If hope springs eternal, like the green shoots of spring, then Bernanke better be consulting this year’s farmer’s almanac to determine if March and April’s green shoots will yield a bountiful harvest prior to winter’s cruel frosts.
Although American recessions do not offer a large sample size for statistical comparison, the following graph shows the performance of the public markets during four notable bear markets.
October 2008 is the obvious D-day for major differentiation between the credit crisis and great depression on the one hand, and the tame bear markets of 73-74 and the tech bubble collapse on the other. This makes some basic sense. The markets of today and that of the Great Depression share a common malady in how the financial markets themselves function. The access to cheap foreign capital enabled tremendous innovation and risk taking by financial institutions, which brought most to a point of insolvency without direct government intervention through loan guarantees, equity and non-equity injections (i.e. the unwinding of AIG’s default credit protection), and changes to mark-to-market accounting. The IMF agrees, stating that these type of recessions take, “50 percent longer on average to recover its previous peak.”
There are many noteworthy datapoints concerning how the financial markets are currently holding up.
In 2009 year-to-date, the FDIC has taken over 25 banks around the country. Florida’s largest bank, BankUnited of Coral Gables with over $14B in assets, has been given a 20 day ultimatum as of April 14th to raise money or be taken over.
In JP Morgan’s investor conference call to discuss its earnings report, CFO Michael Cavanagh described how the markets work. During normal markets, Banks represent 25% of the money moving through financial system. What makes up the remaining 75% is rather mysterious and anyone with any suggestions as to what this is should leave a comment. Undoubtedly, Sovereign Wealth Funds make up a large percentage of the remainder.
China’s current and future role in international money flows will be very interesting. To this end, China is proactively taking steps to protect its interest as the dominant supplier of goods. Most notably, on April 15th China finalized a deal with Argentina, arranging a $10.2bn currency swap of their respective currencies (70bn CNY/38bn ARS). For the most part, the USD has been the primary reserve currency for international trade. China’s move allows Argentineans to directly access Chinese Yuan for trade, rather than having to settle in US Dollars, reducing the barrier of trade with China.
As to the public markets in the US… the current bear market bounce is rather scary in many ways. Unless you absolutely need money from the public markets, the over riding goal of the American public should be that the markets function properly. That value determines price. This is not the case. With tremendously low volume, the current bounce is been driven by the covering of short interests driven by Government intervention. When you hold a stock short, if the stock rises or if there is a dividend, you – the short – have to put up more collateral. Right now, the financials and consumer cyclicals have net short positions of 5 billion and 2.7 billion shares respectively.
Volume in the public markets is also analogous with liquidity. With the introduction of computerized trading, specialized
“quant funds,” have become the biggest liquidity providers in the system. Quants are currently getting destroyed by this market bounce.
Quant funds have blown up before, and when they have, they have greatly disrupted the volume of trading in the markets. The last time this happened was in August 2007. The following graph is a Bloomberg screen of publically available information on the performance of quant funds. The thing to look for in these kind of graphs is the movement away from historical norms, i.e. breaking the lines. Currently the lines are broken. As reported by ZeroHedge, the largest quant managers are getting reamed by the market. The implications of quant funds is that if they stop trading, market liquidity will drop to almost nothing. Meaning public markets will have almost no liquidity and that the value of stocks is irrelevant.
The only remaining thing to thus say, is to say that Commercial Real Estate is estimated to bottom in 2011-2012, credit card defaults are rising, unemployment should drop another 700,000 this month, and anyone concerned about inflation should first take into account how slowly money is moving through the system. It is moving very slowly. The big question is after having goosed the “profits” of America’s banks, where does the money move to next?
Share on Facebook
This evil Los Angeles. Run down low life strip malls spread on and on between ethnic enclaves.
Praise 
Peter Thiel, who according to 
Liberals, shame on you. Only in a fascist Obama government can a good American company go bankrupt because there are not enough Illegals to work the hydroponic farms. But lo and behold, Eurofresh Inc, an Arizona grower of over 200 million tomatoes and cucumbers filed for 
There are well paid political consultancy gigs… and then there is 
Today is very special. Not only does it look likely that the “
On March 3rd, Barry, the Sultan of Dollars, said, “buying stocks is a potentially good deal if you’ve got a long term perspective (i.e. 
“When the glass is full drink up, drink up. This may be the last time we see this cup. If god wanted us sober, he’d knock the glass over, so while it is full, drink up.”
