Joel, will do. i'm going to post a detailed market update on Sunday. as previously discussed, i believe we are at a potentially important turning point here, bullish P&F charts notwithstanding. i think a period of increasing volatility lies ahead, as the Fed will try to head off a period of negative seasonal patterns for both the dollar and the stock market with massive liquidity injections to avoid an election year upset in the markets.
interestingly, there always seem to be reasons for the Fed to print more money...in '98 it was the Russian crisis, in '99 the perceived y2k problem, and this year the election.
of course, the election is the weakest reason to inflate the money supply, but there's nothing Greenspan likes to do better.
as the April swoon has shown, when money supply growth decelerates even a little bit, the stock market bubble threatens to collapse without further ado, which is why the Fed's actions need always to be watched very closely.
there are signs that throwing liquidity at every problem, perceived or real, will be less and less likely to achieve the desired effect. the percentage of personal incomes that goes into the servicing of debt has with 13,6% reached heights last seen in 1987. so far this year, consumer debt has increased three times faster than incomes. there is anecdotal evidence that suggests that the weaker credits at the margin have begun to use the three unsolicited credit card offers everybody finds daily in his/her mail to incur new debt to pay off old debt, in an amazon-type ponzi operation. total consumer debt as a percentage of incomes continues to hit record highs. one often hears that this is not relevant as debt has not increased much over recent years as a percentage of assets. unfortunately this argument completely overlooks that the assets in question (stocks and real estate) have experienced a bubble, and their value could conceivably be subject to sudden drastic changes. the same can not be said of the debt - it will remain as large as ever. in several regions of the country, real estate markets seem to have entered a blow-off stage, not unlike what the Nasdaq experienced from Oct. 99 to March 2000. especially California and NYC are seeing an acceleration in prices that leaves even seasoned operators in these markets with open-mouthed incredulity.
as we know very well from the Japanese experience, this is precisely what bad debts are made of, and the recent rise in bank loan loss reserves will likely turn into a deluge once these bubbles pop. not to forget the monstrous balance sheets of the GSE's, which i hereby promise will one day become the subject of yet another bailout by the tax payer.
debt in the corporate sector, which likewise stands at a record high, is running into expansion problems as well.corporate spreads remain near record highs, so unlike treasury debt, issuance of new corporate debt involves pretty dear rates. it seems the credit markets remain far less sanguine about the economic outlook than the stock market and the incessant 'soft landing' hype would suggest. obviously, the increase in default risk is being priced in, and the junk bond market has for all intents and purposes shut down completely. more junk bonds have defaulted this year than were issued, and Moody's expects default rates this year to reach recession type levels.
this is not without effect on the stock market, where for the first time in an eternity, more stock has been issued by corporations than has been bought back. the era of net retirement of equity seems to have ended for now. longer term, shareholders should be glad, as this means the growth of debt in exchange for overinflated equity on the balance sheets will slow down, and the portion on the balance sheet that reads 'shareholders equity' should begin to stabilize...
managements will be slightly less happy, as the wealth transfer mechanism has been dented somewhat.
regarding the credit markets, one must never lose sight of the inverted yield curve either. indeed, every major recession of the past 25 years has been preceded by a curve inversion. astonishingly, no mainstream economist seems in the least worried by it. and yet, one must always consider that the true meaning of a yield curve inversion is that the market looks at current economic conditions in a more favorable light than future conditions.
in conclusion, we may well be getting close to what i have often referred to as the 'natural limit' of the credit and debt expansion. at that point, the printing presses won't matter anymore, as a liquidity trap type state is reached.
since the stock market, for all intents and purposes IS the economy now (according to A.Newman, for every dollar of GDP, $3,65 in stock trading take place, and the mutual fund industry's assets amount to 42,5% of GDP, vs. 1,3% in 1981), any unexpected large break in the overall market could hasten the arrival of this unhappy state of affairs.
regards,
hb
and good night... |
