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Here are two charts that will blow your mind



February 02, 2009 – Comments (15)

Here are two charts that will blow your mind courtesy of East Coast Economics:

The first one shows the amount of money amount borrowed by US banks from the Federal Reserve through Dec 2007.  The spike at the end of the 1980s occurred during the S&L crisis.  Then borrowing from the fed topoped out at $8 billion.

Here's a second chart that contains the same date...just updated through November 2008.

Sure the Federal Reserve is accepting assets in exchange for this money, but they are in many cases terrible assets.  They have significantly lowered their standards in terms of the types of assets that they will take. 

This is truly a shocking chart.  The question is, what does it mean for investors (we already know it means that taxpayers are likely screwed in the long run)?  It's tough to say.  Here's why.  Normally one would think that this sort of disgusting activity would lead to a dramatic fall in the value of the U.S. dollar.  The problem is that many other countries are in as bad shape as we are. 

I am becoming increasingly skeptical that the Euro will ever recover the ground that it has lost versus the dollar in recent months.  European banks were even more leveraged than U.S. banks were and the EU is having a terrible time managing such a diverse set of economies with a single currency.  Many are predicting the ultimate destruction of the EU and Euro, I'm not sure that I would go that far, but I don't see it doing well any time soon.

We don't even need to get into the UK and the Pound.  The economy there had an almost Icelandic dependency on the financial industry and the housing bubble was even worse there as well.

Russia is doomed.  Period end of story.

That leaves us with the Asians and Latin Americans. 

Mexico is doomed with the falling price of oil on top of the fact that it was running out of oil anyhow and the fact that it is so levered to the U.S. economy that remittances from here and exports to here are falling dramatically.  Argentina is doomed with its terrible government.

I'm not sure what to make of Japan either.  A case can certainly be made that even though Japanese exports will suffer significantly its economy has been so beaten down already and has never recovered that it won't fall much and might be the first to recover.   The problem is the Yen strength that happened in large part as a result of the unwinding of the carry trade is killing Japanese companies.  Still, I am keeping my eye on Japan.

Brazil and China are still interesting to me.  Things are probably worse in China than the government there is letting on, but I could see them bouncing back much more quickly than the U.S. if the Chinese government can stimulate any sort of domestic consumption.  I have always liked these two countries best from an investment perspective. 

China is probably the "safer" play of the two because it is less reliant upon commodities for its income.  Companies in Brazil, like Petrobras need oil to be much higher to take advantage of the deepwater assets that they have there.

I suppose that this is all fairly a moot point anyhow because I personally have been limiting my recent investments almost exclusively to preferred stock and bonds with a sprinkling of blue chip companies with low dividend payout ratios.  I fear that the economic slowdown has a long way to go.  I have been convinced that we won't see any bottom until some time in 2010 at the earliest and even then we'll have a U shaped or an L shaped recovery.

Still China and Brazil are two countries to keep an eye on.

On a related note, I just picked up a copy of Secrets of the Temple: How the Federal Reserve Runs the Country at the library yesterday.  It looks like a worthwhile read.  Here's the review of the book from Publisher's Weekly for anyone who is interested:

"In this penetrating study of the Federal Reserve Board in the Reagan era, Rolling Stone writer Greider (The Education of David Stockman) views the ``Fed'' chairman (until recently Paul Volcker) as the ``second most powerful'' officer of government, the high priest of a temple as mysterious as money itself, its processes unknown to the public and yet to be fully understood by any modern president. Controlling the money supply by secretly buying and selling government bonds and thus affecting interest rates, the Fed can manipulate billions in business profits or losses and millions in worker employment and stock, bond or bank account values, the author explains. Greider's conclusions are startling at times. The Fed, he maintains, could have prevented the 1929 crash. He also asserts the ``awkward little secret'' that the federal government deliberately induces recessions, usually to bring down inflation and interest rates. A time-consuming but extremely informative read. (November 30)""

Well, those are my thoughts this morning.  Not too bad considering the Super Bowl induced hang over that I'm sporting.  Man what a game!  Even the half time show was awesome.



15 Comments – Post Your Own

#1) On February 02, 2009 at 7:38 AM, TMFDeej (97.72) wrote:

Grrr, I meant to say:

"Here's a second chart that contains the same data...just updated through November 2008."

Not the same date.


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#2) On February 02, 2009 at 11:38 AM, Gingerbreadman55 (27.38) wrote:

*Jaw ---> Floor*

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#3) On February 02, 2009 at 12:08 PM, eldemonio (97.84) wrote:

My three year old asked - "Why is the second chart not as bumpy as the first chart?"

I tried to explain that as the highest peak gets higher and higher, all of the other peaks will appear smaller.  She didn't understand.  After about a half hour of thinking, I left her with..........."That chart means that you and your brother are screwed." 

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#4) On February 02, 2009 at 12:57 PM, DarkToast (32.19) wrote:

Secrets of the Temple is a fantastic book. It really goes into detail about Volker's time as chairman. For such a thick book it is surprisingly readable.

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#5) On February 02, 2009 at 3:09 PM, Zanibel17 (93.04) wrote:



Thanks for the charts Deej.  It's good that you and other CAPS players know what they mean, but show them to the general public and you're likely to get blank stares.  Hell, you could probably show them to Obama and members of Congress and they likely wouldn' t get it either.  Until you get the same public reaction as you get from people who LIKE talking about stockpicking, the Fed and the Bankers are going to stay in control of our financial system.

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#6) On February 02, 2009 at 4:01 PM, XMFSinchiruna (26.58) wrote:

Great post, Deej. This is definitely some scary stuff!

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#7) On February 05, 2009 at 10:06 PM, WiiPlayr (< 20) wrote:

at first i was like "what's with the straight line in the second chart?"

then...i looked at the numbers...

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#8) On February 07, 2009 at 7:23 PM, sentinelbrit (57.31) wrote:

The current global economic environment reminds me of the story of  the doctor who went on one of his regular visits to the terminally ill ward. On passing the patients, he said, "you're looking better today."

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#9) On February 08, 2009 at 2:32 PM, VIS46 (40.06) wrote:


Good post.Whch preferred stocks and what bonds you are buying now. I am 70% in cash now.

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#10) On February 08, 2009 at 9:21 PM, nwarrior (< 20) wrote:

Wow that is one mind blowing comparison!!!! Great post.

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#11) On February 09, 2009 at 4:30 PM, cpaw24 (78.37) wrote:

I would keep in mind those numbers relative to GDP, its not quite as significant.[1][id]=TOTBORR&s[1][transformation]=lin&s[1][scale]=Left&s[1][range]=Max&s[1][cosd]=1986-01-08&s[1][coed]=2009-02-04&s[1][line_color]=%23FF0000&s[1][vintage_date]=2009-02-05&s[1][revision_date]=2009-02-09&s_2=1&s[2][id]=TOTBORR&s[2][transformation]=lin&s[2][scale]=Left&s[2][range]=Max&s[2][cosd]=1986-01-08&s[2][coed]=2009-01-28&s[2][line_color]=%230000FF&s[2][vintage_date]=2009-01-29&s[2][revision_date]=2009-02-09&s_3=1&s[3][id]=GDP

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#12) On February 20, 2009 at 1:13 PM, ikkyu2 (97.96) wrote:

You know, looking at this, it occurs to me:
I hold an asset.  No one can see it, touch it, or find it, and its valuation is a product of an arcane model understood only by me.  My model says it is worth $1 billion. The difference between me and the American nobility - the rich people who run banks - is that no one will buy my asset at any price.  However, the Federal Reserve will hand over $1 billion of soft, folding greenbacks to buy the very wealthy person's asset.

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#13) On February 23, 2009 at 9:04 PM, SnapDave (48.35) wrote:

“Secrets of the Temple” was a good read.  However it becomes very tedious and long.  About half way through I couldn’t wait for it to be over.  The title and that review you posted are a little dramatic and conspiracy-sounding but the book itself is serious and thoughtful.  I found him to be a little hard on Volker (as I think is happening with Greenspan now).  At the end of the day you have to ask how many people could have done a better job. 

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#14) On February 25, 2009 at 12:09 PM, XMFTheDoctor (54.10) wrote:

I would point out that eastcoasteconomics has a decidedly conservative slant as well and numbers, especially economic numbers, can easily be adjusted to reflect a political belief.  For example, the website claims the Gulf War and the War on Terror have cost a combined total of about 600bn.  Well CNN (with its slightly more liberal slant) thinks it will end up costing 2.4 trillion by 2017.  I see WWI and WWII aren't even in the pie chart, but WWII cost about 25% of GDP.  The stimulus/bailouts would have to hit ~3.5 trillion to be 25% of current GDP.  (And on a side note, even adjusted, everyone knows the Louisiana Purchase was cheap anyway.)

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#15) On March 21, 2009 at 1:41 AM, chevionUSA (< 20) wrote:

Deej...what do you think about the possibility of U.S. and Iran getting into business together??!!
Chinese have been very aggressive to develop and benefit from gas and oil fields in Iran.

Iranians sit on huge amount of savings, gold, etc. Iranians are mostly very educated ( less than 1% analphabet) .

Iran and Turkey could be a new Brasil or even China. Turkey and current Iran was major part of Persian Empire. Turkey is also refered to as Asia Minor.

I think people are undermining the resources (human and material) that lies in Asia minor, Iran, and middle Asia (the land of Borat). This is not a small area either. Iran, Turkey, mid asia are together double the size of the U.S. 

I personally think 30 years has been enough time and it's time for teh U.S. to start relations with Iran..we will get cheaper oil, can sell tons of planes and stuff to Iran (Iran now buys junk airplanes from Russia and they fall apart all the time) 

I think the future will look great if open the door to Iranian investements (we buying their oil, they buying our technology).

What do you think? 

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