Thursday, November 20, 2008
This market is priced to another depression, as I've outlined in prior posts. Implicit in market pricing is a massive wave of bankruptcies affecting as many as half the companies in existence today over the next five years, the result of a signficant contraction in economic activity on top of deadly (for debtors) deflation. The deflation is expected to last up to five years, while the a price level in 10 years is not expected to be any higher than it is today.
To see how potentially wrong the market's expectations of deflation could be, just consider these charts. The Depression of the 30s was exacerbated by a Fed that allowed the money supply to contract. Fed Chairman Bernanke has vowed repeatedly that such a mistake is not going to occur on his watch. And he really means business: as the second chart shows, the Fed has sextupled the basic money supply (bank reserves) in the past two months. The Fed has created six times more raw, high-powered money in the past two months than it created in its entire existence! This simply breath-taking, for want of a better word.
And when people say credit markets have shut down, the facts contradict them. Non-financial commercial paper outstanding has been growing steadily for the past four and a half years. Companies are having no problem accessing the credit markets. All measures of the money supply and bank lending, for that matter, are at or very near all-time highs, as of the latest data available.
Posted by Scott Grannis at 7:14 PM