Sam,
One of the thing that dismays me about this forum is how everybody thinks they can predict markets, with the implied consensus being "Asia is stinko." Yes, that is true. But the relevant question for the profit-seeking investor is has this been discounted appropriately or not? How do you know this? On that count, I tend to distrust most everybody, including equity strategists. The only folks with a proven record of reliability (sort of) are the currency speculators, and they don't share their opinions with me. But I digress.
>One of his other claims is that US institutions apparently are borrowing money in order to buy other people's paper and equities, and if you ex out this financial borrowing, there has been no net growth in bank borrowing for awhile.
Although you have captured his statement correctly, I don't think this is the case. US companies just don't tend to buy and hold stock in other companies. I think he's misinterpreted that data arising from a) the incremental leverage used by investment banks and other financials for generating trading profit (not buy and hold...) b) the increasing use of debt to pay for corporate financing, including stock buybacks.
>He says that this is why, if the Fed raised rates here, it probably wouldn't affect the real (goods producing) economy much, but would prick the "asset bubble" that is developing, and (as others have been saying for awhile) it would be better to do that sooner rather than later.
If you believe my scenarios, this won't prick it at all or overly much anyway. The prudent financials have hedged (a) with all sorts of complicated swaps so that any simplistic direct cause-effect relationship (i.e. Fed funds goes up, ergo US financial sector goes blammo) is absurd. And (b) would be vindicated as prudent market timing, taking advantage of the extreme attractiveness (the bottom?) in interest rates to finance growth. In either case, I have evidence contradictory to this presumed over-leveraging (more later).
>He says M3 money growth has been at 13% for the past year (I think the last year is the time frame given). I didn't quite follow this part of his argument (especially what he means by "L", and how he computed it), so would appreciate it if anyone could clarify it.
L is an even broader monetary aggregate than M3, and includes short-term Treasuries, commercial paper, and their ilk. You can get the latest and historical data, as well as definitions, here:
bog.frb.fed.us
In practice, tracking L growth is not much different than M3 growth, and both have recently entered the low double-digits, continuing a steady march that began, oh, in 1993 or so. This is disturbing, but only slightly, and only if you're a monetarist. Namely, none of the doomsday predictions have been borne out: no inflation, no dollar depreciation, and no increase in the price of commodities or gold (this is the Kudlow argument, btw).
What's really interesting is if you plot the debt to L ratio over time. From 1959 to 1983, that ratio has hovered around 1.7, then started increasing to a peak of 2.45 around 1994-5. It's been dropping ever since. Right now, it's 2.23. Too much leverage? I think not.
Regardless, it's really tough to make investment decisions based on aggregate data, and this profit-seeking investor certainly wouldn't trust his own analysis of them. I sincerely hope someone out there will review the primary data and refute me so that we can all learn something. If anybody wants to see my spreadsheets, let me know. |
