The big fear is that this funding isn't stable, and there are some reasons to believe that might be true. Yesterday, the Bank of New York announced that it was going to charge large depositors to hold their cash. BNY's explanation was the "massive dollar deposits it has received over recent weeks." What this means is that large investors would rather receive no interest and have their deposits insured by the Federal Deposit Insurance Corporation than take any risk whatsoever. That may be a worrisome sign for the stability of money market funds.
On Aug. 4 the Wall Street Journal pointed out that if European banks can't fund themselves with U.S. dollars any other way, they might avail themselves of a program between the Federal Reserve and the European Central Bank in which the Fed makes U.S. dollar loans to the ECB so the ECB can lend to European banks. (This was used extensively during the 2008 crisis.) But it's not clear that this is risk-free to the United States. Because the ECB has been buying the bonds of weaker countries in an effort to support them, it's no longer certain that the ECB itself is rock solid. While official sources tell me that this isn't even close to being a problem, the pessimists I talk to are worried. (Worry is what pessimists do, of course.)
What's going on isn't all Europe's fault. We have our share of problems here. The resolution of the Republican-manufactured crisis over the debt ceiling didn't resolve anything. As a result of government spending after the 2008 crisis, we have way too much debt. But if we move to cut our debt too quickly, economists say we risk crushing whatever nascent economic recovery there is.
Which gets to another problem: Recent data make it look more and more as though a recovery is just wishful thinking. Last week, the government released revisions to U.S. GDP data going back years. They showed that the recession was even worse than anyone thought and that growth in the first half of the year was barely positive. The numbers, says David Zervos, the head of fixed income strategy at Jefferies, "forced a major rethink for everyone" who thought we were on our way to a sustained recovery. Consumer spending, which is usually a good chunk of GDP, has been virtually nonexistent this year as a contributor to GDP growth. And according to Pesikoff, trucking tonnage, which serves as a measure of general economic activity, has stalled. "This is all to say the economy is stagnating," he wrote in his most recent weekly newsletter.
Bulls cite strong corporate profits as a reason to be optimistic. But most of that has come from cost cutting—all those lost jobs!—not from real growth. I'm not sure how sustainable corporate profits are if the economy doesn't recover.
Speaking of bulls, there is actually a surprising amount of sanguinity out there. The Investors Intelligence poll, another favorite of those who like to measure sentiment, shows that there are more bulls today than there were in June. The "buy the dip" mentality is alive and well, as is the belief that there's a "Bernanke Put"—that the Fed chief will find a way to bail us out. I would really, really like to believe this. But we may be reaching the limits of the government's power to rescue the economy.
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