Random Thoughts After An Historic Speech

“The economy is back from the precipice.” – President Obama (9-9-09)

You may think the historic speech I’m referring to was President Obama’s. You’d be wrong. That speech was politics as usual. Yesterday’s real historic speech was the one given by Zhu Min, Group Executive Vice-President of the Bank of China. He said bankers on Wall Street are suffering from “over-confidence” and are “myopic” in the face of the continuing financial crisis. He went on the say: “THE REAL ECONOMIC CRISIS HAS JUST STARTED.” He then added that the Chinese and the world are once again developing bubbles in real estate, credit, and the stock market.

The stock market keeps rising. If one is to believe that the market is a predictor of the future, you could make a case that the U.S. economy is headed for a strong recovery. However, if you are to believe the U.S. government bond market, just the opposite viewpoint is being supported. The demand for one-year to ten-year treasuries is increasing at a very brisk pace, and not just from our own government. It would appear the bond market is not worried about inflation in the future. If it was concerned, bond prices would fall, and rates would rise. However, just the opposite is happening. Rates are falling, and bond prices are rising. Maybe foreigners (Mr. Min) know something we don’t. This connotes deflation and an economic relapse. Who is right? In addition, sectors of stocks are being swapped for other sectors. That might be a game of musical chairs being orchestrated by the high-frequency traders, which could very well end badly.

No new money is coming into the stock market. Savings rates are accelerating, incomes are being cut, margin balances (borrowing) is not increasing, and money markets have remained where they were last February. Foreclosures are up 18% year over year, and U6 complete statistics unemployment is approaching 17%.

Obama said “we’re back.” To quote Barney Frank, “What planet is he living on?”

Just some random thoughts.

Till next time,

Bill


Source: Bloomberg


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