Monday, March 10, 2014

Let the Prices Decide

I’m seeing more and more construction cranes dotting skylines and even hearing commercials on the radio for financing options that make me think ‘they’re at it again’. Someone is financing these projects, and nine times out of ten it would be a bank; there aren’t too many billionaires with the liquidity and risk appetite to match to fund these many projects.

Basically, it’s this type of credit access that is needed for an economy to grow on a fundamental level when it runs on leverage. Thanks to the creative work of the Fed under Ben Bernanke, the banks are perfectly situated to service to the nascent demand for credit in the economy. This actually has potential to be the start of the next mega-macro business cycle. Which seem to run in 20 – 25 year boom-bust cycles by the way. It comes down to the economic environment that these credit transactions are going to take place in, which for the most part is swayed by Fed activity and the overall sentiment of monetary policy.

In the short term, however, economic data on housing looks to be losing upward momentum, which happens to be a key component of most inflation measures. Official unemployment numbers are creeping lower, but the length of time for which unemployment numbers have been elevated is a bit worrying. At this point there is a huge pool of people that are not being counted as unemployed, and not to mention the underemployed that have surplus labor that they cannot get sold. So that’s two for two with weak components of inflation measures.

With this template, we can expect the Yellen Fed to continue the slow withdrawal of stimulus as already in progress, and the economy to continue to hover at its current levels of growth.

If ever there was price inflation to be found, it would be in financial assets. Their proximity to the toxic amount of cash that is held between the banks and the Fed increased their relative values when compared to other key metrics of economic advancement. From here one of two things can happen; either the US macro-economy snaps up to be in equilibrium with financial assets, or financial assets snap back to be in equilibrium with the macro-economy. We’ll let the prices decide.

Long story short, the monetary stimulus never made it out of the financial ether that is the US banking system. Like the universal solvent that is water, money is fluid and will find even the most miniscule crack in the dyke that is the Federal Reserve, and flood the low lying areas of the economy with the inflation that has been suspiciously absent according to most contemporary observers.