The US banks are awash with liquidity but aren't making loans

. . . or is it that borrowers won't borrow?

The remarkable and unprecedented since 1987 slump continues. (The only thing approaching normal is commercial and industrial lending.) At the same time, banks are maintaining $1.9 trillion in excess reserves at the FED.

Two graphs below:

Will the Fed succeed in engineering a 1970's investment environment?

I think that this is what the Fed is aiming for. It wold reduce the US federal debt burden to a manageable level. Below is a comment from Frank Holmes essay today on what worked then. (Remember, these are nominal numbers; inflation averaged over 8%/annum during the decade. Thus, the real value of the initial stock of government debt was reduced by over 50%; sorry, bondholders.)

"A Rerun of That ‘70s Show?

Looking ahead, if the economy starts to experience runaway inflation, history shows it makes sense to hold real assets. A decade ago, Investment Advisers Stephen Leeb and Donna Leeb wrote a very informative book on how to profit from the “Turbulent Post-Technology Market Boom.” The book, Defying the Market, discussed how to protect against deflationary and inflationary scares, comparing investment ideas that were likely novel to many people in their day, including energy, food, gold, and small-cap stocks.

Will Commodity Investors See
a Rerun of That ’70s Show?

	Nominal Annualized Returns
Gold/Silver	33.10%
Gold Stocks	28.00%
Oil	26.40%
Oil stocks	14.20%
Equity REITs	12.10%
Commodities	11.00%
Real Estate	10.10%
S&P 500 Index	8.40%
CPI	8.10%
T-Bills	6.80%
Government Bonds	3.90%
Source: Defying the Market, Stephen Leeb and Donna Leeb, Leeb Investment Advisors

One table listed the performance of these investments during an earlier era when Americans faced high inflation—the 1970s.

In that decade, gold, silver and oil outperformed many other areas of the market. Gold stocks rose 28 percent on an annualized basis and oil companies grew 14 percent. The S&P 500 Index, on the other hand, grew 8.4 percent on a nominal basis. After factoring in sky-high inflation of 8.10 percent, gold and oil still added significant real returns. The real return of the overall stock market, on the other hand, was nearly zero.

“Stocks leveraged to growth, such as the oils and oil drillers, did splendidly. But the big-cap stocks [i.e. the general market] … were complete duds,” wrote the Leebs."

The shift to equities from bonds is underway in Japan

Japan’s public pension fund, the world’s biggest manager of retirement savings, said it will reduce its holdings of local bonds and buy more shares.  The bond allocation is being reduced to 60% from 67%.

http://www.businessweek.com/news/2013-06-07/japan-s-pension-fund-cutting-local-bond-holdings-to-buy-equities

I suspect that the equity markets have further to go, at least until central banks start tightening.

Asians taking US jobs!

And it's not just Asians in Asia; it's also Asians in the USA. Is this a 5th column? Women, also, show some troubling signs of over-achievement. Lincoln

From today's US Bureau of Labor Statistics press release:

"Among the major worker groups, the unemployment rate for adult women (6.7 percent) declined in April, while the rates for adult men (7.1 percent), teenagers (24.1 percent), whites (6.7 percent), blacks (13.2 percent), and Hispanics (9.0 percent) showed little or no change. The jobless rate for Asians was 5.1 percent (not seasonally adjusted), little changed from a year earlier. (See tables A-1, A-2, and A-3.)

Puzzling failure of household sector in OECD to reduce debt after crisis

Only households in Germany and Japan are less indebted than in 2000. (see attached) This is interesting in light of Martin Feldstein's comments on NPR yesterday, when he pointed out that the household savings rate is now below 3% in the US and so consumption will consequently be very constrained in the next few years.

A small increase in interest may, in the absence of inflation should that be the case, trigger a shift from consumption to saving.

Consumers rewarded for defaulting on mortgages

Eleven banks, including Bank of America, Citi, and Morgan, have begun sending checks to "victims" of the robo-signing scandal, by which banks foreclosed on mortgage defaulters without observing proper procedures.  The cost to the industry, and therefore their shareholders and depositors is $9.3 billion.  Of the $9.3 billion settlement, $3.6 will be distributed to the victims in the form of cash payments. There are 4.2 million of these victims; a case-by-case review has found that only 53 of the 4.2 million were not actually in default.  (Yes, the number is 53.)  So the others (4.2 million minus 53) were in default.  This is why they are being compensated.

It's a little sad that people who actually paid their mortgages are not being compensated.  But such is the way of the world.

"Frustrated central banks move into riskier assets"

This is the title of an article on page 2 of today's Financial Times. Central Bank Publications and RBS have surveyed 60 central banks and these banks expressed dissatisfaction with artificially low interest rates on reserves currencies and fear for the consequences of unbridled monetary expansion as practiced by the Fed and others.  These banks hold $10.9 trillion dollars, most of which reserves are in Asia and the Middle East.  They have been diversifying into non-traditional currencies like the Canadian and Australian dollars, the Chinese renminbi, and the Scandinavia currencies.  Here is a quote: "The response to the crisis by these monetary authorities has had a profound effect, the poll found: more than four-fifths of the respondents said the aggressive monetary easing of the US Federal Reserve and the European Central Bank had altered their behaviour."

The chance of a dollar crisis is rising, but it is hard to see where central banks will go.