Merrill Lynch issued a big report today on the banking crisis.
Here are the main points:
- Everyone is waiting for the big government solution.
- Coordinated moves will not necessarily be effective, but it will be historic if it happens.
- We are barely past the halfway point of the credit down cycle.
- People will continue to crowd into treasuries Rosenberg (and in my opinion, gold).
- Corporate profits not yet impacted will go lower.
- Private sector interest rates are rising.
As Jim Sinclair has predicted in his model, Merrill Lynch’s David Rosenberg, who is their chief economist corroborates my opinion. He states “It is truly a modern day depression, in our view- what else do you call it when an entire industry vanishes (investment banks) in less than a year: the ranks of the unemployed soar more than 30%, and nearly one in ten homeowners with a mortgage are either in arrears or foreclosure?”
Like us, he goes on to say “Now let’s not confuse that with the Great Depression – this is not the 1930’s all over again.”
- The government will have taken over many banks before this ends.
- Finally, Rosenberg states that the current money supply boost may not be inflationary. His argument is that the velocity of money is shrinking in the US and Europe, and that is clearly true.
Over the short term I agree with him. For this reason I stated a few weeks ago that the inflation rate would moderate for a few months.
It will moderate over the short term; long term is a different story. Once the velocity of money resumes its normal functioning, the massive amounts of money currently being pumped into the system worldwide will create a big inflationary bubble. The inflation will not hit in the next few months, but it will be big when it does hit. As Jim Sinclair likes to say, “Weimar on Weimar.”