Wednesday, September 3, 2014

05/29/2003 The New New Game *


What a week; what’s that saying about root canals…  For the holiday-shortened week, the Dow’s 3% surge was slightly bettered by the S&P500.  The Transports and Morgan Stanley Cyclical indices gained about 4%.  The Morgan Stanley Consumer index added almost 3%, while the Utilities gained less than 1%.  The broader market was in near melt-up mode, with the small cap Russell 2000 surging 5.4% and the S&P400 Mid-cap Index gaining 4.4%.  The Russell 2000 and S&P400 have gained 28.5% and 24.3% off of March lows.  The technology sector continues to outperform.  The NASDAQ100 gained 6%, increasing y-t-d gains to almost 18%.  The Morgan Stanley High Tech index jumped 7%, increasing 2003 gains to 28%.  The Semiconductors surged 11% (up 32% y-t-d) and The Street.com Internet index jumped 6% (up 40% y-t-d).  The NASDAQ Telecom index gained 5%, increasing y-t-d gains to 30%.  The Biotechs added 4%, with 2003 gains of 33%.  The financial stocks were sizzling as well, with the Securities Broker/Dealer index surging 10% and the Banks 4%.  The Brokers and Banks have rallied 51% and 27% off of March lows.  Although bullion gave back $4.20 of recent gains, the HUI gold index was about unchanged.

Notably, surging stock prices caused little consternation in the Treasury market.  Two-year Treasury yields actually declined five basis points to 1.35%, while five-year yields dipped three basis points to 2.29%.  The 10-year Treasury yield increased four basis points to 3.37%, while the long-bond gave back 11 basis points of its recent spectacular yield decline (to 4.37%).  Benchmark Mortgage-backs appeared to have enjoyed atypical out-performance, with agency debt generally performing in line with Treasuries.  The spread on Fannie’s 4 3/8 2013 note gained less than one basis point to 35.  The benchmark 10-year dollar swap was about unchanged at 35.  Corporate spreads were mixed, but generally little changed.  The dollar index gained slightly for the week, while the CRB index dipped about 2%.  

May’s $70 billion of corporate debt issuance (according to Bloomberg) was the most since February.  This week DaimlerChrysler sold bonds worth $2.5 billion (raised from $2 billion) at 3.826% (149 basis points over Treasuries), Allstate $400 million, Kellogg $500 million, Sara Lee $1 billion, Ryland Group $150 million, and Autozone $200 million (to name only a few).  Junk issuance remains strong.  Crum & Forster issued $300 million, Texas Industries $600 million, Triton PCS $725 million, and Lamar $125 million.  However, two junk offerings were postponed due to the glut of issues.  It was a huge week for the convertible bond market, capping off a “phenomenal month.”  May’s $11 billion of sales (45 companies) was the strongest in a couple years and triple the level from May 2002.  This week’s transactions included Celgene’s $300 million, Cypress’s $500 million, Lucent’s $1.5 billion, Juniper Networks’ $350 million, American Financial Group’s $175 million, Delta Air’s $300 million, and Ask Jeeves’ $100 million.   

May 30 – Dow Jones (Michael Mackenzie):  “Convertible debt issuance is surging in the U.S., but the credit derivatives market is taking little notice.  That’s quite a contrast to previous years, when a bulging pipeline of this type of paper, which can convert to equity some time in the future, had investors scurrying to buy credit protection. Now, with the credit climate looking better every month, the need to hedge debt exposure is diminishing.”
May 28 – Bloomberg:  “Lucent Technologies Inc., the biggest U.S. telephone-equipment maker, said it raised $1.53 billion in a sale of convertible debt, 18 percent more than planned… Demand for the debt allowed…Lucent to set an interest rate of 2.75 percent on both bonds, the low end of its expectations. Lucent took advantage of an 81 percent increase in its share price this year and increased demand for convertible bonds to boost the size of the two-part offering from $1.3 billion. The funds raised will help the unprofitable company meet its goal having of $2.5 billion in cash at the end of September. About 100 companies have raised more than $35 billion in convertible bond sales this year.”

May 28 – Bloomberg:  “Adelphia Communications Corp., the cable-television company operating under bankruptcy protection, reached an agreement with bank lenders to gain access to $1.5 billion in financing.  The company plans to draw on the credit line to resume upgrading its cable systems…  Adelphia, the fifth-largest U.S. cable operator, lags the industry in improving its systems to offer more channels and services.”

The South Korean government tapped the global bond market for the first time since 1998.  Five times oversubscribed, the issue was sold with a yield of 4.307% (only 92 basis points over Treasuries!).  South Korea’s foreign currency reserves ended April at $123.6 billion, up from less than $10 billion during the 1997/98 crisis.  Will abundant global liquidity and record low interest rates be the catalyst for surprising growth in Asia and throughout emerging markets (Brazil, Russia, India, Argentina, etc.)? 

May 29 – Bloomberg:  “Russia’s bonds gained after the country’s foreign currency and gold reserves surged $3.2 billion, the biggest one-week gain since the financial crisis of 1998. Russia’s benchmark 2030 dollar bond rose 1.35 cents on the dollar to a record 97.85 cents, cutting the yield to 6.79 percent…”

May 30 – Bloomberg:  “MBIA Inc., the world’s largest bond insurer, guaranteed payments on $1.93 billion pesos ($187 million) of debt sold by two Mexican toll road operators, a tool that could encourage lenders to finance new private highways.  The bonds, which will be used to repay existing debt and fund operations, were awarded Standard & Poor’s highest rating of AAA because of the guarantee, which helped attract pension funds and insurance companies as buyers. The guarantee was first of its kind for MBIA in Mexico.”
May 29 – Market News International (Claudia Hirsch):  “Heavy with reserves, central banks are beginning to expand their credit risk appetite beyond sovereigns and into agencies, asset-backeds, mortgage pass-throughs and even some corporate paper, according to a senior portfolio manager with input on nearly $300 billion in fixed income assets.  ‘They have huge pools of money and they want to be able to show greater results,’ said Connie Plaehn, managing director for J.P. Morgan Fleming Asset Management…”

May 30 – Bloomberg:  “Japan’s government sold a record amount of yen in May to stem the currency’s advance as it reached its highest in more than two years against the dollar…  Foreign-exchange transactions in the Bank of Japan’s current account balance rose by 3.98 trillion yen ($33.5 billion) this month. That’s 24 percent more than its previous record sale of 3.21 trillion yen in September 2001.”

Official Foreign Holdings of U.S. Debt increased $10.9 billion to $927.7 billion, with four-week gains of $40.7 billion. 

Broad money supply (M3) expanded $5.5 billion last week.  Demand and Checkable Deposits jumped $11.9 billion and Savings Deposits added $2.0 billion.  Small Denominated Deposits declined $1.9 billion and Retail Money Fund deposits dipped $2.8 billion.  Institutional Money Fund deposits declined $2.3 billion and Large Denominated Deposits declined $1.2 billion.  Repurchase Agreements increased $5.0 billion, while Eurodollars declined $6.3 billion.  Elsewhere, total Commercial Paper declined $1.3 billion to $1.351 Trillion, with Non-financial CP declining $2.5 billion (to $140.6 billion) and Financial CP adding $1.3 billion (up $44.3 billion over five weeks to $1.21 Trillion).  Following recent strong expansion, Total Bank Assets declined $34.9 billion during the most recent week.  Securities Holdings increased $5.0 billion, while Loans and Leases declined $14.2 billion.  Commercial and Industrial Loans declined $3.1 billion and Real Estate loans dropped $14.0 billion.  May was another strong month for the ABS marketplace, with year-to-date issuance of $173 billion up 14% y-o-y.

May 29 – Bloomberg:  Quoting inflation “expert” Donald Ratajczak: “The April (pricing) figures weren’t very good.  The deflation word for that month was appropriate because we do look at unit labor costs and they’re not performing well and they’re now starting not to perform well because of slowing wage growth.  (On the dollar) Another indicator we look at is the value of the currency and our currency is devaluing, which is an inflationary act.  If that was the only thing we were looking at, we’d say that we’re starting to build in potential inflation, not deflation. I won’t say that we’ve abandoned the strong dollar policy, but we basically have told the investors that if you want to try and get a quick return by selling short the dollar you’ve probably got a good opportunity to do so.  This is a policy shift, and it’s understandable.  If you are worried about deflation then you’ve got to put more of your currency out there. If it’s flooding the international market, then maybe that’s the conduit for it. If the banks here won’t lend the money, you can’t flood the domestic market because most of your money is bank-created and if they’re not creating it by making loans and putting the money to work, then you have to do it in the currency markets.”

One of problems with Dr. Ratajczak’s line of reasoning is that U.S. Bank Credit is up 11% over the past year. 

May 28 – Market News International:  Quoting ECB chief economist Otmar Issing:  “No one can rule out negative inflation rates in Germany in the next two years.  But that has absolutely nothing to do with deflation (because Germany is part of a larger economic and monetary region). We are miles away from such developments.”  “The same is true for the eurozone as a whole, he said. The public debate on deflation risks in Germany has become almost ‘hysterical,’ he said.”

May 28 – Bloomberg:  “Canadian home resale prices rose to a record for the third straight month in April, a sign that demand for housing in the months ahead may prevent inflation from dropping as rapidly as some economists have predicted.  The average price rose 6.5 percent from a year earlier to C$201,838 ($146,637), 0.2 percent greater than the record set the previous month…Bank of Canada Governor David Dodge has said rising home prices have fueled inflation…”
The economy’s pulse is becoming less faint.  The May Chicago Purchasing Management index jumped a stronger-than-expected 4.6 points to 52.2.  New Orders surged 10 points to 54.6, the strongest reading since February.  Production jumped 9.5 points to 60.5.  Prices paid dipped 2.2 points, but remained above 50 (53.7).  It is worth noting that during the 2001 slowdown, the Chicago Purchasing Management index dropped to a low of 35.5 and did not surpass 46 during the entire year.   

First quarter Personal Income grew at a 3.9% annual rate.  And with Personal Taxes declining at a 4.1% annual rate, Disposable Income increased at a 5.0% rate.  Year-over-year, Personal Income increased 3.7%.  Tepid Wage and Salary growth of 2.9% was augmented by 7% growth in Transfer Payments and a 4.5% y-o-y decline in Personal Taxes.  Disposable Income was up 4.9% y-o-y.  Outlays were up 4.5% y-o-y.  No deflation apparent in the Income and spending data.

One must look beneath the aggregate 1.9% first quarter GDP growth rate to appreciate stark economic imbalances.  Durable Goods consumption contracted at a 1.8% pace, while Nondurables expanded at a 6.4% rate.   Gross Private Investment contracted at a 3.3% rate, with Non-residential Fixed Investment down 4.8% as Residential investment surged 11.0%.  Investment in Equipment and Software contracted at a 6.3% annualized rate.  The first quarter GDP price deflator increased to 2.5%, the first time above 2% in six quarters.  It has not been higher since the first quarter of 2001.  By category, Durables prices declined at a 3.7% rate, while Nondurable increased by 4.6% and Services by 3.1%.  Import prices surged to an 11.8% growth rate.

This week from the president of the California Association of Realtors: “2003 is shaping up to be another banner year for real estate.  While sales last month declined compared to a year ago, sales in April 2002 were at their highest level in the history of California’s residential real estate market. Year-to-date sales have declined 5 percent, in line with our expectations, while the median price continues to post double-digit gains.”  State median prices were up $46,810 (14.8%) y-o-y to $363,930.  At 2.5 months, “A low level of unsold inventory indicates a tight real estate market and is a key factor driving price appreciation in the state.”  DataQuick reported that 369 of 396 Californian cities enjoyed year-over-year price gains. 

Some of the strongest price inflation is at the lower-end, with Central Valley, High Desert, and Riverside/San Bernardino all posting 20% plus y-o-y gains.  Yet the upper-end remains notably resilient.  From PRNewswire:  “Luxury home values rose in California’s major metropolitan markets in the first quarter versus a year ago, with Los Angeles values gaining more than 11 percent, according to the Prestige Home Index by First Republic Bank…”  Luxury prices jumped 4.5% during the quarter in Los Angeles, 3.0% in San Francisco and 0.8% in San Diego.  The article included quotes from local real estate professionals.  “Malibu has gone into the stratosphere.  We have a limited amount of beachfront property, great schools and this is a terrific place to live.  Our entry level housing is pushing $1 million, and apartments, condos and beachfront properties are at levels we’ve never seen before.”  In Orange County “we’re seeing appreciation in almost every neighborhood, and in some cases, in excess of 20 percent. Sales are down because inventories are down, but prices are way up.  We continue to have a shortage of homes in this area.”  “San Francisco real estate doesn’t seem to be tied to the San Francisco economy.  The economy may be down a little, but real estate is still moving up…”

From the Illinois Association of Realtors:  “We have seen a dramatic upsurge in housing activity in the last month.  A continuation of four-decade low mortgage interest rates could drive the housing market to the second-best year on record.”  And from the Florida Association of Realtors:  “Buyers continued to boost Florida home sales to new heights in April… Statewide, the median cost of a resale in Florida rose 11%...”  Bloomberg quoted the chief economist of the National Association of Realtors:  “Although we anticipate some cooling in the housing markets going forward, most indicators right now indicate otherwise.”

This week from my mailbox:  “Congratulations Douglas C. Noland:  The Federal Housing Authority (FHA) has authorized Assistance For America, and our parent company, United Lending Partners, to assist you (to) find a home, get a loan, and most importantly, we FUND YOUR DOWN PAYMENT and PAY YOUR CLOSING COSTS – all for just a $750 one-time move-in cost.  That’s right.  Your financial responsibility for owning your home through this special FHA, United Lending Partners and AFA program is your one-time TOTAL MOVE-IN cost of $750.” (Their caps and underscores)

Mortgage applications jumped again.  For the week, Refi applications were up almost 6% to the third-highest level ever.  Refi applications surged 74% in four weeks, and were up 500% y-o-y.  Purchase applications were about unchanged for the week, although at a level 28% above February lows.  Purchase application volumes were up 14% y-o-y, while dollar volume was up 23%.  The average loans size was $195,700, with the average adjustable-rate mortgage at $325,100. 

April Existing Home Sales were reported at a stronger-than-expected annualized rate of 5.84 million, the fifth-highest on record.  The $207,900 average price was the second-highest, up 5.8% y-o-y (up 16% over two years).  Year-over-year Calculated Transaction Value (average price multiplied by annualized volume) was up 9.2% y-o-y (up 28% over two years and 39% over three years).   Compared to pre-Bubble April 1997, Calculated Transaction Value was up 98% (averages prices 42% and sales volume 39%). Curiously, the number of homes available for sale is up 15% over the past two months to the highest level since 1991.  The S&P Homebuilding Index is sporting a year-to-date gain of 46%.

New Home Sales were also stronger-than-expected, jumping to the briskest pace since December.  New Homes sold at an annualized rate of 1.028 million units, with 2003 sales on target to surpass last year’s record.  Sales volumes were up 12.2% from April 2002, and were up 38% from pre-Bubble April 1997.  The inventory of New Homes was unchanged and has been steady for the past five months.

Looking back, Fed funds were at 9.75% in May 1989.  By the end of 1990 the Fed had reduced short-term rates to 7.0%.  As the severity of the damage inflicted on our nation’s banking system from the collapse of the late-eighties junk bond and coastal real estate Bubbles became apparent, the Fed anxiously stepped on the monetary peddle.  Rates were chopped to 4.0% by the end of 1991.  Yet there remained strong perceptions (in the markets and real economy) that the economy was not sufficiently responding to even extreme monetary stimulus, this despite GDP expanding by plus 5% during 1992.  Fighting stiff “headwinds” from an impaired Credit system, the Greenspan Fed added some “insurance” by reducing rates another 100 basis points to 3.0% during 1992.  In all, it was 23 straight rate cuts and 675 basis points over a period of about 42 months. 

Importantly, although certainly not apparent at the time, the Greenspan Federal Reserve had set course on The Great Experiment of “Activist” Central Bank Market Manipulation.  By pegging short-term rates at low levels, the Fed learned that it could easily manipulate a steep yield curve that basically guaranteed profits for our troubled banking system.  No longer would the unpredictability of open-market purchases and bank reserve operations be the Fed’s main policy tools.  With the capacity to easily mastermind financial profits, the market no longer had cause to worry that open-market operations might fail to incite adequate bank lending – the old “pushing on a string” syndrome.  And no more was there much reason for the marketplace to fret the potential for another systemic Credit crunch induced by (post-boom) banking system capital impairment.  “The only fear of boom is fear itself…”  

And especially with the Fed-nurtured evolution to a securities-based Credit system - the proliferation of aggressive non-bank lenders (GSEs, MBS, ABS, Wall Street firms, etc.) - the manipulation of financial profits became the most powerful tool in the history of central banking.  It was akin to the Federal Reserve’s fateful discovery of the power of open-market operations back in the early 1920s.  And, similar to the Roaring Twenties fiasco, the Fed’s most recent market manipulation technique spiraled completely out of control.    

Interestingly, however, none of this was apparent back in those Dark Days of the Early Nineties.  The Fed had profoundly changed the rules – contrived a New Game.  Yet this momentous development was comprehended by few.  There were a small group of savvy speculators who recognized early on the extraordinary opportunity afforded by the Fed’s recapitalization efforts – the manipulation of yield curve profits to benefit the impaired banking system.  But the whole world wasn’t fixated on financial Games back then.  Of course, word eventually spread and the New Game caught on like wildfire.  And it was those final (“insurance”) cuts during 1992 that really threw gas on the speculative fire kindling in the Credit market.  The celebrated New Game ran amuck (and caught fire globally) during 1993. 

Although 1994 was a near debacle (U.S. Credit market dislocation, then the Mexican Collapse) and there were a few severe road bumps along the way, the leveraged speculating community has barely looked back since.  Each (duel) central bank (the Fed and GSEs) rescue has successfully emboldened the opportunists.  Today, “everyone” is seeking easy financial profits from Fed largess.  It is The Game and it is being played with an attentiveness and ferocity unlike anything experienced in the early nineties, or for a very long time.

Inarguably, the degree of financial speculation (and resulting economic distortions) has expanded commensurate with the ballooning of the system Credit.  Total outstanding Credit market debt has surged from 1990’s $13 Trillion to almost $32 Trillion by the end 2002.  So even with the collapse of the NASDAQ and stock market Bubbles, the Fed retained extraordinary power to manipulate financial profits and incite lending.  Rate cuts afforded the Fed the capacity to inflate the market value of the massive pool of Credit market debt, and the Fed still enjoyed a very captive audience with the leveraged speculators, the energized bankers, and non-bank Credit creators. 

Paradoxically, and significantly, despite a collapse of one of history’s major speculative Bubbles, the bursting of the stock market was more than compensated by the massive surge in Credit market speculation.  With money flooding into the hedge fund community and Wall Street ballooning balance sheets in anticipation of a slew of Fed rate cuts, the overall size of the speculative pool of finance only inflated.  It was a close call, but the determined Fed retained it coveted policy tool (the massive pool of speculative finance).  It was, however, quickly running out of interest rate ammo.  Alan Greenspan also played his “trump card” (with the complicity of the GSEs and leveraged speculators), sustaining the Credit Bubble by inciting unprecedented mortgage Credit borrowings. 

Yet there is today no doubt that our central bank has lost much of it its flexibility.  There have been some very significant developments along the way:  The extraordinary ballooning of leverage and speculation throughout the U.S. financial system has greatly increased systemic risk to “reflation.” Indeed, never has a financial system been more vulnerable to higher interest rates, emanating from the highly over-borrowed consumer and corporate sectors, as well as the egregiously exposed financial and “speculator” arenas. The ballooning Mortgage Finance Bubble is an unmitigated disaster in the making, pierced by any meaningful rise in rates or slowdown in Credit growth.  At the same time, there is the Credit Bubble Reality that greater lending and speculating excess achieve diminishing marginal returns in the imbalanced real economy.  That is the real story of the post-stock market Bubble experience - the distorted Bubble “service sector” (monetary) economy that is only stabilized by truly enormous financial excess.  And there is absolutely no escape.

On the one hand, the Fed is boxed into a perilous corner, with no alternative than to accommodate only more egregious lending, financial leveraging and speculating.  This is a fact of life that I and a few others have for sometime been fixated.  But we simply cannot today disregard the Fed’s thus far enduring capacity to manipulate financial profits and incite financial excess.  In some key ways, the Fed has never been more powerful; they have certainly never “played” to such an enormous and adoring crowd.  And the greater the risk that this financial house of cards could come crashing down, the more aggressive, determined, and conniving the Fed.  We are today at no analytical disadvantage operating with the premise that the Greenspan Fed is militant in its endeavors. 

I continue to read “bearish” analysts dismissing the effectiveness of the Fed’s reliquefication efforts.  They use as evidence continued strong bankruptcy filings, foreclosures, and unemployment claims.  I also read seemingly reasonable analysis that there is nowadays a highly atypical divergence: the stock market has priced in a recovery, while the bond market has discounted “deflation” and recession, betting on the impotence of Fed reliquefication efforts.  One of the markets must have it very wrong, apparently.

But I just can’t shake the sense that these lines of reasoning, while valid on the surface, are nonetheless completely missing the point.  Similar to the collapse of interest rates and risk premiums globally, something very significant must be in the works.  This is no time to be dismissive, but rather an extraordinary environment demanding deliberate contemplation.

It is becoming increasingly difficult to argue against the analysis that Fed reliquefication has become quite successful over the past few months.  Moreover, it appears that, akin to the early nineties, the “activist” Greenspan Federal Reserve has once again profoundly changed the rules of The Game.  Over a decade ago the Fed was forced to aggressively peg short-term interest rates at a low level.  This manipulation of financial profits was a desperate effort to ward off financial collapse and potential depression.  Its endeavors were too successful.  The ensuing rush of “innovation” toward a securities-based Credit system, with the proliferation of leveraged speculation, derivatives/financial engineering/GSE risk intermediation/credit insurance, and resulting historic asset Bubbles, then forced the Fed to implicitly guarantee abundant financial market liquidity.  Each step of the way, the Fed nurtured excess and financial “evolution” accelerated. Bubble dynamics took deep root.

Last year it appeared that the Fed was nearing the end of its rope.  It was increasingly apparent that The Great Credit Bubble was faltering in the face of even the most extreme accommodation of financial excess.  The Fed then saw little option but to take The Final Step and move toward implicitly guaranteeing stable-to-lower long-term rates, while at the same time intimating that short-term rates were “pegged” indefinitely.  Such a momentous leap in activist central banking only appears a subtle maneuver.  And the Fed is shrouding this historic policy shift in terms of some sophisticated preemptive fight against deflation.

It is also increasingly apparent that our analytical focus must move away from conjecturing whether Fed policies have been or will be “effective.” Rather, we will find value in analysis that focuses on the ramifications and consequences of The New New Game.    

First of all, it appears that we have returned to an environment where the stock and bond markets share a mutual benefactor – the Fed-induced liquidity deluge.  Apparently gone are the days of mutual disdain and quite divergent wants and needs.  We would expect bond managers will refrain from predicting stock market disaster, and equity managers will keep quiet about the bond market Bubble.  The Fed has gone out and designed a trough that can feed all takers.  With The New New Game guaranteeing an all-powerful confluence of abundant liquidity, ultra-low short-rates, and basically “pegged” long-term yields, the leveraged speculators (along with aggressive lenders, derivative players, and Credit system generally) all of a sudden no longer despise the stock market.  The nineties lusty kinship has been rekindled and gone is the bond market’s trepidation for the capacity of equity rallies to spur confidence and economic recovery.  Indeed, Wall Street has quickly (look at their stocks!) come to the glorious recognition that a buoyant stock market is now great for its investment banking business (converts, junk, MBS, ABS, CDO, etc.), without even endangering their enormous leveraged bond holdings.  We’ll have to excuse The Street for once again succumbing to thoughts of financial nirvana.
   
But it is no delusion that the Fed has created an extraordinary environment for the financial sector.  The little remnant that the interaction of supply and demand impacts the price of Credit has been completely repudiated.  The Credit spigot is being turned wide open.  And with Lucent raising $1.5 billion and lenders approving a $1.5 billion financing for Adephia Communications and $1.1 billion for Williams Company, the “Firing on Most Cylinders” analogy is in need of an “upgrade.”  How much corporate Credit growth will now combine with record household and government borrowings?  My analysis continues to point to the likely possibility that we have commenced the parabolic “blow-off” period of Credit Bubble excess.    

While it would be quite uncharacteristic of previous episodes, the “bulls” should attempt to control their euphoria.  There is, after all, a lengthy history of how these terminal stages of excess end.  This unfolding disaster will make history.  There is absolutely no possibility that the liquidity deluge will flow evenly to the imbalanced U.S. economy.  There is every possibility that it will stoke destabilzing asset Bubbles and nurture problematic booms and busts.  The housing market – the sector with the strongest inflationary bias - has commenced a most dangerous phase.  Localities with limited inventory will generally experience further price distortions, while areas with capacity for new construction will face problematic over-building.  The environment now clearly recalls the wild influx of speculative finance, and resulting spending and resource squandering, which engulfed the telecom sector back in 1999.  There will, similarly, be no escaping the financial carnage and wholesale destruction of wealth wrought by such major marketplace dislocations.

And why finance or build any productive capacity when profits are so easily garnered playing the Mortgage Finance Bubble and yield curve?  But perhaps Trickle Down Finance will suffice, and a small portion of wild Credit excess will at some point find its way domestically into productive investment.  But in the meantime, extreme mortgage lending excess will fuel over-consumption and only larger trade deficits.  This mechanism will continue to spew liquidity globally.  The dollar will be pressured on two fronts.  First, there will be unrelenting market pressure as this surfeit of dollar liquidity is exchanged for local and other currencies.  Second, this global liquidity cataclysm will amplify the inflationary bias taking hold in non-dollar assets.  Speculative financial flows will increasingly seek to exit the dollar, and dollar vulnerability will prove The New New Game’s perennial failing.

And let’s not forget the stock market.  Just as the Fed is powerless to direct liquidity to productive investment or to spread it evenly throughout the economy, it is totally incapable of transforming our equity market into any semblance of a mechanism that effectively allocates finance and limited economic resources.  Not gonna happen.  Years ago the equity market was transformed into a bad joke of senseless speculation, and not even a protracted bear market has changed this harsh reality. Destabilizing speculation has awoken from hibernation.  And this is a real problem for our financial system and economy, as well as for our central bank that will again be negligently dismissive of gross financial excess until it is much too late.  With the Fed having “successfully” incited risk-taking throughout the Credit market, it is increasingly a case of the poorly performing, financially weak companies having been granted a new lease on life.  And it surely doesn’t hurt that these are precisely the type of stocks that have accumulated large short positions during the bear market.  Add it all up and the marketplace hasn’t so giddily squeezed the shorts in years.  Better buy the stock of crummy companies while you still have a chance!  So why would anyone even bother to search for value and sound companies with enticing business opportunities?    

The New New Game may be proceeding swimmingly, but there will be few winners and many losers.  Losses will be catastrophic.  The Fed, once again, will only lose further control of its “Experiment,” with dangerously speculative markets coming back to bite the hands of “kindhearted” global central bankers.  The amount of Credit and speculative excess required today to sustain, let alone stimulate, the distorted U.S. Bubble economy is truly frightening.  And while all signs today point to enormous forthcoming liquidity for the real economy, dysfunctional Monetary Processes will do the allocation job especially poorly.  You can bet on it.  I see only greater quantities of destabilizing speculative finance, endemic boom and bust dynamics, a hopelessly unsound and erratic U.S. Bubble economy, a completely deranged Credit system, and an unfolding dollar disaster.  It is truly a despicable Bubble and a despicable Game the Fed is playing with it.  But for now, what I see as hideous and ugly others fancy for its breathtaking beauty.  I certainly won’t be tuning in to Kudlow and Cramer for awhile.