Noland Selected snips.
I found these interesting:
Unbalanced Global Economy Watch:
January 23 – Bloomberg (John Fraher and Simone Meier): “European Central Bank Chief Economist Otmar Issing said property price inflation in parts of the dozen-nation euro region is ‘unsustainable.’ ‘For a number of countries such as France, Ireland, Spain and even Italy, house prices are on a path which is not sustainable,’ said Issing at a conference on global financial imbalances in London. ‘We have a non-neglectable increase in house prices.’”
Bubble Economy Watch:
January 25 - CNNMoney.com (Les Christie): “Americans are among the world’s most cash-strapped people, according to the latest semi-annual survey from ACNielsen… Nearly a quarter (22 percent) of Americans have no money left once they’ve paid for their essential living expenses and spent their discretionary dollars. That puts the United States at the top of a list of 42 countries for saving futility…. Others in the top 10 for most cash-strapped countries included Canada, No. 3, at 19 percent, the United Kingdom (No. 4, 17 percent) and France (No. 5, 16 percent).”
January 25 – Bloomberg (Joe Mysak): “Now that Indiana has sold its toll road, get ready for everyone else to do the same. On Monday, Governor Mitch Daniels said a Spanish-Australian consortium had bid $3.85 billion to run the Indiana Toll Road, a 157-mile highway across northern Indiana… A Merrill Lynch & Co. report published last July on the subject of U.S. toll road privatization asked whether sales like the Skyway were one-offs, ‘or do they represent the beginning of a sweeping trend that will spread to other tolled bridges, tunnels, expressways and long-distance toll roads?’ Let’s bet on the sweeping trend. The money is just too big to resist…”
January 24 – Bloomberg (Brian K. Sullivan and Patrick Cole): “Princeton University, the fourth-oldest U.S. university, plans to charge $42,200 a year for an undergraduate education amid increases in such costs as faculty salaries and efforts to attract minority and low-income students. The tuition and fees will be 4.9 percent higher…”
California Watch:
January 24 – Bloomberg (Daniel Taub): “One in 13 California homes sold for more than $1 million last year as more condominiums and new homes surged past the million-dollar mark, DataQuick…said. A record 48,666 homes in the most populous U.S. state were bought for more than $1 million, an increase of 47 percent from 33,107 in 2004…”
Existing Home Sales in California sank 16% from record-setting December 2004. Median prices, however, were up $74,160 (15.6%) to $548,430. Prices were up $146,710, or 37%, over two years. The inventory of homes on the market has increased from the year ago 2 months to December’s 3.6 months, still low by historical standards. Condo sales were down 21.7% from one year ago, with prices up a “modest” 10.2% to $430,910.
“Project Energy” and Crude Liquidity Watch:
January 25 – Bloomberg (James Cordahi): “Kuwait, the largest shareholder in DaimlerChrysler AG, plans to use its oil revenue to invest more in developing economies such as China and Turkey to benefit from faster growth, rather than traditional markets including the U.S. and Europe. The Kuwait Investment Authority, a government agency that invests surplus revenue, is in talks with the Chinese government to buy a 10 percent stake in Industrial & Commercial Bank of China, the country’s largest lender…”
January 23 – Bloomberg (Carlos Caminada): “Brazil’s Agriculture Minister Roberto Rodrigues said the country must invest $10 billion over the next six years to boost ethanol output in order to meet rising foreign demand for the fuel.”
Mortgage Finance Bubble Watch:
January 20 – Reuters: “New York City Mayor Michael Bloomberg on Friday said the real estate market was slowing ‘dramatically’ and only a ‘miracle’ could stop soaring mortgage rates from eating into housing prices… ‘The real estate market is slowing down dramatically and we’re going to have a problem down the road… If people who want to sell their houses have to wait a longer time before someone comes along and buys it, it would be a miracle if prices didn’t start to go down,’ he said.”
Global Imbalances Watch:
January 24 – Market News International: “There are signs the current global imbalances will turn out to be prolonged and it is fallacious to believe that Asian central banks will forever fund rising US deficits, Bank of England Deputy Governor Rachel Lomax said… In a speech at a Royal Institute of International Affairs conference, Lomax joined the chorus of central bankers raising serious concerns about the threat to stability posed by the imbalances. The US current account deficit has risen to over 6% of GDP, and Lomax warned that it could not be taken for granted that Asian central bank would continue to finance it. Lomax said the US was not ‘immune to the basic arithmetic of debt sustainability - sooner or later persistent deficits will lead to levels of external indebtedness that represent a significant economic burden even on the US; but it is more than usually hard to predict how long this might take,’ she said.”
Noland Comment:
I take quite strong exception with any view holding that the current dysfunctional arrangement “permits more efficient adjustment over time,” or that it “smoothes the impact of economic shocks.” The reality of the situation is that this current market failure is prolonging U.S. excesses and only delaying what will surely be a monumental adjustment process. It is a maxim of Macro Credit Bubble Theory that the risks associated with prolonging financial and economic Bubbles grow exponentially over time and generally culminate with a “blow-off” period of manic excess. Timid policymakers have watched the global cycling and recycling of dollar liquidity in awe – deer in the headlights. Having loitered long enough to recognize that there will be no self-adjustment or correction, policymakers now face the dilemma that to impose the necessary policy restraint to commence the adjustment process comes at a cost much higher than they are willing to bear. So they are stuck hopelessly eyeballing the situation, while paying more strident, but basically useless, lip service. Meantime, highly speculative markets relish in what has evolved into an historic policy vacuum.
From Ms. Lomax: “The dollar’s central role in the foreign exchange policies of Asian emerging markets adds to the uncertainty about the deficit levels at which the US will face tighter credit constraints. Since the foreign official sector - mostly Asian central banks - have been financing a substantial part of the US current account deficit and now hold a substantial amount of the outstanding stock of US Treasuries, private investors’ willingness to hold dollar assets depends to some extent on their expectations of what these Asian central banks will be doing. Since many Asian [emerging market economies] already have far more reserves than they need for self-insurance against financial crisis, their appetite for continued accumulation of US dollar assets will at some stage abate; indeed, there has been some anecdotal evidence of this over the past year.”
Noland:
Bingo. Here, Ms. Lomax hits on a very key (and timely!) point with respect to the extraordinary Global Wildcat Finance backdrop commanded by the interplay between expansionist central banks and the enterprising global leveraged speculating community. I believe very strongly that the hedge funds, “proprietary trading desks,” and others’ “willingness to hold dollar assets depends to” a great “extent on their expectations of what these Asian central banks will be doing.” It’s evolved into the ultimate combination of market intervention, moral hazard, and trend-following leveraged speculation. And this gets right to the heart of the danger inherent in the confluence of activist central banking, marketplace distortions, and speculator liquidity as a key source of system liquidity. This powerful dynamic is as alluring as it is self-serving and reinforcing, yet it is progressively destabilizing and inevitably unmanageable. No one dares to remove the punchbowl.
It is a (yet unrecognized) legacy of the Greenspan Era for the Fed to exploit the global leveraged speculating community and foreign central banks liquidity expedients. The ease with which this policy mechanism incites predictable Credit expansion and liquidity creation responses has simply been too powerful not to abuse. Although many have argued that this extraordinary financing arrangement can finance U.S. Current Account Deficits for years to come, it is better analyzed as a huge regrettable accident in the making. Sure, the deficit is being financed as easily today as ever. Yet the negative consequences of the resulting Global Liquidity Glut have become conspicuous.
From Ms. Lomax: “While the risk of a disruptive adjustment may still be low, the sheer scale of current imbalances increases the potential costs of policy mistakes and misperceptions. Any disconnect between what the markets expect and what policy makers intend to do becomes increasingly hazardous. That puts a premium on excellent policy communication, to reduce uncertainty and minimize the risk of sharp market corrections. And policy makers need to ensure that their policies are robust to the possibility that market expectations may not be consistent with economic fundamentals.”
Noland:
Are “free” financial markets really so fragile? Why? I see it as a declaration of defeat anytime central bankers are compelled to openly pander to the marketplace. Putting “a premium on excellent policy communication, to reduce uncertainty and minimize the risk of sharp market corrections” may sound reasonable and commendable, but it today plays right into the hands of the leveraged speculators. Chairman Greenspan and other central bankers apparently fret over meager risk premiums, yet global policymakers seem determined to discharge all marketplace uncertainty and volatility. Of course, such efforts only augment the process of marketplace degeneration and Bubble Inflation.
New York Federal Reserve President Timothy F. Geithner also spoke at this week’s Chatham House Global Financial Imbalances Conference:
From Mr. Geithner: “Monetary policy itself cannot sensibly be directed at reducing imbalances, but the past and future evolution of global capital flows will of course matter for monetary policy by virtue of their impact on the outlook for output and inflation. For example, the forces that seem to be supporting an unusual level of capital flows into the United States may be materially dampening the level of forward nominal and real interest rates, and other things being equal, this would tend to produce higher levels of demand growth than would prevail in the absence of those factors. Thus, the factors that have contributed to this pattern of external imbalances complicate the task of judging the appropriate stance of monetary policy in the United States today.”
Noland:
What have we done? What on earth have we created? While it is unjust in this instance to shoot the messenger, I do find it appalling that the Greenspan Era has left us with the view that “monetary policy itself cannot sensibly be directed at reducing imbalances.” Then where or to whom do we turn? It’s just shocking… How could we have drifted such a long distance from the traditional role of central banks as prudent regulators of sound money and Credit? We know that we cannot trust politicians to restrain booms or to even recognize underlying financial distortions and excess. It should be a Credit Bubble maxim that politicians never meet a Bubble they don’t adore. Central bankers must be willing and able to analyze the soundness of Credit systems and recognize and thwart excess; it’s our only hope, especially in the Wild World of Contemporary Finance. Today, the stability of the system depends significantly on a consensus group of independent, astute and principled central bankers (i.e. New Zealand’s Dr. Alan Bollard). They picked an especially inopportune time to shirk traditional responsibilities.
This most prolonged Credit Cycle has certainly flourished amid The Ultimate in Asymmetrical Policy Frameworks. Greenspan’s Aggressive Activist/Interventionist Policies began only weeks after his chairmanship commenced (with the ’87 stock market crash); became much more pronounced with 23 straight rate cuts and 3% Fed funds in the early nineties (“mopping up” after late-80s excesses); took on a much broader scope after the collapse of LTCM; became embedded into creative analytical rationalizations and policy dictum with the runaway technology Bubble; and, with the abetment of professor Bernanke, went completely off the deep end with several years of 2% or below short-term rates in the Fed’s reflationary battle against the phantom specter of deflation.
Since 1987, we have witnessed recurring Bubbles, each Bubble and inevitable “mopping up” policy response only more commanding than the last. For years the nagging issue has been how this all ends: What’s the “end game”? Well, we remain very much in the dark. Of course, the unwieldy global liquidity glut does today, as Mr. Geithner noted, “complicate the task” of monetary policy. Of course gradually rising U.S. yields and interest-rate differentials induce speculative inflows and, failing to disrupt Credit and speculative Bubbles, sustain loose financial conditions. Of course the U.S. Bubble has gone global and the most acute inflationary manifestations have developed in the oil and commodity markets – the things that the holders of the inflating dollar balances are keenest to acquire. Of course, the massive pool of global speculative finance grows larger and more dominant with each passing year of enormous U.S. Current Account Deficits, and that the entire world is one’s speculator community oyster.
But at what point do Asian central bankers finally recognize that they are trapped in a dangerous game of false prosperity? When does the euphoria associated with stockpiling unprecedented financial wealth transform into trepidation that they are accumulating receivables that will never be honored for the welfare and enrichment of their citizens - that they are being “Ponzied”? Or perhaps we’re moving in the direction of an initially less dramatic case of unnerved central bankers recognizing that the recycling of U.S. Current Account Deficits is fomenting progressive inflationary pressures throughout the energy and commodities markets, not to mention Bubbling financial markets the world over. They must these days be coming to the realizations that the global financial system is in serious disarray and that the Bernanke Fed is simply not going to be up to the task. For now, I will take an increasingly vocal “chorus of central bankers raising serious concerns about the threat to stability posed by the imbalances” as a meaningful development.
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