Zeev's Turnips Patch-No Politics (ZEEV)

[SantaCruz]

“Measures of credit hit a brick wall over the past several months. It’s not the Fed-controlled stuff that is ailing – it is private sector credit growth that has plummeted. If the economy is doing so great – why is bank lending growth plunging (commercial and consumer) and money supply growth negative (3 month annualized rate)? Probably because the post-July bond market rout sent a shock and margin call through the financial system, jolting cozy leveraged long Treasury and derivative positions established on the assumption that the Fed would keep short-term interest rates low forever and therefore bond prices couldn’t decline. Bad assumption. The bond market sell-off started when bond market psychology was as rosy as equity market psychology is now. We expect a similar jolt out of the blue to strike equity markets, as struck bonds last July. An involuntary convulsion. The contrast between bullish equity market psychology and deteriorating private sector credit conditions is bizarre. The consensus has come around to believe that a liquidity bubble is pumping up world markets – just as liquidity conditions deteriorate. De-leveraging in the credit markets should soon feed through to economic decay. Of course, bubble people would say ‘that will lead to lower interest rates so who cares? Lets keep partying.’ Amore cynical observer might suggest that short-sighted monetary and fiscal policies have borrowed growth from the future – and the cupboard is now bare with regard to auto sales, housing and consumption growth. With nothing left to borrow from the future – and a single-minded obsession with debasing the Dollar, policy makers better pull a rabbit out of their hat quickly, or the complacent equity market might have a rude shock. The bear market rally has done its job well. Almost everyone is back on board – now that it is time to turn down again.”
Michael Belkin
The Belkin Report
Oct. 20, 2003