-The dollar is getting smacked around today and is pushing equities higher, but oil is still weak after briefly breaching the $60 level. The stock market is being driven by macro factors such as commodities, currencies, and government debt auctions. Remember last summer when oil was trading in the $130+ area and pundits said it is equity positive when oil drops? Now that the markets are more macro driven, the dive from $74 to $60 in oil has coincided with the SP hitting a two month low. Coincidence? I doubt it.
-California banks are going to stop accepting the IOU's on July 10. What are the recipients of the IOU's to do with there notes if they can't put them into a bank? Sell them for less than face value to outside vendors possibly, but they'd be getting shafted. Do you think the Fed and Treasury are going to allow the banks to do this? If yes, then the California economy, which is the main component of the U.S. economy, will continue to spiral out of control; If no, then the legislators in California know that the Fed is forcing banks to accept the IOU's and therefore they know they can continue to gear the budget towards what they want rather than what is needed. That essentially puts the great Californian bailout onto the Fed's shoulders.
-"Cash on the sidelines" debate/example. Bob has $150,000 in stocks, a $500,000 house and $25,000 in cash. Bob has $300,000 mortgage and $20,000 in credit card bills. His net worth is $355,000. The stock and housing market drops 50% and Bob has to liquidate his stocks because he took on too much risk. Bob now has $100,000 (cash and stock sale proceeds) and a house worth $250,000. He still has $320,000 of debt. Now his net worth is $30,000. Do you think that money is coming back into the market anytime soon? Sounds deflationary to me.
-Goldman Sachs had a password stolen to a system that automatically traded stocks and commodities. A press release from Goldman today said that password could be used to manipulate the markets. Ummm, does that mean that Goldman could manipulate the markets themselves then? We all know this is what they do anyways so I'm just throwing it out there.
-Read a great article in the FT yesterday from Mohammed El-Erian, one of the top dogs at Pimco and widely known as a brilliant financial mind. It was about the second stimulus plan and there was two important tidbits which I'd like to share. First, is this: he says, "What is economically desirable is increasingly becoming politically infeasible; what is politically desirable may well turn out to be economically undesirable." Secondly, he says, "The global crisis is morphing again. Having already contaminated (in a sequential and cumulative manner) housing, finance, and the consumer, it is now threatening the potency and credibility of the economic policy making apparatus. As far as I can see, there are no first best policy responses that are readily available and easy to implement. Instead, the economy will continue to struggle, navigating both the adverse implications of last year's financial crisis and the unintended consequences of the experimental policy responses. Given the inevitable social-political dimensions, this story will play out well beyond the realm of the economy, policy making and markets." That's some pretty heavy stuff. As I've said from the beginning, as the social moods move into more negative territory, the recession, or what I believe will turn out to be more of a depression, will only deepen. Let's hope policy makers can pull their heads out of the sand soon.
Heading out for the game. Take care.
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