Monday, June 8, 2009

Dead Cat Bounce

It is good to see a breath of optimism return to the markets with rising prices and a restoration of consumer demand. It is fair to say that the panic induced cash flow gap is now been unwound as normalcy of a sort comes back to the economy.

The damage inflicted on the financial system was massive and almost unbelievable. Governments have acted to isolate the cancer while the real economy gets a chance to kick in and start cleaning up some of the damage. The real economy can limp along for quite some time without infusions of fresh credit for capital spending.

What makes me most nervous is that the general behavior of the markets are eerily similar to the 29’ crash and the same time functions are in place. It is only nine months since the actual break took place. In roughly the same time period, in 1930, the markets recovered somewhat and trade also. It really was a dead cat bounce that merely punctuated the ongoing economic decline that rolled on for a full two more years until late in 1932.

As I have said a number of times. The problem is the destruction of the US mortgage market and the ongoing inability of the government to repair the market. The US consumer is not able to restore his household economy until this problem is made well, however long we wish to dawdle. The Japanese took ten years to make the necessary moves, after trying everything else first. We are well on the way to been that stupid.

More positively, the rest of the world is fairing much better than happened in the 1929 crash. China and India both have huge reserves of consumer buying that merely needs to be capitalized and both will emerge the stronger for it. Both economies will be doubling over the next five years just taking care of their own.

Europe’s disaster came from buying US paper and has been back stopped by government printing presses. This will now increase the demand for more prudent investments and strong capital driven investment out of Europe. They are well on the way to sorting themselves out. They may even become large buyers of US hard assets in exchange for the suitcases of worthless paper they have been gifted with. Revenge is sweet.

Latin America is nicely following in the footprints of India and China and looks almost untouched so far. Mexico keeps doing its own thing making it an excellent place to leave.

Canada has gone through the salutary experience of been shot at and missed. We now love our tightly regulated banking system. My only concern is that a lot of excellent work done between the two governments that were unquestionably mutually beneficial are now been subjected to attack by newly empowered incompetents reading from some ideological prayer book. No matter, Canada will end up supplying a third of the globe’s reduced oil demand for centuries, and the big capital build out is about to begin.

That means a positive balance of payments until hell freezes over. We could even afford a socialist system, although we have had great success with the best application of the Laffer curve methodology of anyone.

1 comment:

Lori said...

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