Great Recession, Recovered

At 98.0 percent of its 2007 average, total industrial production in July was 4.4 percent above its year-earlier level. Capacity utilization for total industry moved up 0.4 percentage point to 79.3 percent, a rate 1.0 percentage point below its long-run (1972--2011) average.
Source: Federal Reserve

Statistically, the US has recovered from the Great Recession with regard to industrial production. So if we have all that unemployment, it must be service industry related, or industrial production is a whole lot more efficient, doing the same amount of work with less people.

That being the case, maybe equity profits and prices are not in a bubble after all.

How's That Risk Curve Doing?

As our friends at Bespoke Investment Group point out, the market suggests we are not yet ready for higher-risk equity investments.

Compare that present influence with Pimco's Bill Gross discussion on market risks, namely how demand shifts toward the inner circle of safety during a crisis, then slowly back out the risk curve over time.

Note there are many risk vehicles not in Pimco's analysis; not because they don't exist or aren't relevant, but because there are so many layers and instruments. The key point is that bonds are less risky than equities, and preferred stock less risky than common stock.

The real rally is still taking place in risk circles inside of common equities, and the sell-off at earnings suggests we aren't yet ready to see a strong rally in equity.

There's No Place to Invest Capital

“If you look at financial markets, say, look at how much the Treasury is paying to borrow today, there is a lot of confidence, not just of Americans but investors around the world, that we’re going to find the political way to do it,” Geithner said. “There’s no alternative for us. We’ll be able to do that.”

So that's the optimistic spin on the U.S. Federal deficits and stagnating economy. Bloomberg spins the facts by beginning their title with "Deficits Don't Matter...".

From our point of view, the historical low yield on U.S. Treasury debt in the face of record high deficits indicates the investment world is saying the global economy is so bad there's no place to invest capital with any hope of getting a good yield -- might as well bury it in the back yard until some opportunity presents itself.

If you're unemployed, you better start thinking about how you can start your own business, because Corporate America obviously isn't going to do it for you.

Analyzing Non-Borrowed Reserve Trends

Now this is interesting.

(click for full size)

Latest Observations from the chart. (full data series available from The Fed):
2009-12 968.670
2010-01 966.727
2010-02 1113.265
2010-03 1094.656
2010-04 1036.615

We see a drop from Dec. to Jan., but then a spike from Jan to Feb. It might not be coincidental the stock market was dropping after Jan. Money that flees equity risk may have been parked into the safety of bank deposits for a period of time, faster than banks were making loans. But Feb. to Mar. to Apr. we see either money has been flowing out of banks, or banks are lending more reserves into new loans.

It will be interesting to see in June what happens in May as this early May market turmoil reveals itself in the national metrics of bank balances. If the previous paragraph correctly identified cash flows, we would expect May's non-borrowed reserves to be up, based on the theory that retail investors sweep their proceeds into bank accounts and professionals sweep their proceeds into Treasuries.