By John Packard
Underlying economic and banking system fundamentals rapidly are getting worse, not suddenly better as touted in the media tied into Wallstreet. Another tall tale is of the Fed’s valiant fight against recession, while containing inflation. Now that the economy has been turned, the story goes, the Fed can slowdown or eliminate its easing so as to concentrate on its inflation fight. What nonsense! The Fed’s primary concern remains preventing a systemic financial collapse; everything else is secondary. The Fed has very limited ability at present either to stimulate the economy or to contain inflation, despite severe problems in both areas.
It is polite to be positive despite the overwhelming evidence of a deteriorating economy. In fact, one study put together by the peanut gallery suggests that many millionaires (who knows who thes people actually are) are preparing for an immediate recover in 2009. Waren Buffett was quoted to say that the recession will be deeper and longer than anyone currently realizes. I don’t know about you, but I’ll put my money with Warren.
Ben Bernanke made the decision to sacrifice the U.S. dollar and inflation containment months ago. Any move now to a slower pace of interest rate cutting is due primarily to the targeted fed funds rate nearing its practical lower limit. If the Fed kept cutting rates at the same pace as seen earlier this year, fed funds would be at 0.00% before July.
As will be discussed further, nearly all statistics that underlie GDP suggest a first-quarter contraction, but politics likely will keep the number positive. Recent inflation reporting has been understated, yet market recognition is growing of a serious inflation threat. With oil prices hitting new record highs, the outlook for inflation cannot be good.. Inflation pressures also are in play from food supply disruptions, a weak dollar and excessive growth in the broad money supply.
Nonetheless, the equity markets have rallied, as has the U.S. dollar in conjunction with some gold selling. The stock markets rarely are rational, but the currency markets have been subject to heavy central-bank jawboning, which historically usually has been reinforced with covert market intervention. The gold market, in turn, has been hit with overt intervention. Jawboning and intervention tend to be short-lived in impact. The long range outlook remains dismal for the U.S. dollar and extremely bullish for gold.
Banking Solvency Crisis Continues. Little has changed in terms of the banking solvency/liquidity crisis, except for the passage of some time. The news continues to be bleak, as central banks keep pushing liquidity into the system. As shown in the accompanying graph, the Fed now reports non-borrowed bank reserves at something close to $100 billion. These funds obviously have little to do with banks meeting their reserve requirements, but more generally reflect the Fed’s net lending of cash and assets of approximately $140 billion as a liquidity infusion for troubled banks.
The moral of the story is to payoff as much debt as you can. This will be the best investment you can make.
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