history."
Russell Comment -- So you want to know what's really going on? This is it -- we're currently living through the greatest and most fantastic liquidity bubble in history.
As inflation heats up even further, the world's central banks (maybe out of embarrassment or fear) will be forced to raise rates. Or somewhere ahead, the so-called "bond vigilantes will do the central banks' work for them. Somewhere ahead (nobody knows the exact timing) rising interest rates will run headlong into the world of leveraged and overvalued investments (think real estate). By that time Alan Greenspan hopes he will be safely out of office -- and hopefully out of sight. |
