Record Bank Profits and Zombie Consumers

Posted: Apr 12, 2013 5:20 PM


The big three news stories that impacted the market on Friday:


1) Of course we all know that the word “Profit” has become a dirty word. Just this week some of the biggest CEOs in the country met with the White House to discuss how they are supposed to get their profits "working for the economy." But here’s the interesting thing: The fundamentals are not strong. Sure, the banks brought in healthy profits, but not because of their traditional areas of strength.


Some in the media are confused about the dichotomy. But it’s pretty simple: When the Fed is injecting record levels of liquidity into the market, and keeping interest rates at record lows, it’s pretty easy for big banks to post record profits. When the Federal Funds rate is at nearly zero, it doesn’t take much to squeeze out a few bucks. More than anything, the profits illustrate the way government is rigging the game.


Here’s Bloomberg news reporting the horrible truth behind these profits:




2) Retail sales fell. . . And there might be a reason for this. (Ya know, aside from the whole crappy economy, high unemployment, low median household income, etc, etc.) It turns out you and I don’t have all that much extra money. In fact, Stephen Roach, formerly with Morgan Stanley, put it nicely: “We have Zombie Consumers.”


And you doubted the coming of the Zombie Apocalypse?


3) Gold is making some more downward trends. How is this possible with Ben “QE” Bernanke printing money as if it was going out of style? How do you reconcile the drop in gold prices with Japan deciding to devalue the yen at an accelerated rate? How does this make sense with the massive easy-money policies that are injecting monetary units into an otherwise stagnant economy?


Easy: The velocity of money is low. While the money supply is a driving force behind inflation, it does little to spur inflation if there is no velocity in the economy. Most of this easy-money is being stuffed under the proverbial mattress, or into oil, or stocks, or bonds. . . But it’s not moving throughout the economy. Furthermore, most consumers and businesses are trying to "de-leverage." Put simply: We're using less credit. (Which is also an inflationary force, as it adds monetary units to the economy.) As a result the inflationary pressures that would normally spur a breakout in precious metals have not yet materialized. Credit Suisse explained this phenomenon quite clearly:

Now. . . If I could just figure out how to print my own money, I’d be happy to help Bernanke out with his QE and get gold climbing again.

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