Hi Jay! Hope you got a chance to read Doug Noland's latest Credit Bubble Bulletin in PruBear. Excellent point on why the Fed being "behind the curve" is irrelevant:
prudentbear.com
However, the factor making the current situation particularly ominous (and a point that is not appreciated in the marketplace) is that the crisis in Turkey and the continuing technology collapse are occurring only weeks after the Fed’s dramatic 100 basis point move on interest-rates. Bullish strategists are now claiming – as was the case with Lehman Brother’s Jeffery Applegate this afternoon on CNBC - the market is reacting to the Fed being “increasingly behind the curve.” Nope, that’s poor analysis. In fact, and what is truly an extraordinary development, acute financial stress has unfolded in the face of extreme U.S. money supply expansion and general global central bank accommodation. U.S. Broad money supply expanded another $18 billion last week and has now surged $244 billion in just the past 13 weeks (14% annualized) and $388 billion (13% annualized) over 23 weeks. Further evidence of a financial system run amok was provided by data released yesterday from Strategic Insight: a record $140 billion flowed into funds during January, crushing the previous record of $87 billion during January of 1999. Of this amount, $33.5 billion flowed into equity funds, $8.6 billion into bond funds, and $4 billion into international funds. The vast majority of January’s record flows were accounted by the extraordinary expansion in money market fund assets. Not bad for a household sector with a negative savings rate – this is 100% unadulterated credit inflation.
There is little mystery as to origin of much of this “money.” January numbers are in from Freddie Mac, providing further evidence of the scope of the current mortgage-lending boom. Freddie expanded its mortgage portfolio at a 19% annualized rate, although its average interest-earning assets increased at a 27% annualized rate during January, to $456 billion. It is worth noting that Freddie Mac ended 1997 with total assets of $195 billion.
Interestingly, Craig Tolliver’s article (CBSMarketWatch) on January’s record fund flows quoted the director of research at Strategic Insight, a fund consultancy firm: “The extraordinary commitment of fund investors, reflected in their purchasing and retention patterns, is quite reassuring. This is especially comforting when you take into consideration the tumultuous fourth quarter and lingering uncertainty in 2001.” Well, we see it much differently – this is one big “dog that didn’t bark.” As discussed last week, the U.S. financial system has gone through an extraordinary Reliquefication. Today it should be recognized that this process has had little impact on the collapsing technology bubble and only a muted response for the stock market generally. This is certainly not what Wall Street anticipated. It is actually quite ominous, and the fact that confidence remains so high in the face of such dismal performance should be particularly disconcerting to the bulls.
One of the central themes of my analysis holds that it is the financial sector that largely creates the money and credit that provides liquidity to the financial markets and economy. Money and credit are created through lending, and the financial sector expands money and credit by increasing its liabilities - by taking on additional leverage. I take strong issue with the consensus view that the Federal Reserve is the master of contemporary money creation. And the way our financial system has developed over the years, traditional bank lending has given way to the GSEs, Wall Street firms, the securitization marketplace, and capital markets generally as the driving force behind money and credit growth. In particular, the notion that the Fed is the sole provider of liquidity is misguided, with significant ramifications for the markets currently. Of course, the Fed is clearly a key player, setting the price of short-term borrowings and providing both the general environment and expectations conducive to taking on additional leverage. While the Fed does today have some room to lower rates, it has largely spent all its bullets (and then some!) as far as creating an environment conducive to money and credit excess. Financial market liquidity is predominantly the output of the financial sector. And as I have said before, as goes the financial sector, so goes liquidity.
So goes liquidity, indeed, deep-fried in the fire of credit collapse.
Have a great weekend!
Chugs,
Patron |
