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Strategies & Market Trends : John Pitera's Market Laboratory

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To: Hawkmoon who wrote (8637)	1/9/2008 1:24:39 PM
From: pogohere	Read Replies (1) of 33421

Dave Rosenberg at Merrill Lynch Addresses "Reflation" In a letter to clients, Rosenberg had this to say about monetary reflation: * For all the folks out there complaining about monetary reflation, let’s look at the data before jumping to conclusions: * Since the Fed cut the discount rate for the first time this cycle in mid-August, the St. Louis Fed adjusted monetary base has contracted at a 2.2% annual rate. The YoY trend has slowed to 1% from 3%. That does not sound like monetary reflation to us. * Since mid-August, bank reserves have collapsed at a 13% annual rate and the YoY trend is running fractionally below 0%. * M1 has not grown one dollar since the Fed first eased the discount rate last summer and the YoY pace is running at -1.4%. Excuse us – how do you build a monetary reflation story out of this? * There has been no growth at all in currency in circulation for crying out loud; the YoY trend at +1.2% is the second lowest on record. The lowest ever was flat in Jan/01, the same quarter the last recession began. * Demand deposits are down 9.7% YoY and bank chequable personal deposits are down 1.8%. You can’t make this stuff up – transaction-related household deposits are shrinking at a very rapid rate. * Oh yes – but M2 is running at almost a 6% YoY rate: well, of course it is – most of it is situated in non-transaction savings accounts and these are up almost 8% from a year ago. So transaction balances are falling and precautionary balances are rising – what does that tell you about consumer spending and saving behavior? This is all, from our lens, very deflationary. Not the other way around. * At the same time, since mid-summer the banks have seen $800 bln of assets come back onto their balance sheets as the financial institutions assume the responsibility from the SIVS and conduits; while capital has declined by roughly $50 bln. For the next few years, the banks will have little choice but to cut dividends, sell assets and raise capital to deal with these newly-found balance sheet exposures. from: globaleconomicanalysis.blogspot.com It's worth clicking through the links in this article to see how the charts and the analysis were derived.

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