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Tuesday May 8, 2007 - 11:29:40 GMT
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Don't worry be happy...

• Australian retail sales in March rose a seasonally adjusted 1.1 pct from February to 19.027 bln aud, the Australian Bureau of Statistics said. The increase was above the market consensus forecast for a 0.5 pct rise and followed a 0.9 pct gain in retail sales in February from January. (AFX)

Key Reports:
7:45a.m. ICSC Store Sales Index. Previous: +0.5%.
8:55a.m. Redbook Retail Sales Index. Previous: -4.1%.
10:00a.m March Wholesale Trade. Expected: +0.4%. Previous: +0.5%.
1:00p.m. Semiannual ISM Forecast.
5:00pm. ABC/Wash Post Consumer Confidence. Previous: -5.

“I sincerely believe ... that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.”

Thomas Jefferson

FX Trading – Don’t worry be happy…

The amazing credit machine keeps chugging along.

“U.S. consumer credit in March grew at the fastest pace since last fall -- well above Wall Street's expectations -- the Federal Reserve said Monday.

“Consumer credit outstanding expanded about $13.5 billion in March to $2.425 trillion, according to the latest report from the Fed. That followed a $5.6 billion expansion in February, previously estimated as a $3.0 billion expansion. March's expansion in total consumer credit was the largest since a $20.1 billion increase in November 2006,” according to the Journal.

The last time I checked, US housing prices were heading south—fast. Based on the old school economics, and just plain prudence, one would think Mr. Consumer would be a little worried. But no, he appears quite happy indeed.

Chart of MZM Money Supply growing at over a 10% annualized rate

From Doug Nolan, A Theory on Money & Credit Creation, January 21, 2000 [our emphasis}:

Interestingly, in yesterday’s market commentary, the always insightful Don Hays discussed MZM, the St. Louis Fed’s index of “Money at Zero Maturity.” This index is basically M2, which includes retail money market funds, plus institutional money market mutual funds, but excludes bank time deposits. Quoting from his report, “If you look at the chart of MZM, you will see that every time it has moved above a 10% year-over-year growth rate, it in effect cocks the hammer on the bullish gun. It causes extreme, excessive speculation…” Our response, “Precisely!!! The fuel for the bubble is within MZM.”

There is, however, nothing magical or mysterious about MZM. In fact, to simplify the analysis we suggest that one focus instead directly on money market fund assets. This is the key, the “fountainhead” for the US bubble.

“Before deregulation, the money and credit creation process was dominated by the banks. “Money” was basically currency and bank liabilities/deposits, and money expansion was restricted by prudent bank lending and reserve requirements. Economists studied bank reserve data to judge the banks’ potential for expanding lending. Bank lending completely overshadowed credit creation in the capital markets. But times have changed, and the structure of the financial system has gone through a momentous transformation. Today investment bankers, brokerage firms and the money markets are kings of credit creation and the banks just follow along. Security issuance and financial sector borrowing governs the credit creation process. The business of lending has opened up to virtually any company that wants to try to earn a buck making a loan or providing financing. All one need do is lend the money and get a securities firm to bundle it, securitize it, and sell it. If you are big enough, or have a government guarantee, you can borrow cheap money in the money markets and balloon your balance sheet with loans and leases.”

It is a brave new world of finance. Things really are different this time. Not only can business shape their balance sheets at will, given the multitude of credit sources now available, but so too can the consumer—that is new! And we think the latest increase in credit, in a world when Mr. Consumer’s key collateral, his house, is fading, proves that in spades.

So what does it mean? It could mean a whole lot! First of all, it could mean one of this days we will have hell to pay if there is a Black Swan event shock to the global financial system. But barring that, you have to think Mr. Consumer isn’t too concerned about his job prospects if he’s adding credit. You have to think there is more to go in the stock market and elsewhere if you believe liquidity is the mother’s milk of asset prices. And maybe it means it’s going to be a lot harder to slip into recession if Mr. Consumer can produce liquidity at will.

And lastly, maybe it means the Fed won’t be too concerned about cutting interest rates knowing Mr. Consumer can fend for himself. And if that’s true, all those rate differential and recessions forecasts discounted by the price of the dollar might have to be revisited. Who knows? We know that answer: Not us!

Jack Crooks


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