Monday, November 03, 2008


I have not looked at a long term chart of the US money base but I believe we have never had such a flood of money from the FOMC. The US money base has grown at the annualized rate of 48% over the past several weeks. In addition, numerous countries are pumping money into their economies through one stimulus method or another. Short interest rates and reserve requirements are being slashed, governments are investing directly into companies and central banks are buying every type of bond or note or paper imaginable. Each time a central banker buys paper, it adds to the money supply, which could drive up the price of assets sharply.

This morning, stock markets in Australia, India and South Korea are leading the charge. The world is seeing a "reflation trade". With central bankers flooding the market with cash and with banks such as JP Morgan doing mortgage loan work outs, the financial route could turn into a sudden boom. Gas prices in 11 states are now below $2. A church friend bought a new car this week! What is the world coming to?


During good times, the poorest of people occasionally enjoy beef for dinner. During tough times, beans and rice replace beef on many a family menu. During the recession of 2001, the beef peak price momentum hit in August and September. Bonds were among the best investments from the beef peak until the following bottom in August of 2002. This time around, the peak in beef price momentum was in May of 2007. Bonds did extremely well from June of 2007 until recently. The length of time from the peak has been longer but the decline has not been quite as powerful as in 2001. With last weeks cut in interest rates, the interest rate decline has been much more dramatic than the beef decline. My Mama was right about not fighting the Fed, with the Fed Funds Rate now at 1%, I would not bet on gold or anything else going down in the short run. With the price of money, the price of gas and the price of so many other things having fallen so far, the consumer is about to be flush for an extended period. Real incomes are going to rise.

Unemployment rates are approaching their peak and unemployment benefits have been extended in most states. Even those people who are out of work are seeing more income than before.


Banks that have money to lend are making a killing. They are borrowing money at 1%, but they are not lending it at 1%. Their gross income on new loans is several times normal and they are being highly selective. One car dealer reports that it cannot process loans unless there is a 710 credit score and 25% trade in value or money down. How often do you find a business in the position to acquire raw materials at 20% of the recent price? Still, the best news for the banks are the deals being offered to home owners. It makes much more sense for a bank to help the home owner with better terns than to foreclose on his loan. Banks are going to see paper marked to 50% increase in value to 85% or so. Good news ahead.