Market Commentary

In my view one thing that is becoming clearer
March 09, 2010

In my view one thing that is becoming clearer the economic recovery has become self sustaining especially given that as per Bloomberg two thirds of the $787 billion stimulus [$524 billion] has yet to be spent.  I will skip the infinite number of political reasons why these funds have yet to be spent other than to comment that it was planned this way.

These funds—about 50% of the stimulus was/is planned to be spent in 2010—should amplify the cyclical or natural recovery that is already occurring as indicated by February’s labor statistics.  Yesterday I read various reports suggesting March’s nonfarm payrolls may rise between 50,000 to 200,000.  Wow!

If the growth in the labor does occur at this pace, will the first quarter of 2010 be the period when the markets officially transitioned to interest rate risk as the largest threat to investors as opposed to event risk?

As per First Trust, the interest cost servicing the national debt is 1.3% of GDP, considerably lower than the 3% level experienced in the 1980s and 1990s.  The average maturity of US government debt is at a generational low of 4.5 years, again as per First Trust.

What happens to monetary policy assumptions if monetary velocity suddenly accelerates—a possibility given that excess bank reserves are over $1.35 trillion versus the historical average of $1 to $ 2 billion? Recent data suggest banks hold more cash than the total amount of commercial and industrial loans outstanding, the first such occurrence since the 1973 inception of this data point.

This extremely liquid position is enhanced by the record amount of cash, $2.18 trillion, comprising the balance sheet of S & P 500 companies.

Can a scenario develop all this cash—stimulus, bank reserves, corporate cash—enters the economy at the same time causing inflationary expectations to become “unanchored?” How will this impact the carrying costs of the national debt?  As noted above the average maturity of US debt is at a generational low of 4.5 years.

The consistency of this crisis is its inconsistencies.  Several years ago I wrote a gazillion times an inverted yield curve (short term interest rates higher than long term interest rates) has a 100% correlation to a slowing economy.  I thought the economy was going to have issues but not at the level we had just experienced.

Today the slope of the yield curve is around an all time record (short rates vastly lower than long term rates).  This environment is highly correlated to economic activity and potential inflationary growth.

If inflation is defined as too much money chasing too few goods maybe my concerns about inflationary expectations becoming unanchored is not farfetched as first thought.

Last night the foreign markets were down.  London was down 0.53%, Paris down 0.37% and Frankfurt down 0.35%.  Japan was down 0.17% and Hang Sang up 0.05%.

The Dow should open nominally lower on a multitude of reasons including the possibility of the normalization of monetary policy, sovereign debt fears as well as good old fashioned profit taking.  The 10-year is up 8/32 to yield 3.69%.