A Brand New Week

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The banks which helped turbo charge the American consumer with credit cards, HELOCS, what have you, have decided it’s a bad idea for the consumer to have too much credit:

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[note: expect more of this meme: the banks got bailed out and now the poor have to subsidise them. Perhaps it will spark a backlash in years to come]

Human nature being what it is, there will be far more stockpiling than anyone has seen before. There will have to be and the pendulum that swung to 120% of household income as debt will probably move the other direction far harder than anyone expects.

There`s an investment play in that but I can`t think of it at the moment.

Bloomberg is talking up how “risk appetite is returning to the stock market” and the Yen is about to totally unravel:

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However there are more cards yet to play as:

So essentially, if the bailout for Detroit doesn’t happen we’ll see another huge uptick for the Japanese Yen.

The Yen has been reported down and out every time there has been a rally that look like it might sustain itself. However, whenever the bears return - it’s back to Japan with the “lustre of save haven” shining like the morning sun.

It appears that the incoming administration may well keep on using Quantative Easing (someone should copyright that):

Bando bought Treasuries, as did Mizuho Asset Management Co., which oversees $41.9 billion and bet all year that inflation in the U.S. will turn into deflation, buoying government debt. JPMorgan Asset Management Japan Ltd., part of the largest U.S. lender, is buying Treasuries, speculating the Federal Reserve will purchase the securities to keep yields down and spur the economy, just as the Bank of Japan did a decade ago.

Fed holdings of Treasuries on behalf of foreign central banks and other institutions rose 12 percent since September, compared with a 7.7 percent increase last quarter.

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“Investors are studying Japanese market history,” said Shinji Kunibe, a Tokyo-based senior money manager at JPMorgan Asset, which oversees $847 billion globally. The company bought Treasuries in the last week of November, he said.

Japan’s government resorted to debt-financed public spending plans to jolt the economy in the 1990s, a move U.S. lawmakers are considering after Fed Chairman Ben S. Bernanke and Treasury Secretary Hank Paulson agreed to provide an unprecedented amount of cash to unlock frozen credit markets. The Treasury has set up a $700 billion bailout fund for the financial industry, while the amount of the assets held by the Fed more than doubled to $2.14 trillion last week from $889 billion in 2007.

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In Japan, one result was the creation of the world’s biggest debt market, with government bonds and bills totaling 787.2 trillion yen ($8.48 trillion), or more than 1.5 times gross domestic product. The U.S. comes next at $5.3 trillion, based on records of 35 countries compiled by the Bank for International Settlements in Basel, Switzerland.

U.S. federal debt rose to about 36 percent of GDP in September from 32 percent in 2001, as President George W. Bush raised funds to spur the economy and pay for wars in Iraq and Afghanistan.

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The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and notes, which reflects traders’ outlook for consumer prices over the life of the securities, narrowed to 42 basis points from this year’s high of 268 basis points in March.

“Deflation fear is alive and well,” said Wan-Chong Kung, who helps oversee $76 billion in fixed income as a money manager at FAF Advisors Inc. in Minneapolis, the asset-management arm of U.S. Bancorp. “The constant parallels being drawn to the Depression era as well as to the Japanese experience leads to the feeling we’re looking at a pretty gloomy period for a long time.”

More Ugly News

Even more folks are losing their homes, coming in waves like those zombies from a Romero film:

One in 10 American homeowners fell behind on mortgage payments or were in foreclosure during the third quarter as the world’s largest economy shed jobs and real estate prices tumbled.

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“Until we see a turnaround in the job situation, we’re not going to see these numbers improve,” said Jay Brinkmann, chief economist of the Washington-based bankers group, in an interview. “We’re seeing more loans build up in the 90-days bucket as lenders work to modify loans and states put in place programs that delay foreclosures.”\

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The median home price in the fourth quarter probably will be $190,300, down 19 percent from the record $226,800 in 2006’s second quarter, according to a Nov. 24 forecast by Fannie Mae, the world’s largest mortgage buyer.

If that is down 19% then there is about 21% left to go as the median price was at minimum 50% beyond where it was supposed to be.

I’ll let the reader decide what that kind of continual attrition is going to keep doing to the rest of the economy.

Because the layoffs are going to keep coming:

The worst jolts to the labor market tend to be only the precursor of six months or more of additional layoffs. Employment suffered a major contraction in December 1981 and January 1982, and workers did not see a stable market for about 10 months, including another big round of layoffs in July 1982.

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Some economists predict that the economy could lose as many jobs in the first six months of 2009 as the entirety of 2008. Nearly two million jobs have been lost since the start of the recession last year, two-thirds of them since September.

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Americans who are lucky enough to still collect a paycheck are likely to save more, cut back on luxury items and restaurants, and channel more of their income into savings accounts for college and retirement.

“Even Americans who still have a job are looking around and saying, ‘Well, you know, how much longer?’ ” said Joshua Shapiro, chief domestic economist at MFR, a research firm.

All of this is likely to make many people hesitant to invest any money they do have. Many Americans chose to save over the last two decades by investing in stocks and real estate. Now, the jar-in-the-kitchen approach may return, analysts said.

[exec summary: don't expect the "money on the sidelines" to return any time soon.]

The Takeaway

I still like the Japanes Yen and the idea of averaging down on shiny metals for two reasons:

1. The “risk appetite” is going to turn to indigestion once the bear rally fades and turns downward again. So, the Yen is probably going to get cheaper this month.

2. All of the inflationary spending that governments around the world are engaged in could very well spark a weird result that no one (including me) had thought of and there is a great chance of some unknown side affect which will freak everyone out.

Lastly, I avoid talking politics here but I have to say that the contention is for those of us outside the US that the recent election is a harbringer of good tidings shall we say.

That will change the first time his administration does something the markets don’t like. And the result will be probably be one of the ugliest plunges seen yet in this bear market.

Mother Market is schizoid after all. She likes you or she hates you.

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