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August 5, 2013

Is the U.S. Starting to Re-leverage?

by andrew.clark.

U.S. M2 Velocity

U.S. M2 Velocity

Has the American economy really escaped the post-2008 deflationary deleveraging malaise? Several analysts, including Christopher Wood, say no.  Why?  In part because they are not convinced that Treasuries has seen their low in yields. This and other issues raises in their minds the critical issue of the current stark contrast between strong housing data and classic “macro” data such as money multiplier and velocity charts (see the velocity chart above).

The reality is that if velocity and money multiplier values do not turn up, this signals a lack of empirical confirmation that re-leveraging is happening.  Indeed the proposal announced on July 9 by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency to impose a 6% leverage ratio on the eight largest American banks is a further obstacle to re-leveraging assuming, optimistically, there is the demand for credit. And in the strong U.S. housing market, it has been noted that first-time home buyers, strong users of credit, are often being outbid by purchasers offering to pay cash.   These first-time buyers accounted for 29% of existing home sales in June according to the National Association of Realtors. This compares with an average of 40% over the past 30 years and more than 50% in 2009.

 

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