As total fees in the past grew by 0.5%, we agents basically reached into the clients’ balance sheets, snatched the 0.5%, and turned it into income and GDP. Magic! But in doing so, we lowered the savings and investment rate by 0.5%. So, we got a short-term GDP kick at the expense of lower long-term growth.I guess that makes me a bloodsucker wannabe.
(...) Concern about debt levels and growth prospects has pushed sovereign CDS spreads wider while corporate credit spreads have continued to narrow. The trend is similar in Spain and Portugal.
While only recent, this phenomenon should spark intense debate among market participants. One camp might argue that it is difficult to justify sovereign credit spreads that are wide relative to domestic companies, as the sovereign will always exercise its right to levy taxes and fees to correct its balance sheet at the expense of the private sector. The other camp might suggest that many corporate balance sheets are pristine, and for particularly strong companies with a global footprint, the risk of default is indeed lower than the sovereign as they can only be taxed where they earn revenue and, in an extreme case, could change their domicile.I am not an expert on credit or on Italy but I would personally be surprised if this situation persisted in the long run.
I want to remind subscribers that (in my opinion) we are now dealing with a bear market rally that is in the process of topping out. The actual bull market topped out back in 2007. Therefore we are now dealing with a rally in a bear market that appears to be topping, and there is a world of difference. A bear rally that is topping out will not give off the same warning signals that a dying bull market will. Thus, many analysts who are still bullish are looking at the wrong thing. They don't see the usual signs of a bull market topping out because that is not what is happening. And this is keeping them bullish. What we're looking at is a rally in a bear market that is in the process of topping out.Top or not, I don't see the point in having much, if any, exposure to equities at these levels of valuation (see most of my previous posts... this little correction we've had should come as no surprise to regular readers, and it wouldn't be much surprising either if it develops into a full fledged down leg. Upside potential is very limited for the broad U.S. stock indices).
St. Louis Fed President James Bullard is delivering a pretty clear message. In his view, policy for the foreseeable future is about altering the rate of asset purchases, not interest rates. This will be a challenging new ocean for Fed Watchers to navigate. Will the Fed scale up asset purchase by $25 billion? $50 billion? Hold steady? Sell $25 billion back into the markets? Fun, fun, fun.What I find interesting is that, initially, when the Fed entered quantitative easing (or qualitative easing if you prefer to call it that way - I personally believe it's not what the Fed buys but how much of anything it buys), they decided to start paying interest on excess reserves. The goal was to be able to eventually raise rates without having to scale back the Fed's balance sheet.
With the equity market 70% off its lows, we have a mere 23% bearish sentiment reading on the AAII survey (American Association of Individual Investors), a level not seen since four-years ago. Imagine that at the March lows, bearish sentiment on this survey was running at 70%. Now it is 23%.I'm reading the headlines today and I see that, despite bellweathers JP Morgan and Intel beating analyst forecasts, the indices are down almost one percent. This is not good action.
Looking at the Investor Intelligence poll, the bearish sentiment is all the way down to 16% (the lowest since April 1987). At the March lows in the market, 47% of the investment newsletter editors were bearish. And for the traders, we see that Market Vane bullish sentiment is now at 57%, which is the highest since November 2007; at the March lows, the reading was 35%.
It may not appear to be costly at present, since risk-averse individuals conscious of credit risks, and foreign countries running massive trade surpluses, are still willing to accumulate the Treasury securities being issued, with no apparent impact. But ultimately, those securities will either stand as claims on our future national production, or they will be inflated away. Either the Treasury securities will retain value, so that holders such as China get to use them to acquire our productive assets in the future, while we ultimately tax ourselves in order to pay off that debt, or we must dilute the ability of those Treasuries to claim real goods and services, which is another way of saying we inflate away the debt.There are two mistakes here, a tiny one and a more important one. First, it is wrong to say that foreigners will in the future acquire more U.S. productive assets: they already, today, by buying these newly issued securities, receive a higher share of U.S. national income through interest. Interest comes from taxes, which are paid thanks to productive assets. In other words, whether foreigners swap their Treasuries for U.S. equities or stick with their Treasuries, they still claim larger share of U.S. assets.
We sometimes describe fiscal policy as determining the overall level of the public debt, while monetary policy determines the composition of that debt between money and interest-bearing federal obligations. By that definition, the Fed has clearly now entered the realm of implementing fiscal policy, by issuing debt directly in the form of interest-bearing reserves, reverse repos, and now term deposits.
The Fed would no doubt argue that it is doing so wisely, and that the decision to absorb Fannie and Freddie's debt and mortgage guarantees into the fiscal liabilities of the U.S. government has already been made by Congress and the President. The Fed is simply taking that reality as given and trying to minimize collateral damage.
Or one might see it this way: political pressures had been the cause of the quasi-nationalization and then de facto nationalization of mortgage debt in the first place, and the Fed found itself inextricably drawn into the mess. There is now political pressure to inflate the debt away, from which pressure the Fed nevertheless sees itself as immune.
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