Sunday, August 30, 2009

One of the more popular articles of the weekend comes from the Washington Post re: the banks. Apparently, since many of the big banks were too big to fail last year, the solution has to be.... make the BIGGER!!

One of the big questions I struggle with daily is --- where are we going from here? Everywhere I turn the choices look to be hard, unpopular and/or painful in the short-term. In a well designed piece John Mauldin argues that as a country we continue to act like teenagers. We want to take the easy way out and kick the can down the road to deal with the consequences later. This isn't a Republican or Democratic issue, this is a nationwide disease.

Within the piece Mr. Mauldin also quotes Mr. Roubini who articulates my worst case scenario, I don't think it is the most likely scenario, but it is the worst case scenario....

“A combination of higher official indebtedness and monetization has the potential to yield the worst of all worlds, pushing up long-term rates and generating increased inflation expectations before a convincing return to growth takes hold. An early return to higher long-term rates will crowd out private demand, as lending rates on mortgages and personal and corporate loans rise too. It is unlikely that actual inflation will emerge this year or even next, but inflation expectations as reflected in long-term interest rates could well be rising later in 2010. This would represent a serious threat to economic recovery, which is predicated on the idea that the actual borrowing rates that individuals and businesses pay will remain low for an extended period.

“Yet the alternative – the early withdrawal of the stimulus drug that governments have been dispensing so freely – is even more serious. The present administration believes that deflation is a worse threat than inflation. They are right to think that. Trying to rebuild public finances at a deflationary moment – a time when unemployment is rising, and private demand is still contracting – could be catastrophic, turning recovery into renewed recession.”

Higher rates during a second leg down in 2010 is a double whammy for the US economy. I hope this doesn't happen, but we need to be aware that it is a possibility.

It is the proverbial rock and the hard place. Cut the stimulus too soon and we slide back into a deeper recession. Let the budget spin out of control for a few years and we will see inflation return, with higher rates and a recession. Raise taxes by 1.5-2% of GDP in 2010 and we are shoved back into recession.

There are no good choices. If we do the right thing and cut the deficit, it means very hard choices. Can we keep our commitments to two wars and our massive defense budget? Medicare and Social Security reform are not painless. Education? Research? The “stimulus”? But cutting the deficit by hundreds of billions while raising taxes by even more than is already in the works, is not the formula for sustainable recovery.

Have we grown up? Are there adults in the room? Sadly, I don’t think there are enough. We are still a nation of teenagers.

Good stuff......


Finally, there was a great deal of talk last week about the run in the zombie banks and financials. Companies that were on life support six months ago, Citigroup, Fannie, Freddie, AIG, etc have seen their stock prices explode recently and there have been a number theories as to why - short covering, etc.

However, there is a really interesting set of data that was dug up by TraderFeed that shows an unbelievable surge in the volume of Citi, Fannie and Freddie as a percentage of NYSE volume.

I won't take the leap that some are making that this is a coordinated effort to prop up the banks again without the pain of another bailout bill, but something is clearly amiss. These volumes are astronomical...


PS - Does anyone else find IE8 as buggy as I do? If the reviews weren't so bad for the alternatives (FireFox and Chrome) I'd probably switch...

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