The Pimco essay is another in the "Through the Looking Glass", Alice in Wonderland school of thought, but found this part illuminating
Russ, according to Doug Noland world wide liquidity is still expanding. What is your opinion?
Time to Pause?:
First quarter nominal U.S. GDP expanded at an 8.2% rate (4.8% inflation-adjusted), the strongest pace since the third quarter of 2003. It is worth noting that growth quickened sharply from the fourth quarter, a period notable for 9.5% annualized Non-Financial Credit growth. Year-to-date, Bank Credit has expanded at a12.4% rate, a notable acceleration from the fourth quarter. Bank Real Estate loans have expanded at an 11.0% rate so far this year, with Commercial and Industrial loans up 15.5% annualized. Wall Street securities firms’ balance sheets are expanding at 20%-plus rates. Commercial Paper is expanding at a 14% pace, and Asset-backed Securities issuance is in line with last year’s booming record pace. Time to Pause?
The NYSE Financial Index broke out to a new all-time high this week, sporting a 10% y-t-d gain and a 27% rise over the past year. The NASDAQ Other Financial Index (90 stocks) is up almost 14% in 2006 and 48% over 52 weeks. The AMEX Securities Broker/Dealer Index is up 18% y-t-d and 71% during the past 12 months. And it would be atypical for financial sector managements to observe booming stock prices and not feel compelled to deliver strong profits (by lending and trading aggressively) to The Street. It is also worth noting that the breadth of speculative excess today easily outdoes 1999/early-2000. The small cap Russell 2000 is up 14% y-t-d, the S&P400 Mid-cap index 9%, and the NASDAQ Telecommunications index 20%. Time to Pause?
The Conference Board’s survey of April Consumer Confidence Present Situation index jumped to the highest level since August 2001, following a month when Retail Sales were up 7.6% y-o-y (ex-auto 8.8%). March Non-Defense Capital Goods Orders were up 31.3% from March 2005. Federal government Receipts are running better than 10% ahead of last year’s level, with spending up almost 9%. Despite double-digit export growth, our Trade Deficits grow only larger. The U.S. Current Account Deficit will easily exceed $800 billion this year. Time to Pause?
Gold is up 27% y-t-d to the highest price since 1980, with a 52-week gain of 51%. Silver has gained 51% in less than four months to a 23-year high (52-wk gain of 90%). Crude oil is up 18% y-t-d and 38% over the past year, last week trading to an all-time record. Unleaded Gas futures prices are up 40% from a year earlier. The Goldman Sachs Commodities Index is up 34% over the past year, closing last week at a record high. International central bank reserve holdings (mostly dollars) are expanding at a 20% clip. After trading above 120 in 2002, the dollar index sits today tenuously at 85.88, not all too far off of its 2005 low of 81.11. Time to Pause?
Looking internationally, Canada’s TSX equities index has posted a one-year gain of 32%, Mexico’s Bolsa 68%, Brazil’s Bovespa 65%, Argentina’s Merval 44%, Germany’s DAX 44%, France’s CAC 40 33%, Spain’s IBEX 32%, Norway’s OBX 67%, Poland’s WSE 71%, Russia’s RTS 148%, Japan’s Nikkei 225 54%, South Korea’s KRX 56%, India’s Sensex 89% and Australia’s SPX 31%. Eurozone broad money supply growth has accelerated to an 8.6% pace, with private-sector loan growth up 10.8% y-o-y. China’s money supply has recently expanded at an almost 19% rate. India is in the midst of an unprecedented Credit boom. In short, never have global financial conditions been remotely this loose.
A few years back I began referring to the U.S. “Monetary Economy.” It was becoming apparent that both the pace and composition of economic output were increasingly commanded by Credit growth and the nature of asset-based lending/speculating excesses emanating from the Financial Sphere. To insightfully analyze the U.S. economy, one must first grasp the workings and biases of the underlying Credit Apparatus. As for policymaking, to disregard the character of Financial Sphere endeavors is to go asking for major policy blunders. To accommodate the current Credit Apparatus is to feed a precarious Monetary Bubble Economy, both at home and abroad.
After building his career on a revisionist’s view of the 1920’s and ‘30’s – certainly including a lambasting of the late-twenties “Bubble poppers” – it should come as little surprise that chairman Bernanke is indisposed to employing real financial condition tightening. His true chairman stripes, perhaps veiled somewhat up to this point, have shone through. The Fed is left hoping that rate increases to date are in the process of imposing meaningful restraint, and they are likely preoccupied with the cooling housing sector. Yet, the reality of the situation is that financial conditions have never been looser; the Credit system continues to fire on all cylinders; and Inflationary Manifestations just keep popping out all over the place.
It is the inherent nature of a ballooning Financial Sphere (especially boom-time Credit mechanisms and attendant pools of speculative finance) to foster an ongoing series of Bubbles, the broadening scope of each new Bubble sufficient to outweigh the aged and displaced. The system will develop evolving Inflationary Biases depending on the source and disposition of the newly created flows of finance, although I suppose it is the constitution of analysts and policymakers to pay most attention to the more established (and vulnerable) Bubbles (i.e. today in mortgage finance). It is, however, the cutting edge Bubbles poised to provide the unexpected marginal source of ongoing liquidity.
Abundant liquidity flows readily to inflate a particular sector, in the process exacerbating system-wide Credit, speculative and liquidity excesses that create monetary fuel for the next fledgling Bubble. Market perceptions, expectations and infrastructure play instrumental roles in directing financial flows. When the Fed “reliquefied” the system post the Russian and LTCM collapses, it did so apparently not recognizing the intense Inflationary Bias that had taken hold throughout the technology/telecom debt arenas. When they “reflated” post-tech/telecom Bubble, the Fed – along with the elated Credit system and leveraged speculating community - ensured a historic Mortgage Finance Bubble. Today, determined to avoid bursting this Bubble, the Fed foments Propagating Global Credit and Asset Bubbles.
The Bernanke Fed is in one hell of a predicament. There is today no way to rein in escalating global excesses without a serious bout of U.S. financial and economic tumult. These days, such a scenario is simply unthinkable. Yet the status quo fosters only more problematic Monetary Disorder. Mortgage Credit growth is likely to approach last year's stunning $1.4 Trillion level, while energy and M&A-related borrowings surge. Global leveraging of commodities, securities markets, and real estate is creating unfathomable liquidity excesses. Bull markets create their own liquidity until they don’t.
More than ever before, U.S. consumer retrenchment and resulting recession are required for the commencement of the long-overdue and unavoidable adjustment process, although the Fed is more determined than ever to maintain the boom. At this point, boom-time conditions are sustained only by ongoing massive Credit inflation (dollar debasement), with this inflation/debasement exacerbating the increasingly destabilizing non-dollar speculative flows.
We are indeed witnessing The Critical Policymaker Credit Bubble Dilemma: the bigger and more vulnerable the Bubble, the greater the propensity for policy acquiescence and accommodation. The present course guarantees ongoing $800 billion-plus Current Account Deficits. Unconvincingly, Dr. Bernanke too loudly declares that our deficit is a global issue and – especially considering the backdrop - too conspicuously is content to do nothing.
We’re now into year four of the Great Dollar Bear Market. Importantly, the Financial Sphere has by this point had ample opportunity to adapt and devise myriad instruments, avenues and strategies to profit from a declining greenback (inflating non-dollar prices). Speculators and investors have played and won overseas, and these strategies are now widely accepted as mainstream (a deepening “inflationary bias”). Global markets today capture the majority of U.S. mutual fund flows, while American stocks are bolstered by massive company buybacks. The ballooning pool of global speculative finance is more than comfortable playing global equities, emerging market debt, and commodities; and the more favorable the relative out-performance versus dollar returns, the greater the (self-reinforcing) flows from dollars to non-dollars. Additionally, pension funds are now keen to participate in the easy outsized returns. Derivatives markets and other leveraging strategies have evolved to meet booming institutional demand across all markets.
Meanwhile, scores of new mutual funds, ETFs (exchange-traded funds) and other instruments have sprouted up to provide less “institutional” investors easy access to the commodities and emerging market booms. Pimco’s Bill Gross even recommended an Asian ETF (twice) yesterday in a Bloomberg interview. I don’t believe the ramifications for the powerful and intensifying Inflationary Bias toward non-dollar asset classes garners the analytical attention it deserves.
The Fed is playing a losing hand and keeps wagering our currency. Accommodating the current Credit Bubble guarantees massive Current Account Deficits, as well as heightened speculative flows out of dollars and into commodities and global markets. The expectation that a declining dollar would help rectify global imbalances has failed to come to fruition, a circumstance not the least bit surprising to Macro Credit Analysts. Flawed policymaking (accommodating Financial Sphere excesses) ensured escalating Credit Inflation and only more and bigger Bubbles. As buyers of last resort, foreign central bank reserves have ballooned about $1 Trillion over the past 18 months. Ominously, this incredible support has only stabilized the dollar’s freefall. Time to pause?
It is today ridiculous for chairman Bernanke and Fed officials to state that changes to our trading partners’ policies (chiefly to stimulate foreign domestic demand) and currency exchange values will assuage the U.S. Current Account Deficit (and other global imbalances). We’ve already witnessed the consequences of wholesale Global Credit Inflation: a ballooning and more unwieldy pool of global speculative finance, along with wildly inflating commodities and asset markets. Global inflation is the problem and not the solution.
The higher energy and commodities prices surge, the greater U.S. Credit expansion and resulting dollar outflows necessary to satisfy (monetize) our dependency. The more foreign asset markets inflate, the greater the tide of speculative outflows to non-dollar markets and assets. With foreign central banks fully loaded to the gills with dollars and not all too tickled about it, it is not an easy exercise to contemplate a backdrop more conducive to a run on our currency. And how ironic would it be if such a run was instigated by our own institutions and citizens, as opposed to our foreign creditors?
Time for the Federal Reserve to contemplate pausing? Of course not. Chairman Bernanke just committed his first mistake; the dollar got clobbered; and the flight to the safe-haven (non-dollar) metals intensified. The bond market froze (deer in the headlights?). And, as one would expect, global markets turned increasingly unsettled this week and are surely poised to become only more so. |
