The Beginning of the End - Or the End of the Beginning

Sorry to steal from the mighty Winston C. but some facts are coming together that tell me that we are at the end of the beginning of a true recovery.

First, federal tax revenues are up (thank you tepid recovery) and federal spending is down, at least slightly (thank you Sequester!). This reduces what in the old days we called "Crowding Out" which I discussed here and here some time ago.

Second, bank loans to small businesses are up which I discussed here. (The Federal Reserve does not "print" money. It creates banking reserves and the banks then create money by making loans. Cullen Roche had a great comment on this when said that the government has privatized the creation of money.) This is a very powerful stimulant to the money supply in the real world, not in Federal Reserve Land.

Third, the market is noticing. This morning uber-investor David Tepper, being interviewed on CNBC noticed the falling rate of growth of the government's need for money while at the same time the Fed is still creating excess reserves (through QE) and the infamous money multiplier may be kicking in. In paraphrase I lifted from Seeking Alpha he said, 

The U.S. budget deficit over the next 6 months will only be $100B, while the Fed is scheduled to buy about $500B. That's $400B coming out of the bond market and going to investors who can buy more fixed-income, more real estate, more stocks.

 What does that mean? Less money in the hands of inefficient governments and more money in the hands of efficient businesses. What does that mean? Good old-fashioned growth.

Fourth, Obama is now embroiled in scandals. I'm not here to comment on the scandals or Obama. He is, though, seen as aggressively hostile to free markets and any political damage to him will be taken by market makers as a positive sign for markets.

I'm cautiously optimistic that this is the end of the beginning.

Is This the Beginning?

A problem with the Federal Reserve's policies of the last few years has been the lack of a multiplier effect of the easy money (aka Quantitative Easing). The Fed works with the monetary base and the rate at which banks load money in the base creates what's called the velocity of money. This velocity for a long time.

Money goes into the economy when banks in the Federal Reserve system lend against their reserves that make up the monetary base. The monetary velocity has been falling for years and is a key marker of why the Fed has been pushing ropes with quantitative easing.

So, is this changing now? Cullen Roche of Pragmatic Capitalism reports that loans have been growing recently.  If so, this means the money supply gas pedal may finally be pressed down. The recent swing in the financial markets from defensive to cyclical stocks is another confirming indicator.

On balance, this is very good news. Now let's watch for the first tickling signs of our old friend, inflation.

Because Tom Said So - Jefferson on Public Debt

I've posted this before but it bears repeating. Here's our third president on the topic of public debt. From this point on, his words speak for themselves.

“To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our selection between economy and liberty or profusion and servitude.

If we run into such debts as that, we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are.

Our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers.

Our land-holders, too, like theirs, retaining, indeed, the title and stewardship of estates called theirs, but held really in trust for the treasury, must wander, like theirs, in foreign countries, and be contented with penury, obscurity, exile, and the glory of the nation.

This example reads to us the salutary lesson that private fortunes are destroyed by public, as well as by private extravagance. And this is the tendency of all human governments.

A departure from principle in one instance, becomes a precedent for a second, that second for a third, and so on, till the bulk of society is reduced to be mere automatons of misery, to have no sensibilities left but for sinning and suffering.

Then begins, indeed, the bellum omnium in omnia, which some philosophers, observing to be so general in the world, have mistaken it for the natural, instead of the abusive state of man.

And the forehorse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.”

– Thomas Jefferson 

Where Do They Find the Time?

Omnipresent economics gadfly James Pethokoukis of the American Enterprise Institute has an interesting post on economic growth in the US versus other areas over a veerrryy long time. 

It's pretty cool that our poor, downtrodden US of A outperforms the rest of the world without even breaking a sweat. Only Europe comes close and it isn't really that close.

My other observation is that I wonder how guys and gals like Pethokoukis find the time in their day to appear as talking heads on television, write copious amounts of research and observation, and still stop at the 7-Eleven on the way home for milk? There are dozens of folks out there like that and I'll bet you can name some too. My jealous hat is off to them for their raw productivity.

We're Not Number One!

Here's a nice little tidbit about the ratio of household debt to income in some of the developed countries. Apparently, Americans are not the most irresponsible, profligate tribe on the planet. (The downward trend, by the way, is the deleveraging that continues from the Great Recession.)

  
This chart from The Economic Analyst blog shows that our seemingly frugal neighbors to the north carry more debt per household than do we spendthrift Yanks. Who knew?

Brevity is the Soul of Wit

Well, that's what they say ...

A blogger I haven't read until today named Paul (never trust anyone with two first names) Nathan has a very concise summary of the panic of 2008 at this link. It's a good read if you're confused by all the storm and fury you hear in the mainstream press on the topic.

Before 2008 I never thought I'd live through something like it. I thought our financial betters had learned their lessons from the Great Depression. I wish.

In some respects, I still doubt that they have ... but don't we all?

Nathan raises the point of two great blunders made by the Securities and Exchange Commission (SEC) that didn't cause but did exacerbate the plunge, mark-to-market accounting and the uptick rule.

Adding injury to insult, at the very time the stock market entered a bear market the government made two disastrous moves. First, it imposed the mark to market rule. ...

Further, the government allowed the uptick rule to expire for the first time since the Great Depression. The uptick rule discouraged massive short selling. By removing it as a governor on short-selling it encouraged shorting just as the market began to dive. Not only were these questionable moves, they couldn’t have come at a worse time, reducing liquidity just when increased liquidity was critical.

It's the uptick rule that still puzzles me. Why did the SEC suspend it? It's a very simple rule that has a powerful effect on preventing bear raids on stocks. Since 2008, the SEC has suspended mark-to-market but has still not re-instated the uptick rule.

So, here's a challenge for the financial press. Let's start dismembering the crash of 2008. Next time you have Chris Cox (SEC) or Ben Bernancke in the box, ask them about the questions Nathan raises. I'd love to hear the answers.

If you want to see who is going to guarantee your funds, look in the nearest mirror.

I've seen two posts today that put paid to the notion that Cyprus can't happen here. In fact it is possible (if not probable) that it will happen again somewhere in Euro-World.

Now just for the record, I am not a fan of hyperventilating shock scenarios and predictions of disaster. I am perpetually amused at the commercials for gold sellers that flood the radio waves when I'm out running errands at lunch time. Well, I'm not one of them. Each blip in the economy is not the end.

But this post in ETF Daily News and this one at Seeking Alpha give very detailed and technical explanations of how, in fact, in can happen here.

Again, I want to say that I do not believe this will happen just that it can happen within the legal framework that sits atop our financial system. My money is still in the bank and my retirement account is still at eTrade.

Still, as the ETF Daily News author says, "If you want to see who is going to guarantee your funds, look in the nearest mirror." This will win the award as my favorite quote of the week.