Here are two charts that will blow your mind
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.