RIG

It Was a Very Good Year. Harvest time is arriving and the financial markets have experienced several starts and stops since the beginning of the Summer. An ever accommodating Federal Reserve is supplying financial fertilizer to the banking system with current 25% growth in M-2 money supply on an annual basis. Wars and rumors of wars all around the globe over borders, dictatorships, monarchy, tribal warfare, and oil confiscation have been prevalent during 2011. Instability has plagued the markets over the past six months as fiscal problems in Greece, Ireland, Spain, Italy and Portugal threatened the capital structures of a beleaguered European banking system. Except for China, Brazil, New Zealand and Australia, worldwide short-term interest rates are near zero.

The Man Who Knew Too Much. Ben Bernanke has completed his announced QE II asset purchase program which has grown the Adjusted Reserves at an extraordinary rate.  Recent data for bank lending remains anemic though banks do have the capability to make loans.  Unfortunate for our banking system is the leverage for banks continues to be high cramping their ability to increase lending risk.  The prevailing headwind of deteriorating housing values remains the financial wildcard for loan assumptions and tight lending rules imposed by the FDIC for the troubled banks creates a quandary for bank management.  Chairman Bernanke knows this as well as soft employment data.  We believe that Bernanke will announce a third asset purchase by the Federal Reserve by the fall of 2011.

Boy Named Sue.  Spring has sprung.  QE II is supplying ample reserves thanks to a ready, willing, and able Federal Reserve Chief.  Ben Bernanke once said he would sprinkle money down from a helicopter if necessary to prevent a financial meltdown.  We anticipate significant money supply growth in the coming months as we have entered the fifth month of continuous purchasing of U.S. Treasury bonds in the open market.  High powered money should stave off any further recessionary fears.  We do wonder where the missing John Maynard Keynes’ books are that told us how the Government Debt ($14 Trillion) actually gets paid?  The stock market has risen commensurately since October, 2010.  Unfortunately, very few jobs have been created during this period and housing remains anemic.  Stagflation is coming as rising commodity prices across the board should make it into the local grocery store and noticed at the gas station.

Happy New Year!

Return to Normal. The market has rewarded patient investors in 2010.  The New Year greets us with a sense of normality whether it is false or premature.  The financial system has been somewhat restored and the emergency triage can be removed and policy makers can now address employment and housing issues.  The stock market is a leading indicator and the DJIA was up for 2010 forecasting an improving economy for 2011.  Fear and panic gripped the country in 2008 and 2009.  The subtle move in the market in 2009 and the carry through in 2010 gives us all a sigh of relief.  The Federal Reserve, with much opposition, announced its QE II program in October, 2010 at the advisement of the former Japanese central banker who weathered ten years or more of zero interest rates and economic recession.  Washington has come to reason in the middle of the night and extended lower tax rates for the next two years signaling a united front against further recessionary forces.