Central Banks and Bullets

Bullets are flying in markets and in policy shifts. Here are a few.

1.This morning (December 1) Barclays Capital commentary by Julian Callow includes this observation: “In his Q+A, Mr Draghi expressed concern that the high level of liquidity provided by the Eurosystem ‘is not re-circulating through the credit channel’, and ‘that is why we must ensure that the credit channel must work: we have seen significant credit tightening’”. In our view, the message is clear. More easing will be forthcoming from the ECB.

2. Demographic economist Richard Hokenson notes, “At long last there is some good news on housing in America. In the year ending March 2011, the number of new households formed increased by 1.44 million, the largest annual gain since 2007. The number of housing units completed during the same period increased by only 636000 (completions normally exceed formations by about 300,000 units per year).” In our view, the message is clearing up. The long fog on housing is slowly lifting.

3. The FDIC quarterly banking statistical release shows banking system leverage has stabilized. The number of troubled institutions and the number of bank failures are both reversing multi-year trends. (Thank you to BCA Research.) In our view, the ongoing strategic entry point into the US financials and banks continues to evolve.

4. BCA adds (November 30) that the “coordinated move by seven major central banks, including the cut to the reserve requirement ratio by the People’s Bank of China, represents a significant step on the road toward global reflation.” Our view is that the deflation risk and deflation-fear arguments are getting weaker.

5.The Federal Reserve press release (November 30) is clear as well. “These central banks have agreed to lower the pricing on existing temporary US dollar liquidity swap arrangements by 50 basis points so that the new rate will be the US dollar overnight index swap (OIS) rate plus 50 basis points.” Our view is simple. The central banks that represent nearly the entire capital market structural weights of the world have cut rates and are going to cut more. This IS a rate cut.

Cumberland US stock ETF accounts remain fully invested. We have stated the following position for months. 2011 will NOT be a recession year. That seems to be validated by the data, which is slowly improving. The US stock market peaked on April 29 and subsequently a non-recession-year bear market ensued, which lasted until the early August selling climax. The lows were tested twice more in stock futures markets, and there was a final selling climax on October 3.

US stocks have been headed higher since. We have been and remain fully invested in our US portfolios. We target a level of 1350 on the S&P 500 index in the nearer term (yearend or early 2012). We target a longer-term (end of decade) level of 2000 on the S&P 500 index.

We have another year, two, or three of low interest rates, low inflation, slow but positive growth, slowly curing employment, slowly stabilizing housing – all this will work its way through our system at its own natural pace. All of this is bullish for the US economic recovery and the US stock market.

The biggest risk to the US comes from its political leadership, which has demonstrated the extreme of failure. Reid-Pelosi Democrats failed us. McConnell-Boehner Republicans failed us. Obama White House failed us. It is not hard to explain why US politicians are viewed with the lowest measure of respect in modern history. America would like to throw them all out and start over. However, it will take third-party initiatives, independent candidates, and new faces to make this happen. That is not easy in the American system, because the incumbents have rigged the game to make it difficult. The incumbents actively disenfranchise the challengers as much as possible.

Nevertheless, new faces are still possible. It is still possible. We expect to see some of it in 2012.

We may not get a new version of the Bull Moose (Progressive Party – Teddy Roosevelt – 1912). Or again, we may. This is not yet determined. But we may at least see some new faces appear. We hope so.

We have not given up on America, whose citizens are slow to anger but forceful once they do. And we haven’t given up on a 15-trillion-dollar US economy that is growing nominally by more than a half a trillion a year in additional GDP. We remain fully invested.

Many thanks to NPR, CBS News and Associated Press for covering our comments on the central banks’ response. Bloomberg TV (Sara Eisen @ 6:45 am) and Bloomberg radio (Tom Keene & Ken Prewitt @ 7-8 am) are scheduled for next Wednesday morning. CNBC-Asia Squawk Box is booked for next Tuesday night (5 pm EST). And tomorrow we plan to be on with Kathleen Hays of Bloomberg Radio at the Philly Fed conference.

Cumberland Advisors Commentary
December 1, 2011
Central Banks and Bullets
by David R. Kotok

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