The 'New Normal'- Yet More Economic Deterioration Out of Europe

The real financial news today had nothing to do with Mr. Dimon at the Senate.  It was again out of Europe.  German mfg took a big drop per MarkIt, and Spain is nearly insolvent per Egan-Jones.  So we had yet another sharp stock reversal to the downside and yet another lower high about the 150 day sma.

It continues to look as though Europe is going through the U.S. experience of 2008.  Now it's nation-states, before it was the core financial structure of the sole superpower with immense global reach.  Not sure which is harder to deal with!  In any case, the other structural difference from the standpoint of this American observer is that what happened in 2008 occurred at the home of the most important central bank in the world.  This European thing is different.  The Fed in theory can loan them all they need.  In this scenario in which Italy is up next and falls despite the various reassuring words out of Europe today on this topic, Treasury rates could drop to unimaginably low levels.  As in Japan, the general stock averages would get hit hard.  However, if no catastrophic "Lehman moment" occurs this time, there might be a lot of differentiation between stocks, as was the case in the major 2001-2 U.S. bear market.

In this scenario, volatility will go wild between deteriorating fundamentals and the certainty of intervention-- but when, oh when will they print, and how much and in what form?  Summer 2011 set certain modern-day records for 1% up- or down-days.  Could a rerun of some such volatility spikes be in the offing?

I am also paying no special attention to the Greek election.  Whichever party wins will be happy to have the spoils of power and will do whatever they will do.  It's impossible for an American to invest based on such unknowns and the high chance that even if Syriza wins, Tsipras will pull an Enda Kenny, who became P.M. of Ireland only to follow the bail-out course set by the previous guys.

Momentous, perilous times.

Sometimes cash is kingly. 

Inflationary Signals in More Places

While savers continue to receive, incredibly, shrinking interest rates on money market-type deposits, the money-printing that Dr. Bernanke has been pouring down the gullet of a thirsty Street has been working its usual magic. A case in point is seen in the accompanying graph of a Markit index that relates to commercial mortgage-backed securities. (Click on image to enlarge. Click on AA.4 on the linked Markit web page for this specific index, or click on any other index for a similar price-time display.)

It would appear from this and other charts available on the Markit site that commercial real estate prices, or at least prices of securitized mortgage pools, have joined gold and silver in strong uptrends, or, in the case of CRE, in the reversal of a strong downtrend. Relativistically it's sort of the same thing.

The increase in the money supply over the past few years is working its way gradually through the economy. Wages and employment are reacting slowly, given all the malinvestment that occurred in the U. S. Thus what I suggested in my Fire and Ice post of January 2009 might happen is happening. Here is a quote from that post:

. . . we must consider the possibility of a mixed inflation-deflation. Houses and municipal bonds, which you may own, can continue down in price and the cost of a haircut or cereal, which you purchase can go up. You can lose both ways.

Fire and ice.

The fire of price increases is becoming apparent in the food stores of America. There is nothing more fundamental than food and water (still mostly free) to staying alive, so of course there is no justification for excluding it from measures of living costs. And since so much food Americans eat is processed, the prices we pay for food have relatively little to do with so-called "volatile" costs of the underlying foodstuff. Increases in food prices have everything to do with packaging and transportation costs, lack of "deflation" in total compensation including taxes and benefits, and profit margins.

This blog repeatedly pointed to the "deflation" talk in the media the past months as a deliberate diversion (to use a favorite word of the President) to hide the money-printing that was going to ensue once again. How the 2-10 year Treasury complex keeps trending down in yield is incomprehensible if yields were responding to a free market or unless the "market" knows that something is going to blow, such as BofA pulling a Bear or Lehman. In which case gold is to the moon (and probably Treasuries as well), with the dollar probably moving in an opposite direction.

Once again, the broad stock averages continue in their downtrend compared to gold. Within the stock market, though, divergences in relative value have continued to appear and allow certain stocks to represent good value, it being understood that the flood of "money" that the Fed has created is so large that arguably no important financial asset is truly "good value".

Copyright (C) Long Lake LLC 2010

Explaining Some of Mr. Markit's Moves

A free website at Markit allows one to track pricing on commercial mortgage-backed securities. Click HERE for the link. At the site, I use the AA securities, priced in the 30's to 50s, as they are the most volatile. After a huge sun-up, they have weakened a fair amount recently. The stocks of super-regional and other banks track this CMBX set of indices very closely. The huge runs in STI, FITB and many others correlate closely with these readings, as do the recent markdowns in their prices.

As with so much else in this economy, the flood of Federal and Fed "money" has had only partial and often transitory effects. It has been illogical and anti-free market and has served primarily to reward the undeserving and foster speculation.

At a certain point, this relationship will break down. For now it's interesting.

Copyright (C) Long Lake LLC 2010

Inflation on the March

Markit's CMBX indices of commercial real estate securitized values has been soaring recently. Reflation is, more and more, here. Not to mention inflation. The NY Fed's Empire State Mfg Survey was out today, showing much more cost of goods price increases over selling price increases. Barring a big change in trend, the next step is business raising their selling prices to keep their margins up. Cash is, more and more, trash, but where it should be deployed is a very difficult decision.

For now, in addition to passive savers, the current losers are small businesses and much of labor.

Copyright (C) Long Lake LLC 2010

Commercial Real Estate Values Declining in Real Time

The Markit website gives current prices on CRE. A CMBX price chart shown here for AA.3 is representative of a broad range of pools of different quality. Clicking on the chart will enlarge it.

Consistent with price and trend charts of Big Finance stocks, there was a surge off the bottom of a year ago, but poor price performance recently and from the peak about a year ago.

What values are "in" the stock market is of limited concern to me. The bigger issue is that demand is obviously very weak.

Nothing is ever clear, but given the rapid decline in such measures as ECRI's weekly leading indicator growth rate, the

continued poor velocity of money, it continues to strike EBR that too much of the positive economic statistics that show recovery from the worst of the depression is due only to Fed money/credit creation.

Thus the major trend remains with gold, in my humble opinion. That's the opposite of the 1980s and 1990s, when growth at least appeared to be more organic, with the kicker that declining interest rates goosed stock prices.

Copyright (C) Long Lake LLC 2010