Big Picture Update

The MBA market composites finished down for the week ending July 25, 2008. The market index fell by 14.1% for the week. Most of this fall was due to the refinance index, which fell by 22.9%, but the purchase index also lost significant ground with a 7.8% loss. Activity on the demand side of mortgage markets remains at a near comatose level thanks to the continued deflationary trend and to relatively high contract rates.

 

Ford's Finance Arm Tightens Lease Terms on Trucks, SUVs

http://online.wsj.com/article/SB121734798153793667.html

 

In a debt-laden society, it is imperative that the exponential growth of debt inflation continue or we will witness a deflationary unwinding of all assets.  One of the keys in the big picture is home prices.  Home prices continue to fall in value in the US and as we all know, it is spreading around the world.  

 

AMEX OIL INDEX attached,

 

On another note the commodities cycle and oil picture continue to confirm that the deceleration in global growth. If we have seen the high for oil this cycle then inflation numbers will peak over the coming quarter.  That will allow central banks the headway to aggressively lower interest rates and for governments bonds to outperform other assets.

 

Banking Sector

And who is responsible for breaking the faith? In this country no one is responsible. American banking is governed by law; the law assumes that bankers cannot be trusted not to ruin themselves and their depositors. Therefore, we have more laws to mind banking practice than any other people—and more bank failures in spite of them. The federal and state governments employ thousands of examiners who go round and round, looking into the private books of the banks to see if they are solvent and law-keeping, and the law says that when they find one to be insolvent they must shut it up immediately. And still they fail.  

 

 A BUBBLE THAT BROKE THE WORLD By  GARET GARRETT  June 1 1932

 

How history repeats itself.  Financials were extremely oversold.. due for a bounce. 

 

Q. Is the bottom in? A. Have homes stopped falling in value? 

 

 

 

Wilshire 5000 Target

Rally until Sept?

 

 

Pakistani Investors Stone Karachi Exchange as Stocks Plunge

http://www.bloomberg.com/apps/news?pid=20601087&sid=a111C0hsxBic&refer=home

 

Asset deflation is spreading..

 

Big picture

Leading indicators are accelerating to the downside outside of China.  Lagging indicators are topping here, (CRB index inflation global growth).  I would expect that the hard down phase would occur in the third or fourth quarter.  Oil prices will collapse once it becomes evident that Chinas unsustainable growth is slowing, that would probably be not until the fourth quarter of this year... too much of the current peak oil fears are based on continued growth that would have never occurred outside of the credit cycle. 

 

The global unwind is accelerating as Canada has now joined the asset deflation game. 

 

I looked at the current models this morning and there is a high probability of a Fed cut within the week.

 

A large drop in oil prices along with central banks easing would be good catalysts for this oversold market.

 

 

 

S&P GSCI INDEX

Was that the blow off top?

 

 

Target for the Wilshire 5000

 

 

 

 

Credit Market "New Era"

"The thesis of this paper is that the existing depression was due essentially to the great wave of credit expansion in the past decade. There is a lamentable lack of comprehensive and accurate data concerning this process of debt creation. But highly suggestive information may be assembled regarding the growth of bank loans and investments; the increase in mortgage indebtedness, urban and rural; the increasing volume of securities outstanding; and the expansion of installment credit… [I]n the six years after 1922, loans and investments held by banks had increased over $18 billon. This is over 45 per cent…

"The great field of credit expansion in the last decade lies in the realm of urban real estate mortgages… We have undoubtedly expanded the credit structure, spending today and postponing the accounting until tomorrow. We have been guilty of the sin of inflation. And there will be no condoning the sin nor reduction of the penalty because the inflation is of credit rather than a monetary one.

"Thus the area covered by credit sales enlarges and the volume of credit expansion increases. As in monetary inflation the immediate results seem favorable. Credit expansion results in business activity, in full employment, in optimistic outlook and in a flood of gratulatory literature proclaiming us wiser than our predecessors. But the evidence is consistent and cumulative. The past decade has witnessed a great volume of credit inflation. Our period of prosperity in part was based on nothing more substantial than debt expansion.

"Several financial devices of recent invention have contributed to this process of debt inflation… The Federal and Joint Stock Land Banks refinanced a growing proportion…of rural land mortgages into long term paper. This gave the borrowers security… Of similar tendency but more obvious in its recent developments is the newly originated and rapidly introduced device of urban real estate bonds. As a method of credit inflation this plan could hardly have been bettered… The volume successfully sold rolled up with the speed of the proverbial snowball traveling down a steep hill. The fruits of such sales gave us building activity and contributed to the flush times of the decade…

 

The Quarterly Journal of Economics - November 1930
Charles E. Persons, excerpt from "Credit Expansion, 1920 to 1929, and its Lessons"

 

"In a flood of gratulatory literature proclaiming us wiser than our predecessors..."    It seems we could insert Bernanke here..

 

Why was this false sense of security from the use of this steroid of debt fostered onto the public again?  

 

No fear yet!

The market is very sold, but there is not enough fear and no positive impetus for the market, yet.  

 

 

Irish Market

No sudden crash just a steady deleveraging; the Irish is a good proxy for the global markets.  Ten years of gains gone,.  While the market is becoming cheap, it will be interesting to see if relative value goes by the way of the do do bird…

  

 

Global Bank Index FTSE EPRA Nar Index

Both the global banking index and the global Real index points to new lows., while the leaders are oversold, the  global economy is not going to heal until the banking index turns around, highly unlikely as the Global Real Estate boom is turning into a bust.