Here’s the news of the week – and how we see it here at McAlvany Wealth Management:
1. Brother, Can You Spare a Trillion? CNN Money shared a truly remarkable piece of information with the market this week. During the institutional bailout days of 2008, the companies in need of a helping hand – just a bit of liquidity to keep the gears turning – received no less than $9 trillion in overnight loans.
Think about that. Perhaps now you can appreciate the scale of our problems.
But more than that, there’s a danger in assuming that that was then and this is now. The problems of yesterday are like the scratches on a record, revolving to be heard and experienced once again.
The issue two years ago was thought of in liquidity terms. The specter of the great depression was heavy on the minds of our financial witch doctors, and liquidity seemed an appropriate offering to the gods of the marketplace. But the assessment was wrong from the start, and continues to be inaccurate. Solvency remains the underlying issue, not liquidity. Adding liquidity to a solvency problem simply alters the timing of a collapse, or bankruptcy.
Stubbornly, this week the Fed has again withheld information from the public, deeming it sensitive enough to create a bank run if fully disclosed. That alone gives me pause. During those bailout days, certain collateral was pledged for more than $885 billion in loans. Again, the fed refuses to give any details about those assets, using the aforementioned excuse. If we knew, we might not like what we found.
Consider that Merrill, Citigroup, and Morgan Stanley were given $2 trillion (each!) to avert the forced liquidation of assets and a “mark to market event,” as those institutions scrambled for cash and narrowly evaded acknowledging the true value of their assets. Remember that even a minor discounting of those assets, due to the high degree of balance sheet leverage, would have led to insolvency. Were these companies insolvent, or are they still? As long as they can privately determine the value of the assets they own, and Mr. Market minds his own business, we’ll never know.
The answer to the solvency issue (recognized in Ireland and Greece, and very soon in Portugal and Spain) is now a universal call to liquidity. The ECB has long been considered an inflation hawk due to the influence of the Germans. Now, however, it is gradually joining the U.S. central bank and others in the developed world in monetizing debt and attempting to buy time with newly created liquidity. The ECB is adding muscle to the promises made last May, and is actively intervening in the European bond market.
In 2008, when those venerable (or should we say vulnerable) institutions said to the Fed, “Buddy, can you spare a dime,” did they know such vast sums of liquidity existed? Where did $9 trillion come from? What was reported as the “all in” number was a fraction of this amount at the time (what Churchill used to call a “technological inexactitude”). In fact, these are easy questions for Keynesians to handle. There are no limits to the credit that can be created when nothing backs your money. Imagination is the only limiting factor.
We remind you of events this week and those from a few years ago because the stock and commodity markets are moving again because of Central Bank liquidity infusions. The most significant thing about this is that there is nothing exceptional about it any more. It defines normalcy in U.S. and overseas markets. Inflation is the perpetual element governing the financial markets, capital allocation, and ultimately the economy.
2. Unenjoyment on the Rise. Perhaps before we close we should mention the unmet expectations on the employment front. We watched U3 move from 9.6.% up to 9.8% as fewer jobs were created than expected. And the market’s response is always tied to expectations, not reality.
The reality is that we are creating jobs. But they are neither numerous nor substantive enough to compare to previously held jobs, so a deep economic deterioration continues to unfold. The Labor department this week reports that long-term unemployment is likely to be with us – long term. “People out of work fewer than five weeks are more than three times as likely to find a job in the coming month than people who have out of work for over a year, with a re-employment rate of 30.7% versus 8.7% respectively….”
Remember that 175-200 thousand jobs need to be created each month just to keep up with population growth. So, the 39,000 created last month doesn’t quite cut it.
Finally, did we hear the unimaginable? Our good Mr. President is promising to freeze the wages of Federal employees for two years? (If you don’t adjust Social Security payments for two years because your statisticians tell you there is no inflation, you really should apply the same measure back on the Hill, even if you are two years late.)
I’ll be far more encouraged when we measure progress not with a skipped wage increase, but with a 20-40% decrease in head count. We could always start with a smaller number – say, 535 pink slips?
Have a wonderful weekend.
President and CEO
VP Investment Management