Monday, August 3, 2009

Silent Liquidity

Now that was a long weekend! Late night concert Friday night and then plenty of errands all weekend. When I got to work this morning it seemed like I had never left.

PIMCO Puts the FED in Their Place
Last week there were some voices from the FED trying to play the "we may raise rates" game. This is of course absurd, and it is puzzling why anyone at the FED would bother with such silliness. Today the bond giant PIMCO put the FED in their place by not only forecasting ZIRP until 2011, but going on the record that their investment portfolio is geared for just such a thing. As PIMCO is the Goldman Sachs of the bond market, it should be finally clear to any and all that there will be no drainage of FED liquidity any time soon. So stop saying otherwise, you are making my head hurt:
Fed Won’t Raise Rate Till 2011, Pimco’s McCulley Says
Aug. 2 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke won’t raise borrowing costs before 2011 as the threat of deflation remains for the U.S., said Pacific Investment Management Co., which runs the world’s largest bond fund.
Benchmark rates will not rise “before 2011 and I’m not only forecasting that as a professional forecaster, but positioning portfolios on that proposition as well,” said Paul McCulley, 52, managing director at Pimco, in an interview that was broadcast by the Australian Broadcasting Corp. today, and taped earlier in the week. “What I’m worried most about is simply a shortfall in global aggregate demand relative to supply potential.”

Bond Auctions Over, Dollar May Now Resume it's Slide
After the massive debt issuance of last week, it came as a surprise to this blogger that the dollar was not lifted higher before the bond auctions. The delicate balancing act of keeping a stock market moving ever higher, yet maintaining the dollar in and around the 80 mark on the index can be tough. Of course now that the sales are done, the dollar has resumed it's slide downward, with a nice two step drop today alone:

While the downdraft has picked up some momentum, I would not get concerned until 75 on the index is breached. Should that happen, the dollar will become a big story. You may not hear much about it as stocks will be flying high at that time, but it would bear watching.

Not that you need to look very far for fundamental reasons for the dollar weakness, but if you want a nasty headline, check out this piece (hat tip reader Watchtower):
Biggest tax revenue drop since 1932
WASHINGTON – The recession is starving the government of tax revenue, just as the president and Congress are piling a major expansion of health care and other programs on the nation's plate and struggling to find money to pay the tab.

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession's impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government's revenues were this bleak, the year was 1932 in the midst of the Depression.

"Our tax system is already inadequate to support the promises our government has made," said Eugene Steuerle, a former Treasury Department official in the Reagan administration who is now vice president of the Peter G. Peterson Foundation.

"This just adds to the problem."

I did not know most corporations paid income tax, so that was news to me! There is a nice graph in the story worth a look as well.

Silent Liquidity
The current period has been marked by debt destruction and deflation as it pertains to money supply velocity. Many of the inflation mindset see a graph like this one (I have seen this a few times just today, click for large view):

And wonder just how all this money is not finding a way into the market place. I wonder the same thing myself.

Much of the FED/Treasury inspired liquidity has been tied up by banks "hoarding" the cash. The argument is that banks will not lend out because they are fearful and still concerned over losses. This has resulted in money velocity falling precipitously. Hence no credit expansion.

This line of thought assumes that banks are both 1.) fearful of anything except making a killing and 2.) have real concerns over future losses.

The "Stress Tests" were concocted to give a free pass to the banks to conduct business as usual. If you have not been seized by now, you are either too small to bother with, or you are not going to be seized. The massive TARP bailout for the banks against overwhelming public opposition has surely emboldened the banks going forward. Goldman Sachs has had no problem posting monster profits with a straight face.

I think the banking system has been waiting for the right kind of story to materialize before they begin to deploy all of their new shiny capital. The recent crossing of 1000 on the S%P 500 and moving over 2000 on the NASDAQ has all the right looks of a speculative ramp up.

The banks will not flood enough money into the system through the stock market however. There needs to be an more diffusive method. I think the model the government will look to use is the wildly successful "Cash for Clunkers" hand out. Depending on how much the car being bought costs, the $4500 giveaway can represent anywhere from 10% to 25% of the purchase price.

One may wonder why the $8000 tax credit for first time home buyers was not such a good show. The $8000 is a small percentage of a home price, and it was a tax credit which is in now way as tangible as cash money in the hand.

Looking ahead I think we are going to see expansion of the "Cash for BLANK" model. You can already see how giddy the politicians are whenever they discuss the program and how well they think it is working. Here are some possible items I would expect to see:
-$4500 towards any car purchase, not just a clunker retirement
-$25,000 towards a new home purchase
-Revival of the Television money program, now expanded to $1000 to get rid of your old TV if you buy a new one
-Business tax credits for heavy equipment orders
I could go on.

Am I being sarcastic? I think a little. I do think we have not seen the end of the "Cash for BLANK" program idea. Seeing the response from the government and sadly a public looking to take on more debt just because it is 20% off has really changes my mind about frugality going forward.

Of course, should the indices continue to rise (they will) and several or more of the "Cash for BLANK" programs generate artificial demand for all sorts of items, we come to see that silent liquidity sitting in the bank vaults come into the marketplace. The banks need cover and renewed demand (forced by rebate lures) and a rapidly escalating stock market (has there been a down day in 3 months?) may be the all clear they were looking for.

One might wonder just how a higher debt burden will impact the unemployed. One might worry about wages which have been falling for a few years. One may be concerned that a flood of money into useless consumer items to present goosed GDP growth will not address our economic base problems.

The solution, as preferred by the government, is to target numbers. Whether you are talking about the indices, GDP, ISM, etc those numbers are going higher. Under the surface nothing has changed, nothing has been fixed. Plow Trillions of dollars into any economy and reward gambling and consumerism and you are bound to get some kind of a pop. The question is now that some kind of a superficial recovery is close at hand, will all that money finally make it into the economy?

I think that it will. Keep an eye on that dollar chart and remember, the DOW could be at 20,000, but that may not work out quite the way you think it will.

Have a good night.


terry said...

Don't foget the millions of children under the age of 8 who don't have their own cell phones. Government sponsored rebates are most definitely needed. Remember, it's all about the kids.
Regards, Will Profit

Jeff said...



We are on the same page.

Great article. Thanks for the PIMCO update. I actually own a good chunk of their bonds and I think Gross is a brilliant guy.

The one thing that scares me is if China says stop the spending or we're done with you.

The Fed might be forced to pull liquidity at that point.

Interestng times to say the least!

getyourselfconnected said...

i do not recommend you search for Bill Gross on my blog. While he may be sharp, his muscling of government policy and craven pumping for support of his positions by FED action makes me ill. I once challenged him to a steel cage match:

"Get this Bill, I don't care what you want. I don't care if the only thing that will save me from a life of hunting and gathering to eat is a massive government sponsored backstop of all things financial. I would rather have the system collapse than keep up this charade any longer. You want to take my money and give golden parachutes to banking executives? You want to take my money and support home prices in ghost towns in Metro Phoenix? You want to take my money and keep your crap FNM paper good? I tell you what sir, you can have it. Just step right up and into a steel cage. They close the door and we have at it. Me to keep what's mine and you to take it from me. The person that can exit the cage gets his way? Are you game?"

I love that article!

getyourselfconnected said...

I missed the cell phone angle. Nice take. Did you try out the J-10 and 5-6 hands I discussed in the comments from your Friday post in front of a raiser or bluffer?

watchtower said...

If you really want to get GYSC going, just request a Beatles song for Friday Night Rock blogging : )

terry said...

J 10 is usually good. 5 6 can work. Friday saw me clubbed like a baby seal. I was hammered on a hand where "notorious bluffer" drew a straight flush in spades, deuce thru six on the river. I was holding a spade flush K high. another player stayed with three 9s. BIG POT. It was a good night for drinking.

getyourselfconnected said...

rough hand. I remember a hand I played in a huge $10 buy in tourney, like 8000 people in it, so big money if you can last. I was at a table with a bunch of "ace any's" pushers, it was raised, I had KK, go all in, get 3 other callers! 4 guys had an ace, so no ace can hurt me, but things went down 2-4-10-3-5 and they all turned a wheel and split my chips. Poker is 90% annoying, and 10% pure fun! Anyways, 5-6 is pretyy underated, plus its an easy play to the flop; either you have a sweet hideen draw or you fold.

Please do not encourage bad behavior! Let me tell you about the Beatles.............

getyourselfconnected said...

Donde esta Lisa??
Lisa, are you out on a kayak someplace?

jeff said...



Gross is very hateable but its the main bond fund in my work 401k and I have no

I must admit I am very happy with the performance. Up 6% YTD with a nice divi.

I am sure u woulda kicked his butt in the cage tho!

jeff said...

lol Watch

Can I request "I wanna hold your hand or yesterday?"

Lisa said...

I read your Seriously, I'm exhausted. It's 2am and I'm sick of the forex market. Ugh! I should have been in the kayak instead of trying to trade this crap. And I have company, so just a bit busy around here :)

watchtower said...


Those are two of GYSC's faves I'm sure!

I double dog dare you to request them :)

GawainsGhost said...

Interesting article in the new issue of BusinessWeek about the incredible shrinking Boomer economy. Yeah, when the largest and wealthiest generation in American history cuts back on spending and starts saving, after watching its assumed net worth decrease by 1/3 right before it enters retirement, that is going to have some effect on the economy. Especially since consumer spending accounts for 70% of the economy. Welcome to the Great Recession.

This is why the recovery, assuming we ever actually get one, will be anemic. Gen X and Gen Y are hardly going to replace the Boomers in terms of narcissistic spending, because the former have different tastes and frugality is the new normal. These young kids are looking at a much tougher job market than their elders ever faced, runaway government spending on entitlements and other failed programs, and relentless taxation. So they're not going to go out and buy a luxury car. If you doubt it, take a look at Mercedes Benz (the archetypal Boomer car) sales last year, down 30%.

Technically, I'm classified as a Boomer, born in 1961. But I have a different take on that. I look at the kids born between 1960 and 1970 as Generation L, as in Lost. We're somewhat different, because we were the first generation raised on television. My parents didn't have television until they were in their teens; they were raised on radio. So Gen L has a completely different take on life than the Boomers, who led the decade of protest in the 60s when we were children, and Gen X, because we came of age in the decade of change in the 70s, when the Gen Xers were children. Especially us guys, because we started dating right when feminism was in full swing and all the girls copped bad attitudes.

I look around me in befuddlement at the world today. It's not the way it was when I grew up. The Golden Age of America is gone, and it's not coming back. I feel for Gen X and Gen Y, but I feel more for Gen M.

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