Trader’s Narrative

The US financial system was resuscitated by the largess of the taxpayer. Without any real quid pro quo, transparency nor discussion, they were made whole. Their losses made public while their profits were guaranteed to remain private (as the recent obscene bonuses attest).

So now that the US economy is still on the ropes, fighting for its very survival and in dire need of a liquidity transfusion of its own via the credit markets, where are the banks?

Surely they are pumping the lifeblood they received from the US treasury and the Fed back into large and small businesses that are the engines of growth to allow the economy the same recovery they enjoyed. Right? right? Well, no. In fact, if you assumed that you couldn’t be more wrong.

As you can see from the chart above, bank lending in the US has contracted to an unprecedented degree. You may notice that a contraction of some shape or form happens each time we have a recession (the dark bars). And you would be right. But we are not taking a random walk down Wall Street these days. These are extraordinary times, which required extraordinary measures - whether rightly or wrongly.

So what are the banks doing with all the cash they received from the hard working American Joe and Jane Sixpack?

Hoarding it like a miser:

So we have banks flush with cash, not lending to those who need it and deserve it, but rather sitting on the cash or in Goldman’s case, using it to generate billions of dollars in profit which then is promptly cut in half to be paid as bonuses.

As David Rosenberg of the Toronto boutique firm, Gluskin Sheff posits, this may be why the US government bond market is so subdued:

The banks are deploying the cash in the government bond market, buying a net
$27 billion in the latest week and $130 billion in the past 18 weeks. Meanwhile, cash reserves keep piling up and just reached an all-time high of $1.2 trillion — enough to finance the entire U.S. fiscal deficit. This is a nice back-of-the-door mechanism for how the Fed is monetizing the government’s endless need for money: bolster reserves at the big commercial banks and have these banks buy the bonds that Uncle Sam sells in order to raise the capital needed to fund all the government’s fiscal stimulus measures.

Here is a very long term chart of the US 30 year bond yield:

The Chinese have a saying: ‘May you live in interesting times.‘ All I dare hope is that things don’t get any more interesting than this.

By the way, here is an almost too good to be true offer for my US readers. For a limited time, you can get a complimentary subscription (aka FREE) to SFO magazine (Stocks, Futures, and Options).

It takes less than a minute to sign up and you need to provide some basic information. But as I mentioned, you need to be a resident of the US (because you need to provide a US address). Enjoy!

Every single great bear market has left its own unique mark on the psyche of investors and consumers. While it may be much too early to declare what the effects of this most recent bear market may be, the US consumer may provide a clue.

For the past few decades the insatiable appetite of the US consumer has been the engine of global consumption. Fed by the trifecta of easy credit, loose fiscal and monetary policy and cheap goods from Asia, it went on a binge.

The personal saving rate was in decline since the mid 1970’s when it reached a high of 14.6%. Last year the average US consumer had zero savings. The disparity between the spendthrift lifestyle enjoyed by the average American and the average miserly Chinese or Japanese (or Korean) suddenly became cartoonish.

And then this extreme scenario began to unwind:

According to the Bureau of Economic Analysis (US Department of Commerce) the latest data for April 2009 was a saving rate of 5.7%. While this is a welcomed change, there’s no question this will have a deflationary effect on the economy.

In April 2009 Americans paid down debt at a record rate of $15.7 billion. Combined with $16.5 billion in March and $10.9 billion in February we have a trend. According to Lombard Street Research, this is the fastest decline in credit since 1980 and the largest since 1943 when wartime rationing restricted consumption.

We’ve seen a reduction of consumer credit in every recession but the recent numbers are simply mind boggling:

While the US consumer garnered a fame for profligate spending over the past decade, those days are clearly over as a new frugality becomes the watchword. Those who lived through the Great Depression - even when the worst was over - were changed for the rest of their lives. Similarly, this Great Recession may change the attitudes of a whole new generation towards discretionary spending.