Long, but good read on current derivative risks and the credit bubble. (2nd half is the best part).
64.29.208.119
Excerpt:
To appreciate the dynamics involved, recall how it was the Fed’s aggressive rate cuts and GSE liquidity operations post-Russia/LTCM that fueled the parabolic explosion in telecom debt and technology speculation. The ongoing collapse of this Bubble will result in unprecedented Credit losses. As we have been following, this round of Fed and GSE “reliquefication” is directing Credit and speculation predominately to consumer and mortgage debt. We’ll go on the record and predict that real estate Credit losses – particularly in the precarious California housing Bubble – will eventually significantly surpass telecom losses. Fed policies and resulting market dynamics are, regrettably, ensuring this outcome. With market perceptions that the Fed will hold rates low, speculative finance is providing unlimited cheap Credit to this sector. As conspicuous as this Bubble has become, Wall Street “research” departments are busy creating propaganda arguing against the Bubble hypothesis. And with speculative interest and resulting Credit excesses in high gear, Wall Street is heartened with the reality that this mortgage finance Bubble has room to run. This also buttresses general market complacency.
So this brings us to the key issue of dollar risk. Our hunch is that this is precisely where the wildness lurks, and recent market action supports this view. I sense that there is not much appreciation for the character of the most recent Fed/GSE “reliquefication” or its ramifications. The post-Russia/LTCM systemic bailout (and Credit Bubble), of course, ushered in an historic technology Bubble. This, importantly, acted as a magnet for global speculative financial flows, perversely imparting strength to a dollar that should have been vulnerable in the face of unprecedented and reckless domestic Credit excess. The bursting of the tech Bubble, ironically, later supported the dollar, as speculators recognized that Greenspan would respond by aggressively cutting rates. Although not readily apparent, today’s inflationary manifestations are nonetheless profoundly different. While the scale of domestic Credit creation remains enormous, no longer do we see much of a “magnet” to attract global finance (recycle dollars). Sure, we witnessed a flurry of speculative finance rushing to U.S. securities during the fourth quarter to play more aggressive cuts, but that’s fully run its course. Moreover, with consumer and mortgage finance at the epicenter of Credit and speculative excess, there is every reason to believe that imports – and the consequent global deluge of dollars – could finally become a problem.< Moreover, with lenders and speculators favoring the U.S. consumer over the lowly producer, the prospect of a marked deterioration in the U.S.’s overall trade position appears virtually assured. 2002 is no 1999. The halcyon days of the Fed enjoying the luxury of a strong dollar have ended. |
