Chart of the Day: No bank lending...no Fed tightening

"Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence." - John Adams, American President

Following the Fed's tinkering with "tapering", our Chart of the Day comes from Bank of America Merrill Lynch's note entitled "Bubbling his way out of Trouble" indicating the following:

"The Fed may taper once housing sustainably picks up. But in our view it is very unlikely to tighten until banking sectors around the world start lending again."

- source Bank of America Merrill Lynch

In their note they also make a very important point in relation to corporate cash levels:

"Fed’s asset price reflation has yet to cause corporate cash levels to fall. This may not be the Fed’s fault. Significant uncertainty over tax, health & regulatory policies as well as muted bank lending are

better explanations for the lack of corporate “animal spirits”. Until they perk up, Fed interest rates will likely remain extremely low."

- source Bank of America Merrill Lynch

In that context, as we argued in our conversation "Misstra Know-it-all":

"If the policy compass is spinning and there’s no way to predict how governments will react, you don’t know whether to hedge for inflation or deflation, so you hedge for both. Buy put-call parity, if there is huge volatility in the policy responses of governments, the option-value of both gold and bonds goes up."

Bonds are an option on the short-term interest rate, and gold is a perpetual put option on the dollar.

As David Goldman correctly put it in August 2011 in Seeking Alpha:

"If there is huge volatility in the policy responses of governments, the option-value of both gold and bonds goes up."

"All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation."- John Adams, American President

Stay tuned!