Living in a Low Growth World

Posted on May 16, 2013

Michael Drury, Chief Economist, McVean Trading and Investments LLC – Reprinted with Author’s Permission

Perhaps the question we are asked most frequently is when things will get back to normal, meaning in most investors’ eyes the way they were before Lehman.  Unfortunately, our answer is “That bird has flown” and we are now dealing with, and will continue to deal with for many years, a very different environment.  The mainstay of that difference is a lack of trust between those that have money to invest and those that want to use it for risky undertakings, and, in particular, a lack of trust in the banking system that used to intermediate between these two groups.  The result is a glut of savings available to “safe” investments driving risk-free yields to very low levels.  However, the central banks, by buying bonds and manipulating long term interest rates lower, are introducing a significant risk of capital loss into even “risk-free” assets.  Investors are both moving and driven out the risk and yield curves, and returns on riskier investments are falling.  The decline in returns at the precise time many investors want to start spending investment income has pushed up prices for proven existing income flows.  Meanwhile, a combination of distrust and a reduced pool of money that will wait long periods before income is produced have generated fewer green-field investments in physical plant and equipment, resulting in a slower potential growth path for the economy.

We are neither monetarist nor Keynesian, but rather institutionalist and a storyteller.  We see the current situation as the culmination of a long path where growing reliance on banks and the central bank to maintain economic growth has run aground.  Both re-establishing trust and balance in the old system or building a new one will take time – likely many years … read the rest

Dell Deal: A Sign Of The Future?

Posted on February 9, 2013

Authored by John Mason

Things are changing in the financial markets. Financial institutions are starting to make money again in mortgages. Money market funds are “flush with cash.” Collateralized Debt Obligations (CDOs) and Collateralized Loan Obligations (CLOs) are staging a comeback.

And, now there is the $24 billion deal by Michael Dell to take his company private. The interpretation of this transaction that I am most interested in is the one being mentioned in almost all the stories coming out in the press: “This is the largest corporate privatization since the financial crisis and the largest tech buyout ever.”

I am not interested so much in whether or not Dell, Inc. (DELL) is eventually saved. What I am interested in is what is happening in finance. It appears as if money is being mobilized again.

Goodness knows, the Federal Reserve has done just about everything it can to push money out into the economy. Comedians have gotten serious about QE1 and QE2 and QE3 … and QEfinity!

It has only been in the past six months or so that there has been any evidence of funds creeping out of the commercial banking system into other parts of the economy. But now, evidence seems to be growing of money flowing into other parts of the economy. This latest transaction, the creation of a large buyout deal, with the growing possibility that others are thinking about more deals, or even mergers and acquisitions, is very encouraging.

Over the past couple of years, myself and others have wondered about all the cash being built up in the coffers of large corporations. It seemed as if these large organizations were piling up cash hoards in preparation for moving in on less well-off institutions and making deals while the getting was good and while interest … read the rest

August 2012 – The Future of Small Business Financing

Posted on August 23, 2012

Everyone loves small business.

At least that’s what the politicians want you to believe.

The reality is different. Small business is under attack from every quarter. Government policies favor large banks and large multinational businesses. Credit is tight and the banks favor the larger borrowers. Increased regulations stifle innovation and protect large incumbents that can afford teams of lawyers and lobbyists.

What’s the little guy to do? Waiting for the politicians to change the system is wishful thinking. Smart business people find ways to prosper in every environment.


And the current environment is not great for small firms. The Federal Reserve Senior Loan Officer survey has recently confirmed what we have suspected for some time: banks have been more generous in easing underwriting requirements for larger companies than they have been for smaller companies. Paynet, which maintains data on 17 million small business loans, reports that lending conditions for small firms have deteriorated in recent months after two years of bounce back from the 2009 bottom.  For additional details go to the full article on Capital Matters.


Financial Market Risk
And there’s a risk that things could get a lot worse for businesses that don’t tie down their financing soon.  We just published an article on Seeking Alpha that has received a great deal of attention with more than 14,400 page views so far. Our thesis is that the Fed’s zero interest rate policy has led to a situation where longer term treasury bonds are trading at yield levels that provide a spread to inflation far below the historical norms. Markets eventually return to their mean and often overshoot it so there is growing risk in the longer term debt market. Our concern is two-fold. First, that individual investors need to be aware of the potential impact of this return to the mean … read the rest

QE Anyone?

Posted on August 10, 2012

If anyone doubts we are moving to more monetary accommodation, take a look at the excerpt below from last night’s U.S. Financial Data release from the St. Louis Fed. The lower right hand corner reflects the most recent trends.

In June, we posted an article indicating a seeming correlation between the trend in direction and magnitude of U.S. M2 growth and U.S. economic activity. The decline in the M2 growth rate has now turned, and is headed up again, as you can see below, but the turn is not as dramatic as the growth in the Monetary Base.

We’ve previously stated our concern that the U.S. could be heading into a period of rapidly increasing inflation, similar to that experienced in the early 1970s that led to many years of stagflation, only ending with Mr. Volcker’s monetary castor oil. We’ve got all the ingredients, including this summer’s rapid runup in commodity prices. The past twelve month the GDP price deflator has dropped from 2.4% to 1.9% on an annual basis, averaging a bit above the Fed’s 2% target. 2-3% is in the range where the 1970’s inflation began to take off. Yet, we’re in a period where many, if not most, observers have been talking recession and increased likelihood of deflation. Real inflation will come as a black swan for many, with significant implications for both fixed income and equity markets.

Could the current round of easing be the spark that finally ignites the inflationary flame? There are lots of reasons to suspect that’s possible. Calculated Risk just supported a growing belief that housing may finally be bottoming. Declining home prices have been a primary force that’s kept inflation in check for the past few years. Add to that a renewed commodity spiral, annual wage inflation in China hitting 13-15% and evidence that the read the rest