Analyst: Financial Crisis Winding Down
There are several signs that the financial crisis that has long plagued the market is winding down, according to one expert.
"The first thing is, just money itself," said Richard Bove, financial strategist with Ladenburg, Thalmann & Co., on CNBC's "Squawk Box." "The money supply of the United States is now, literally, explosive. It's growing at a 16 percent rate, if you look at M3 or you look at MCM, which is another way of looking at money. Secondly, worldwide, money supply is even growing at an almost faster rate. There's literally $40 trillion worth of funds out there in the world financial market, which is money. There are two euros outstanding for every one dollar outstanding at the present time, so there's a huge amount of money out there.
"Second thing is the junk bond market. If you take a look at where yields are in the junk bond market, a couple of months ago, when the crisis was really hot, the yields have gotten up to 12.3 percent. They're now down somewhere around 10.25 percent, which means that you've had a significant rally in junk bonds."
Bove recently put a sell rating on several financial outfits, including Lehman Brothers , Goldman Sachs , and Merrill Lynch .
"If you take a look at the banks themselves, what you're seeing is, usually when the economy slows, and when you see interest rates decline, deposits pool in the banking system," Bove said. "Money comes back into the banks because there's nowhere else for it to go, so deposits are slowing into the banking system. The banks are having no trouble, no bank anywhere in the United States is having any trouble in raising capital. They've raised tens of billions of dollars of it, and, finally, if you take a look at institutional money market funds, they're literally up 57 percent year over year, as a result of all of this foreign money which has no place to go, and which is sitting there, waiting for an opportunity to be invested.
"So, I don't see the financial crisis as being an issue any longer. I think inflation is the issue, and I think inflation is going to have a very negative impact on the economy."
So does that mean Bove believes an economic crisis is here?
"It's hard to call a recession, because when corporate profits are where they are, ex the financials, and when cash is so high in corporations, and you do have a full-employment economy, it's really hard to say there's a recession going on, but the fact of the matter is, the consumer is in a lot of trouble. The job market has topped out. I think that's pretty clear. Real incomes are no longer rising. Wealth is declining. In the fourth quarter of last year, which is the last quarter for which we have numbers, for the first time in six years we saw household wealth go down.
"So, if people don't have excess wealth, if they don't have incomes rising, if they're worried about keeping their jobs, and at the same time their cost of living is skyrocketing, you have to assume they're going to spend less money, and you/re going to have to assume that that's going to have a negative impact on the economy. Back in the days when Ronald Reagan was president, they calculated the consumer price index a lot differently than they do today. If you use the methodology that you would use when Ronald Reagan was president, the CPI is actually up over 11 percent. Now, of course, every president since Ronald Reagan has debased the way the calculation is made, so it shows it being up less than 4 percent, but if you go out to the store, you can see that Mr. Reagan's way of doing it was better."