Comment

Posted by me on Russ Winter's blog:

I would like to believe that everythings poised for a rebound. I think the withholding taxes chart is your best evidence that things aren’t that bad. Also, your chart of demand deposits is interesting.

First, withholdings. There are several things that make me question that data. What about state taxes? They’ve fallen off a cliff. I live in CA and the budget that was supposed to be balanced two months ago on spending cuts is now projected to be $25 billion behind over the next 18 months. Reason: loss of tax revenue. These two pieces of information are in direct contradiction, and I never like to rely on just one source.

Next, demand deposits. These spiked in mid-September or October. I don’t
see this as bullish at all. This is not money waiting on the sidelines to go
back in the market. (There’s a buyer for every seller anyway, so only IPO’s take money into the market.) This is not joe six-pack’s money. This is money that companies have parked at banks by drawing down their lines of credit. All of this is just an accounting change as banks move money from reserves to deposits.

Don’t believe me? Check out http://www.federalreserve.gov/releases/h3/Current/. This is the info on aggregate reserves of depository institutions. A year ago, they had reserves of their own; now those reserves all come from the Fed. The banks are enormously negative without the Fed.

For Oct. 2007, nonborrowed reserves were positive. Total borrowings from the Fed were only 254 mil. and reserve requirements were met with nonborrowed reserves.Flash forward to October 2008. Total borrowing from the Fed jumped by $360 billion from September. Nonborrowed reserves are a negative 360 billion.

Now you may think that the Fed lending will juice markets, but I don’t think so. They’re paying interest on those reserves that is higher than the borrowing rate. Why will banks lend this money out? If I lent you billions
at 0.5% and paid you 1% interest, would you put that in the stock market?