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Economic Update for the Week of 8/31/2012

Fed Chairman Ben Bernanke gave his annual presentation at Jackson Hole Wyoming where he outlined what the Fed is willing to do if we see further economic weakness. He said that the Fed still has unconventional tools at its disposal and stands ready to use them if/when necessary. Bernanke is using his words to convince the US and the world that everything is ok and that Daddy Ben will fix everything if we get into trouble. The upcoming meeting on 9/13 is likely to see the next round of stimulus announced as I have been writing about for some time now. The markets will probably rally in anticipation of this stimulus as we are seeing already. Despite the anticipation of stimulus, September is right around the corner which is usually a bad month for stocks and this rally is getting tired. We might have a bit more to go with the elections drawing near with all eyes on who will be the next President to "fix" our economy. 

Pending home sales were up 0.4% and the Case/Shiller 20-city Home Price Index went up 0.5% over last July. With the recent positive news from housing, the bulls are back and again saying that we have hit a bottom in housing. I don't think so just yet. This news is better than falling prices for sure however I think we will either continue to see a slow march down for a few more years or perhaps a sharper leg down before we see a real bottom in housing. 

The Spanish banking authority reported that total deposits in Spanish banks fell by $93 billion in July which is about 5% of all bank deposits. Spanish deposits are now down 12% in the last year and the pact seems to be accelerating as it did in Greece. When bank deposits decline, lending must decline because the deposits are used to make loans. To reduce lending, the bank must either sell the loans it has or call in load that have been made. This is only done with good loans which leaves a higher ratio of bad loans on the books. As this situation gets worse we are likely to see a major bailout in the next few months. 

Chinese bank delinquencies are on the rise and Japan has lowered its assessment of business activity as exports drop. As the US and Europe slow down, their suppliers such as China slow down, which results in China's suppliers such as Australia and Japan to also slow down. This is all interconnected and we should expect it to continue. 

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