05/15/2003 The Desperate Experiment of Maximum Global Liquidity *

With the spotlight on the incredible collapse in market yields, the stock market generally posted decent gains.  For the week, the Dow and S&P500 added about 1%, yet the major indices masked significant divergences between groups.  The Transports declined 2%, while the Utilities gained 4%.  The Morgan Stanley Cyclical index rose 2% and the Morgan Stanley Consumer index added 1%.  Today’s late sell-off wiped out most of what had been a 2% gain for the unrelenting small cap Russell 2000.  The S&P400 Mid-cap index posted a 1% gain for the week.  The tech sector remains strong, although the NASDAQ100 mustered only a 1% gain.  The Morgan Stanley High Tech index jumped 4.5% and The Street.com Internet index gained 5%, increasing respective y-t-d gains to 22% and 34%.  The Semiconductors added 1%, boosting the 2003 advance to 23%, while the NASDAQ Telecommunication’s 4% rise increased its y-t-d rise to 25%.  The biotechs enjoyed a 6% increase this week.  The Securities Broker/Dealer index jumped 5% and has now surged 40% off its March 12th lows.  The Bank index gained 2% this week.  Although bullion jumped $6.0, the HUI gold index was about unchanged. The Treasury market enjoyed its best two-week performance since 1995 (according to Bloomberg).  Melt-up conditions saw two-year yields drop 13 basis points (1.31%) and five-year yields sink 22 basis points (2.39%).  The 10-year Treasury yield dropped 26 basis points (3.42%), with a stunning 52 basis points two-week collapse.  The long-bond saw its yield drop 26 basis points to 4.41%.  Benchmark mortgage-back yields declined 26 basis points, although agency bonds appeared to have somewhat underperformed.  The spread on Fannie’s 4 3/8% 2013 note widened two to 36, while the 10-year dollar swap spread narrowed 2.5 to 30.5.  One has to go all the way back to early 1994 to find the 10-year dollar swap spread below 30.  Investment grade and junk issues participated in the melee, although spreads widened marginally.  It is noteworthy that spreads have not widened significantly in the face of such a dramatic collapse in Treasury yields.  The dollar index declined 1% to the lowest level since early 1999.  The dollar was hammered for almost 2% today, with global currency market trading volatility increasing noticeably this week.  The CRB commodity index added about 1% this week. The bond issuance boom runs unabated, with one of the strongest weeks of corporate sales this year. Citigroup issued $2.5 billion, General Dynamics $2 billion, American Express $1.5 billion, Countrywide $1 billion, Fund American $700 million, Centerpoint Energy $575 million, Cargill $500 million, Midamerican Energy $450 million, Clear Channel $500 million, Comcast $1 billion, American Electric Power $300 million, John Deere $200 million, Duke Realty $150 million, and Northwest Airlines $150 million.  General Motors raised their expected $300 million issuance of 45 year bonds to $1 billion. High yield is hot, hot, hot.  Capital One sold $600 million, Lyondell Chemical $325 million, Forest City Enterprises $300 million, US Steel $450 million, PT Medco Energi $250 million, Semco Energy $300 million, Sinclair Broadcast$100 million, Dole Food $400 million, L-3 Communications $400 million, Standard Pacific $175 million, Interline Brands $200 million, Smithfield Foods $350 million, LSI Logic $350 million, Forest City Entertainment $300 million, and Rite Aid $150 million. Dow Jones reported that emerging-market bond funds posted record inflows last week.  Year-to-date flows are already double the amount for all of 2002. AMG reported another $331 million (after the previous week’s $1.3 billion) flowed into junk bond funds for the 12th straight week of positive flows, increasing year-to-date inflows to $18.5 billion.  This is more than double last year’s pace and already surpasses 1997’s record (according to Dow Jones’ Nicole Bullock). Year-to-date junk issuance is up 34% to $42 billion. May 16 – Bloomberg: “Private investment in emerging market nations will rebound 26 percent this year to $139 billion as falling oil prices and a quick end to the Iraq war buoy global growth, a group of international banks said. The flow of private capital to Latin America will more than double to $34 billion from $14 billion posted in 2002, said the Institute of International Finance, which represents Citigroup Inc. and more than 300 other banks.” Freddie Mac’s 30-year mortgage rate sank 17 basis points to a record low 5.45% (down 40 basis points in five weeks and 144 basis points from 52 weeks ago).  The 15-year borrowing rate dropped 13 basis points to a record low 4.84%.  Bloomberg’s tally of Mortgage-Backed Security issuance had April sales of $189 billion ($2.27 Trillion annualized!), with a five-month total of $713 billion.  Last April saw MBS issuance of $102 billion. Broad money supply (M3) jumped another $29.1 billion ($108.6 billion in three weeks).  Demand and Checkable Deposits added $6.2 billion.  Savings Deposits jumped $33.2 billion ($67.5 billion in two weeks), and have been expanding at a 21% annualized rate thus far in 2003.   Institutional Money Fund deposits declined $18.6 billion, while Large Denominated Deposits added $7.3 billion.  Repurchase Agreements declined $4.7 billion as Eurodollars increased $6.2 billion.  After several weeks of big gains, Bank Total Assets dipped an insignificant $2.5 billion.  Securities holding declined by $15.3 billion, while Loans and Leases jumped $23.1 billion.  Real Estate loans surged $23 billion, as Commercial and Industrial loans declined $4.9 billion. Commercial Paper increased $6.2 billion.  Non-financial CP declined $1.6 billion, while Financial CP added $7.8 billion.  Financial CP is up $34.9 billion over three weeks to the highest level since early December.  The asset-backed securities marketplace remains hot.  This week saw troubled subprime lender AmeriCredit increase the size of its securitization by more than a third to $825 million.  As lenders to marginal Credits, as well as themselves marginal borrowers in the capital markets, I view the subprime lenders as decent “canaries in the mind shaft.” Well, with AmeriCredit’s stock up five-fold from March lows, the gasping little bird has miraculously begun whisking around the cage again.  Elsewhere, Honda’s $1.55 billion securitization was as much as three-times oversubscribed, while Harley-Davidson saw record narrow spreads on its six-times oversubscribed ABS deal. Surging demand for its bonds led Volkswagen to increase the size of its bond offering 50% to 4.5 billion euros, its largest debt sale. May 11 – Financial Times:  “Seven of the top 10 US law firms saw fee revenue increase more than 10 percent last year, despite clients in corporate America suffering from a slowdown in the economy…  The survey (of the top 50 firms) found revenues and profits per partner – the industry standard measure – both rose an average 8 percent last year…  In spite of a dearth of lucrative merger and acquisition deals and initial public offerings, US firms saw strong gains in litigation, bankruptcy cases and corporate restructurings.” Last week's 34,669 bankruptcy filings were up 7% y-o-y.  Preliminary May University of Michigan Consumer Confidence jumped a much stronger-than-expected 7.2 points to the highest reading in one year.  The Economic Outlook component surged 13.4 points.  The Empire State (New York) Manufacturing index posted a stronger-than-expected gain in May to the highest reading since January.  New Orders, Shipments and Prices Paid posted strong recoveries from a weak April.  In a notable sign of stronger confidence, the index of general business confidence six months out surged 18 points to the strongest reading since November.  While improving from April, the Philadelphia Fed index was unimpressive.  Initial Jobless Claims declined for the third straight week.  The 1.9% decline in Producer Prices reduced the y-o-y price gain from February’s 4.2% to 2.4%.  And April’s 2.7% decline in Import Prices reduced the y-o-y price gain from 6.7% to 2.3%.  The National Federation of Independent Businesses “Small Business Optimism” index jumped better than 5% in April to the highest level since November.  Only 2% of respondents saw Credit Harder to Get, down from February and March’s 5%.  April Housing Starts were weaker-than-expected, although they were up 4% from April 2002.  Building Permits were slightly stronger-than-expected, with the 1.708 million unit rate up 4.7% from one year ago.  But clearly the mortgage rate environment has improved dramatically since April.  The May National Association of Home Builders housing activity survey index posted a four point gain to 56.  This was the highest reading since February.  The index of future expectations for single-family sales jumped six points to the strongest reading since January.  Prospective Buyers Traffic also gained six points. May 11 – Los Angeles Times (Jesus Sanchez):  “The hillside house Linda Lutz has lived in for 25 years isn’t only her home.  It’s her bank too.  The character actress has had little work in recent years, but she has been able to cover her expenses by cashing in on the equity of her house in Encinitas in northern San Diego County.  In September, Lutz refinanced for the sixth time in five year, taking out $100,000… ‘Every time I thought we had tapped out, the property value had increased again…’ without refinancing, she said, ‘I would have been out on the street.’” May 15 – “The Mortgage Bankers Association of American (MBA) today announced it is now forecasting that $3.0 trillion in mortgages will be written during 2003, beating last year’s record-setting mortgage origination volume by more than half a trillion dollars (the MBA raised their estimate from $1.77 Trillion to $2.4 Trillion last month).  MBA estimates that approximately $1.95 trillion of that total, or 65 percent, will be due to mortgage refinancings. ‘We knew that originations had been strong for the first half of the year because rates had remained at very low levels. However, we had been expecting the refinance market to dry up as increased economic activity in the second half of the year caused interest rates to increase," said Doug Duncan, MBA’s chief economist.  ‘The Federal Reserve’s announcement last week that it was concerned with potential deflationary pressures in the economy has moved deflation from being a theoretical consideration to an active policy issue. The market sees this announcement as increasing the probability that the Fed will further lower short-term rates and, more importantly for mortgages, influence downward long-term rates through its open-market purchases of bonds,’ Duncan said.” May 14 – Dow Jones:  “‘The housing market is remarkably strong,’ (Fannie Mae’s Franklin) Raines said, adding that those who believe the housing market is a cyclical one are wrong.  It doesn’t appear to be the case this time,’ he said. ‘There have been enough changes in the housing market through the growth of the high-production builders and the connection to the capital markets that it is no longer the old-fashioned cyclical market that we all thought it should be.’” Countrywide Financial enjoyed another incredible month.  April Total Loan Fundings of $42.3 billion were up 12% from March’s huge record, and have ballooned 200% from April 2002.  Non-purchase Fundings (Refis) surged 320% y-o-y to $32.7 billion, while Purchase Fundings jumped 52% to $9.6 billion.  Home Equity Fundings were up 56% y-o-y and Subprime Fundings doubled.  The company’s announcement made reference to an origination market share that has grown to 12.5%.  This would put system-wide April originations at $338 billion, or a stunning $4 Trillion annualized.  The Parabolic Rise in Mortgage Credit... Fannie also posted a spectacular April.  “Total business volume (mortgage purchases) rose to a record high of $139.0 billion, up almost 28 percent from March.  Fannie Mae’s book of business grew at an extremely strong compound annual rate of 36.6%.  Outstanding MBS grew at the highest rate in a decade, at a compound annual rate of 67.6 percent.”  Fannie’s Book of Business surged $50.6 billion during the month, or a stunning $600 billion annualized.  For comparison, April 2002 saw Fannie’s Book of Business increase $19.6 billion, with Total Business Volume of $58 billion.  Year-to-date, Fannie's Book of Business has surged $154 billion, or 27.6% annualized.  For comparison, the Book of Business expanded $105 billion for the entire year-2000.  This year's Total Business Volume (mortgage purchases) is running at an amazing annualized pace of $1.4 Trillion. The National Association of Realtors this week released first quarter housing pricing data.  Nationally, median prices were up 7% y-o-y to $161,500 (up 15.6% over two years).  Y-o-y Median Prices were up 16.7% in the Northeast, 4.1% in the Midwest, 7.5% in the South and 8.0% in the West.  It is worth underscoring the Top 10 price gaining markets:  Philadelphia was up 25.7%, Providence, RI 25.7%, Melbourne, FL 25.4%, Sacramento, CA 25.3%, Trenton, NJ 24.0%, Monmouth/Ocean, NJ 23.4%, New Haven, CT 21.8%, Bergen/Passaic, NJ 21.1%, Orange County, CA 20.5%, and San Diego, CA 19.5%.  Other notable gainers include San Bernardino, CA 18.3%, Nassau/Suffolk, NY 17.6%, Los Angeles 16.2%, Baltimore 15.2%, NY/NJ/CT 15.1%, Chicago 11.1%, Washington D.C. 10.3%, Minneapolis 9.3% and Milwaukee 9.2%.  Of the more than 120 metropolitan areas, only eight had y-o-y declines.  Only three had price drops of more than 2%, with the worst performer (Chattanooga, TN) down just 4.4%.    While the national median sales price may have been $161,500 during the first quarter, the Mortgage Bankers Association reported average new loan size this week of $188,800.  The mortgage application index jumped another 13.7% this week (35% over two weeks!) to the fourth highest level on record.  For perspective, the index that surpassed 1400 this week traded above 800 for the first time (and for only two weeks) during the infamous month of October 1998.  It traded above 1400 for the first time during the month before last.  This week the Refi Application index surged 19.3% (42% over two weeks!) to the fourth highest on record (up 366% y-o-y).  The number of Purchase Applications was basically unchanged from the previous week’s record.  Purchase Application volumes were up 16.5% from the strong year ago level, while dollar volume was up a noteworthy 26%.  The average Purchase Application mortgage amount was $199,400 last week.  The average size of adjustable rate mortgages rose to $314,100. California home prices set another record during the first quarter, with the median price up 14.3% to $337,780.  The Florida Association of Realtors reported a strong first quarter, with both sales and median prices up 10% ($145,600) from one year earlier.  Median prices were up 18% in Miami and 24% in West Palm Beach/Boca Raton.  Statewide median prices have inflated 50% since 1998.    Unrelenting mortgage Credit excess is fueling absolutely dreadful (gone parabolic) trade Deficits, and it is today difficult to see this circumstance changing any time soon.  March’s deficit of $43.5 billion was up 33% from March 2002.  Year-over-year, Goods Exports were up 6%, while Goods Imports surged 15%.  Goods Imports were 81% larger than Exports during the month.  Crude oil imports were up 76.8% y-o-y, Consumer Goods 15.9% (Pharmaceuticals 34.2%), Automotive 7.7%, and Food & Beverage 16%.  Capital Goods Exports declined 1.3%, while Food & Beverage Exports jumped 10.0%.  Year-to-date, our trade deficit with China is up 30.0% ($24.67bn), Japan 1.5% ($16.37bn), Canada 18.1% ($14.50bn), Mexico 28% ($10.84bn), Germany 25.3% ($8.56bn), Ireland 18.4% ($4.1bn), and Saudi Arabia 146% ($3.58bn). We read analysis these days that the weak dollar will likely induce the U.S. to export “deflation.”  Well, this is one area where we should surely avoid the nebulous “inflation” vs. “deflation” debate.  And one issue should be beyond dispute: these massive and unrelenting U.S. trade deficits are now “exporting” aberrant liquidity globally.  Throughout the world – from China and greater Asia, to OPEC, India, Russia, Europe, Mexico and Canada – central banks’ dollar reserve assets are surging.  Today, the world is awash in liquidity, with Credit Availability the most accommodative in quite some time.  In many ways the environment recalls the Credit market speculative frenzy and pre-Mexico crisis period of 1993.  It is inarguably a much different world than late last year. From a global Credit-centric perspective, the parabolic rise of King Dollar from the depths of the 1998 financial crisis was a significant impediment to liquidity and Credit availability for many economies internationally.  Post-LTCM crisis, there was absolutely no doubt that the U.S. financial system provided (with the systemic liquidity assurances and “buyers of first and last resort” functions courtesy of the Fed and GSEs - our “twin” central banks) THE cozy safe-haven for the expansive global speculating community.  Hot “money” flows abandoned Brazil in early 1999, Turkey in 2001, and later sidestepped the Argentina debacle.  The resulting financial and economic crises were all too similar to previous “hot money” booms turned busts in Mexico (late 1994-95), Thailand (summer of 1997), S. Korea and SE Asia (late 1997), and Russia (summer of 1998).  By 1999, The Reign of King Dollar was taking firm control.  And, in reality, the year-2000 NASDAQ collapse/equity bear – and the Fed’s and GSEs’ consequent historic accommodation/"reliquefication” - only solidified the dominance of dollar denominated Credit instruments as the surefire way to easy speculative “trading” gains.  How could one lose?  Understandably, global financial flows were keen to avoid the emerging markets and commodities, enticed instead by the incredibly powerful King Dollar liquidity magnet.  Why play anything else?  A strong case can be made that King Dollar was restraining liquidity, Credit availability, and economic growth for many economies.  The liquidity feast in America was the mirror image of famine elsewhere.  And during each respective crisis, the SE Asia melt-down in particular, it appeared that the intense flight to dollar denominate financial assets was on the verge of stoking severe deflationary forces.  The final speculative dollar melt-up certainly exacerbated the Argentine collapse and nearly sank Brazil. But the King Dollar Bubble also sowed the seeds of its own destruction.  Incredible Credit and speculative excesses fed The Great Mortgage Finance Bubble, the GSE and “Structured Finance” Bubble, and acute financial fragility, while further distorting the maladjusted Credit and consumption-driven Bubble economy.  The inevitable reversal of dollar fortunes and last year’s serious systemic stress very nearly pierced the U.S. Credit Bubble.  Yet this Day of Reckoning was postponed by historic assurances from the likes of Ben Bernanke and Alan Greenspan.  I’ll stick to my view that in the guise of fighting the evil of “deflation,” the Greenspan Fed is really signaling to the marketplace that they are prepared to do everything in their power to bankroll the continued Credit and speculative excesses required to sustain the U.S. Bubble.  The Greenspan Fed is determined to nurture leveraged speculation, they will buttress any cracks in the frail foundation of Structured Finance, and that they will stand fully behind the daisy chain of institutions comprising our contemporary Credit system (banks, derivative players, GSEs, Wall Street firms, Credit insurers, ABS/MBS markets, etc.).  They will disregard all excesses and ignore escalating financial and economic imbalances and distortions.  And, in a seminal departure from established and prudent central banking, they have intimated that they will in no way move to assuage Credit, speculative, or liquidity excesses to defend a sinking dollar.  This will prove a momentous mistake.  In short, the Fed this past autumn initiated a guarantee that it would not allow the runaway U.S. Credit boom to wane, let alone go bust.  This is heady, historic stuff, with profound ramifications both domestically and globally. So nervous markets, both at home and abroad, made an abrupt u-turn.  Now markets would no longer need to discount for the seemingly imminent termination of gross U.S. Credit and speculative excess – and resulting liquidity effects from massive trade deficits and speculative financial flows emanating from the U.S. financial sector.  Today, the Federal Reserve has players believing they have promised that excesses and the liquidity torrent from the U.S. Credit Bubble will be sustained as far as the eye can see.  May 14 – Bloomberg (Gavin Serkin):  “Sergey Pakhomov, Moscow’s municipal debt chief, spreads a map across a polished boardroom table, indicating plans to build new 10-lane roads, create more subway lines and replace decaying, Soviet-era apartment buildings.  ‘Those ugly prefabricated houses with shoddy construction, they really have to be demolished,’ says Pakhomov, pointing to areas in the north and south of Russia’s richest city. A new subway line linking the suburb of Butovo and downtown has already cut the daily commute for half a million people by 45 minutes. Who’s financing it all? Bond investors. The City of Moscow, along with businesses such as OAO Gazprom, Russia’s largest company, are leading an increase in domestic bond sales that may reach 320 billion rubles ($10 billion) this year. That’s up from 196 billion rubles last year and triple the amount in 2001… Five-year federal government bond yields have dropped to a record of 8.14 percent, half the rate of a year ago. That compares with more than 100 percent at the end of 1998 on three-year paper. Moscow city government’s four-year ruble bonds recently traded at a yield of 8.6 percent, compared with the 16 percent rate on one-year bonds a year ago. Russia’s bonds aren’t the only emerging market bonds gaining. J.P. Morgan Chase & Co.’s EMBI Global emerging market bond index jumped 17 percent this year, with Brazil's bonds up 44 percent, as international investors seek alternatives to the lowest U.S. Treasury yields in four decades.” Emerging market debt spreads have narrowed 80 basis points during the past month, and have collapsed more than 450 basis points since October.  Mexican government bond yields this week sank to a record low 5.14%.  This is down 155 basis points since February and 225 basis points from a year earlier.  Brazilian yields have collapsed 700 basis points since February, while Argentine yields have crashed 2,450 basis points.  Over the past twelve months India has seen yields decline 220 basis points to 5.90%.  Australian yields are down 140 basis points to 5.0%, while New Zealand yields have sunk 230 basis points to 5.65%.  Ten-year yields are down 220 basis points to 5.85% in Poland over the past year, and are only slightly higher in Hungary.  Yields have collapsed about 300 basis points in South Korea (5-year yields at 4.39%), while Thailand 20-year government bonds today yield just over 4%.  Russian 10-year Eurobonds yield 5.58%, down about 300 basis points since September.  Ten-year yields are down about 140 basis points over the past year throughout the eurozone (from Germany to Greece) to generally less than 4%.  I am attempting to convey that it looks increasingly likely that something very significant has developed that requires careful contemplation.  We have witnessed no less than an all-encompassing collapse in global risk premiums, and the riskier the asset class the more dramatic has been the market’s revaluation.  Yes, many will aver that this collapse in yields is linked to heightened global “deflationary” forces.  Yet I’m not so convinced that the nature of deflationary risks would engender the type of pervasive global equity option, Credit default swap, and junk/emerging bond premium collapses recently experienced. And would heightened deflationary pressures be consistent with this year’s major flight to “commodity” currencies such as the Australian dollar (up 16% vs. the dollar), Canadian dollar (up 15%), Brazilian real (up 20%), and South African rand (up 11.5%)?  My gut tells me that there is something more at work here than “deflation.”  Is it possible that global markets are adapting to a new and historic post-King Dollar environment, with an audacious Fed accommodating unrelenting U.S. Credit excess and, in the process, sanctioning The Desperate Experiment of Maximum Global Liquidity?  Truly nothing would surprise me anymore. Many capable analysts take a careful look at the world and see unmistakable and broadening (downward) pricing pressures, especially in the goods sector.  They also correctly see great price risk associated with inflated asset markets, especially real estate.  But at the same time, diligent Credit analysis brings to light today’s unprecedented household debt growth, enormous government deficits, unparalleled Credit market speculation, and the resulting inflationary manifestations - asset bubbles, endemic trade deficits and extreme divergences in relative prices throughout.  Indeed, the three major (interrelated) components of the Great Credit Bubble – the Leveraged Speculation Bubble, the Mortgage Finance Bubble, and the Risk Intermediation/Structured Finance Bubble – all appear to have recently commenced a state of parabolic (we would argue terminal) excess.  As evidence, look to the speculative frenzy that has engulfed the Credit market, truly incredible mortgage lending growth, and the hyper-expansion of Fannie’s Book of Business.  Then, the question becomes, how would we reconcile the outward paradox of heightened “deflationary” pressures in the face of Credit Bubble excess going parabolic?  Can we look to history for insight and/or guidance? First of all, I don’t buy into the notion that we can garner much from the Japanese experience; they are, after all, a manufacturing, saving, Creditor island nation in Asia with atypical demographics.  But the current global environment does seem to parallel the waning years of the Roaring Twenties more all the time.  As we have learned from our study of history, pricing pressures and deflationary forces gathered steam throughout the global economy as the twenties progressed.  Literally several decades of cumulative financial and economic imbalances – that went to gross Credit and speculation-induced extremes at the Bubble’s late/terminal stages – imparted profound structural effects.  Key sectors were increasingly susceptible to overcapacity, waning demand, and/or changing spending patterns.  Meanwhile, financial leveraging and speculative excess ran uncontrolled, dictated by market dynamics increasingly detached from real economy travails. It was surely much easier to make “profits” speculating in the financial markets than it was by producing products. With its well-founded fear of economic vulnerability, the Fed focused on the economy and acquiesced to financial folly.  The Fed apparently did not appreciate the extent to which the financial markets had become a key mechanism injecting liquidity into the real economy, and that the increasingly destabilizing flood of financial liquidity was emanating from unsustainable speculative leveraging.  Asset inflation became the driving force of self-feeding liquidity creation.  Such dynamics dictated that it was only a matter of when and from what degree of financial excess the Bubble would burst.  And, quite importantly, a shot of whiskey from the Fed to liven up the real economy was tantamount to serving a jug of moonshine to the drunken stock market. The very market forces and Credit mechanism that had so successfully financed prolonged economic prosperity had become increasingly detached from economic fundamentals, destabilizing, and, in reality, deranged.  Moreover, there was the key issue of speculative market dynamics, whereby speculation and Credit excess begot only greater excess that culminated in a destabilizing parabolic “blow-off.” At several critical junctures (1927, in particular) the Fed gave the Bubble a new lease on life (a shot of “liquid courage”), setting the stage for greater folly and eventual financial and economic collapse. I rehash this economic history as I believe it provides the most useful guide for making some sense out of this extraordinary environment of conflicting talk of inflation vs. deflation, post-Bubble vs. Bubble, and recovery vs. recession.  The Roaring Twenties clearly offers the closest comparison to today’s conundrum of heightened “deflationary” real economy risk in the face of parabolic Credit and financial excess.  I will add, however, that unlike the late twenties, it is my view that the paramount Bubble of leveraged speculation (and liquidity creation!) during this cycle resides within the U.S. Credit market, not the stock market.  The latest shots of liquid courage is enjoyed in gross excess by an inebriated Credit system. And while today’s historic Bubble has faced near death experiences on several occasions (this past fall the latest, and perhaps most serious), it may today appear more impervious than ever.  And yet this is perfectly consistent with speculative market dynamics, and recalls how surviving through the late-1998 crisis emboldened “animal spirits” sufficiently to set the stage for the NASDAQ/technology parabolic blow-off.  Clearly, Credit market speculators are today thoroughly “emboldened,” and never before has a central bank so explicitly conveyed the convergence of mutual interests they share with the speculating community.  Has the Fed set the stage for one final period of parabolic Credit excess?  Such a view is appearing more plausible by the week. But this scenario has set the course for dollar disaster.  Here at home, the inflation of dollar financial claims accelerates, underpinned by little in the way of true economic wealth creation (exponential rise in non-productive debt).  Endless liquidity is available for the taking, although acute financial fragility only hibernates.  Meanwhile, the (non-dollar) world has become the oyster for the energized and emboldened speculator community.  The torrent of liquidity, emanating from the deranged U.S. Credit system in the thick of historic parabolic excess, sees growing flows exiting the dollar in an endless pursuit of higher returns.  Dollar selling begets dollar asset underperformance that begets dollar selling.  And the more liquidity that flows to markets such as gold and basic commodities, or economies such as Brazil and Russia, the better these assets classes appear in comparison to dollar instruments.  And with the Fed’s current “deflation”-fighting mandate stoking over-liquefied markets globally, I am convinced that dollar weakness will only exacerbate Credit excess and self-reinforcing dollar devaluation.  If our authorities believe that the sinking dollar will settle at some level of “fair value,” they surely don’t appreciate the dynamics of runaway Credit inflation, consequent currency debasement, and speculative Bubbles.  Perhaps Washington actually believes that a weakening dollar is a good thing and that it will help us get out of our mess.  It’s not and it won't.  The Desperate Experiment of Maximum Global Liquidity is playing with nitroglycerin.