Joan- agree on the malinvestment and asset bubble.
Regarding the printing press- I think in a global system things aren't as simple as traditional relationships suggest. For example- how much of the asset bubble is the result of asian money seeking better returns in the US- rather than Fed credit expansion?
Then there is this;
10:49 AM
FED TALK: The Fed is conducting yet another coupon pass wherein they will purchase U.S. Treasuries in the open market for their own account. The Fed last bought Treasuries on April 3rd when they bought $1.392 Bln of short maturities. The Fed conducts these passes because the need for money in the banking system is too large to be addressed with the Fed's daily open market operations (temporary injections of money) alone. The Fed has chosen the 4/30/03 to 2/15/04 sector for today's pass. The shortness of the maturities will likely limit the overall market impact. The Fed has significantly increased its open market purchases in recent months due to changes in the Fed's procedures. As Dana Saporta of Stone & McCarthy Research Associates has recently pointed out, the Fed recently announced changes to its open market operations that affects they way the Fed manages its portfolio of Treasury securities. For starters, the Fed announces that they want to avoid any further lengthening of their System Open Market Account (SOMA) which has lengthened from 2.6 years in 1992 to 4.2 years as of July 5th, 2000. Therefore, the Fed is expected to purchase more short-term debt than they have in recent years. Importantly, until July, the Fed routinely rolled over its SOMA holdings into new Treasuries. But since July, the Fed altered that procedure so that less than the full amount of the Fed's SOMA holdings will be henceforth rolled over. This means that the Fed must buy more Treasuries in the open market than in the past. Hence, the increase in coupon passes. Although today's operation is technical, it is notable the money has been growing quite sharply in recent since the end of November. Indeed, M3 has grown at a roughly12% rate since then.
bondtalk.com
The ancedotal evidence is quite clear here too; people are becoming more cautious. This feedback reinforces the downward move, and is the basis for consumer confidence being a key factor. Overall, I agree that the bears had a strong case 1 year ago for excesses in the market. I don't agree we are replaying 1929 or Japan 1990. "Things are different this time" is a flag, yet in reality, things are always different. Common ground with the past remains, making it worthwhile to understand past outcomes and processes. But that is no excuse for accepting material, like the Prudent Bear credit bubble assertions, at face value. We should make every effort possible to poke holes in those arguments. Only if we cannot, can we accept them as potentially valid concerns.
For example, let's look at the low Savings Rate.
This number is poorly concocted, ignores the impact of using current income to pay taxes on roth conversions, and the impact of a government in surplus on net US savings. It is true that people without adequate savings are much more likely to take damage during the downturn, but I do not accept the thesis that most of america has no savings and is 8k in debt to their credit cards. Like you, and others on this forum, I pay my balance every month, collecting the goodies for using the cards.
Total interest burden, as a percentage of personal income, dropped in the mid 90's and has increased over the past couple of years, Yet it still remains below 3%. This interest coverage ratio is the key to understanding the consumer debt, IMO. Things may not be as bad as they may seem.
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Another example, lower home equity in aggregate (52% now vs 76% in the past). This ignores that home ownership is much higher now, with the most recent period having the highest employment and home affordability in recent history. As these newly employed people buy their starter homes, their equity is near zero compared to those who've owned 15 years. This dilutes the aggregate. Further, you have the removal of the capital gains tax on sale, which encourages those who need to, to sell their homes and move into something more suitable. If older people choose to downsize, and then put some of their equity in CDs to maintain a sense of security and leverage on their home investment, you get a double wammy. Higher M1/M2, lower equity. Will this create a less than natural surge in home building? Yes. Does this mean most of america is on the edge of loosing their home as a result of tapping equity for consumption? No, IMO. |
