Notes From Underground: The U.S. Economy Remains a Shadow of Itself

The unemployment was right on the market forecasts, except that the unemployment rate rose to 7.9%. In this world of central bank activism, tepid economic performance is what the global equity markets desire right now as deleveraging continues to plague the world’s developed economies. The moderate unemployment numbers–with some upward revisions to the two previous months job growth–allowed the U.S. S&P and DOW JONES equity indices to rally to five-year highs. Those who continue to argue that the PE ratio is high are missing the point: How do you value any asset class in a zero interest rate environment? Again, a global financial system awash in liquidity is an anomalous situation in which it is more than difficult to measure valuations based on historical levels. The FED wanted investors to enhance their risk profiles and that is certainly being accomplished.

***The EURO currency continued its rally against all the world’s currencies–against the YEN, British POUND, Aussie DOLLAR … against virtually every major currency in the world. It seems that the world has come to believe that the risk of European nations leaving the EURO has diminished to virtually no chance, thus there is a demand for European assets from stocks to sovereign and corporate debt. If there is no fear of EU dissolution and ECB President Draghi is to be deemed the savior of Euro assets, then the high yield on Italian and Spanish sovereign debt is deemed a very valuable asset in the realm of extraordinary low interest rates. Unfortunately, the recent news out of some European nations does not make for such sanguine reading.

Thursday and Friday brought word that the Dutch bank SNS had to be bailed out by the Dutch authorities with shareholders and subordinated debt holders most probably being wiped out. It is a Dutch bank that had to be rescued and the Dutch economy is a European success story. A weekend Financial Times story on the Dutch Bank rescue began: “Another Dutch bank nationalization, spiraling property losses in Spain and a vast write down at France’s third biggest bank ….” This is hardly the news of a Europe on the mend. The news for the Spanish banks continues to be dreadful as the article makes known that NONPERFORMING LOANS are growing and will certainly test the strength of Spain’s banking authorities and most probably the ECB. Nonperforming loans at the Caixa Bank are up to 11%; BBVA are up to 6.9%; and Banco Popular have risen to 8.98%, yet it is a Dutch bank that needs rescue. The EURO currency is presently the most beloved of the FIAT MONEY but its present strength is built on a very fragile foundation. As for me, my kingdom is not for sale for a small pittance of extra return.

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4 Responses to “Notes From Underground: The U.S. Economy Remains a Shadow of Itself”

  1. Says:

    So where to park money then? The pricing of risk of all stripes is being distorted by central bank activism – there is no fundamental basis for current valuations. Any reaching for yield puts you on out on a very flimsy limb and cash is losing value at the rate of (actual) inflation. What’s left, become a scalper?

  2. Euro: stronger for longer? « macromantics Says:

    […] Harris posed a brilliant analysis in his blog Notes From Underground today, with which I can only […]

  3. yra harris Says:

    Larry:If scalping is your comfort yes that works but day trading is a more preferred route for me.Also,if I chooses to day trade I begin looking at areas that I believe have been somewhat neglected by the momentum investors;but also it is why I watch some indicators which I believe will signal a sea change.The yield curves have great insight on market direction –right now the most prominent are very range bound but if the U.S. curve were to steepen above 200 basis points on the 2/10 I believe that would signal an up move in the equities as the financial stocks would get a new push upward—that is something I watch to signal to me something is changing

  4. Ron Ferrill Says:

    Will the $$ flowing from developed economies into developing economies cause the same leveraging up as we saw, (or did they participate too)? And, therefore, will this cause either just a lengthening of the global de-leveraging, or a second round?

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