Last week, we presented an equity "valuation" analysis based on Austrian economics, which concluded that the only thing that matters for the economy and for asset prices in general, is the amount of credit money moving one way or another at the margin, ie how active global central banker printers are. Unfortunately, in this economy of record correlations, and in which alpha creation is now impossible, this may well be the only approach to capital markets that works any more. Today, Tradition Analytics takes this analysis from the micro the macro level, explaining why the US, and global, economy is now like a shark - cash has to move (inward) or else the economy will suffocate. Naturally, nothing could make Bernanke happy- according to Tradition, "To sustain the up-cycle banks will have to pump out net new credit probably in the order of about $1 trillion in the coming 8-10 months, even larger than the $700 billion pumped out in the previous 8-10 months." Alas there is a problem with this, very much along the lines of what we discussed last week, which is that the new crude baseline is now a triple digit number, not one in the $30s or even $60s: "it is going to be difficult to sustain this level of credit expansion, not only due to the sheer gravity of the inflation problem that would follow, but also simply due to the fact that it is always increasingly difficult to extend more credit at the margin, and this time into an economy that is already steeped in credit."
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