Monday, October 05, 2009

Whose buying US bonds?

David Rosenberg, Chief Economist & Strategist for Gluskin Sheff publishes a daily commentary on markets and the economy. It's always worth reading. Today it included this comment.
The latest data indicate that the Fed’s reserve creation showed through as cash on bank balance sheets ballooning $182 billion in September (+64 billion just in the last week) on the month to an all-time high of $1.076 trillion. The banks, instead of finding new creditworthy borrowers in private sector to lend to, are basically lending the Fed’s reserve creation right back to Uncle Sam. If you’re wondering who is funding the deficit – it is the major banks; they bought $31 billion of government bonds last week of September – bringing monthly pickup to $52 billion (fourth highest on record). …

The typical Wall Street economist sifts through the data like a robot, tweaking numbers here and there and basically doing little more than reporting what the numbers are doing but nowhere do we see adequate analysis over what is termed ‘behavioural economics’. The economists are so focused on the minutia or the background noise that they can’t see the forest past the trees. They can’t see that attitudes towards credit, homeownership and discretionary spending are undergoing a profound change. As they focus myopically on the ISM index, they don’t see that households now understand that they have to shrink their balance sheets and alter their budgets. This is a secular theme, which means that it will last years … (As an aside, and we have said this before, it is not about being a perma-bear or a perma-bull, but about being totally realistic and honest regarding what a post-bubble credit collapse world really looks like. Japan had no fewer than four of these massive rallies since its bubble burst and the Nikkei is still down more than 70% from its prior peak.)

While thrift is still considered a ‘bad thing’ by most economists who crave a consumer-led revival, we would be happy to open that for debate. It would be much more heartening to see a revival fuelled by capital investment but when over one-third of manufacturing capacity is sitting idle, that may be a stretch; and considering that exports comprise little more than 10% of GDP, the foreign sector is hardly going to be adding a whole lot of torque to the GDP data, at least over the intermediate term. Looks like we are left with government.

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