11/11/2005 (Pollyanna) Poole on the Current Account *

The bulls remained in full control.  For the week, the Dow gained 1.5% and the S&P500 rose 1.2%.  The Transports surged 3.5% to an all-time high.  The Morgan Stanley Cyclical index advanced 1.7%, and the Morgan Stanley Consumer index gained 1.6%.  The Utilities fell 0.9%.  The broader market rally continued.  The small cap Russell 2000 rose 1.3%, and the S&P400 Mid-cap index gained 0.7%.  The NASDAQ100 gained 1.6%, and the Morgan Stanley High Tech index added 1.1%.  The Semiconductors rose 2.2%, and The Street.com Internet Index gained 2.2%.  The NASDAQ Telecommunications index was about unchanged.  The Biotechs jumped 3%, increasing y-t-d gains to 23.5%.  Financial stocks succumbed to buyers’ panic, with the Broker/Dealers rising 3.3% to a record high and the Banks surging 3.8% to a near record.  With bullion up $11.80, the HUI gold index rose 4.7%. The Treasury market was volatile but finished yesterday with a strong rally.  For the week, two-year Treasury yields declined 4 basis points to 4.43%.  Five-year government yields fell 7 basis points to 4.49%.  Bellwether 10-year yields dropped 10 basis points for the week to 4.57%. Long-bond yields declined 8 basis points to 4.74%.  The spread between 2 and 10-year government yields declined about 6 to 14bps.  Benchmark Fannie Mae MBS yields declined 7 basis points to 5.89%, again underperforming Treasuries.  The spread (to 10-year Treasuries) on Fannie’s 4 5/8% 2014 note widened 2 (to the new 10-year note) to 35 and the spread on Freddie’s 5% 2014 note widened 2 to 36.  The 10-year dollar swap spread declined 2 to 53.25.  Corporate bonds generally traded in line with Treasuries, with junk bond spreads little changed.  The implied yield on 3-month December ’06 Eurodollars declined 5.5 basis points to 4.94.            Investment grade corporate issuance surged to $23 billion.  Issuers included SBC Communications $2.5 billion, Comcast $2.25 billion, Wyeth $1.5 billion, Washington Mutual $1.5 billion, First Tennessee Bank $1.25 billion, Simon Property $1.1 billion, Branch Banking & Trust $750 million, Zions Bancorp $600 million, ERAC Finance $625 million, FPL Group $500 million, Oneok $400 million, Allstate $350 million, Plum Creek Timber $300 million, Baxter International $250 million, Southern Co. $250 million, Ohio Power $200 million and Phoenix Cos $150 million.  Junk bond fund outflows rose slightly to $138 million (from AMG).  Issuers included Crown Americas $1.1 billion, Tesoro $900 million, Unumprovident $400 million, Vitamin Shoppe $165 million and Tunica-Biloxi $150 million. Convert issues included Maverick Tube $220 million. Foreign dollar debt issuers included Brazil $2.1 billion, KFW $2.0 billion, Rentenbank $1.0 billion, Canada Mortgage & Housing $750 million, ICICI Bank Singapore $500 million, Export-Import Bank of Korea $500 million, Colombia $400 million, Korea East-West Power $300 million, Diageo $250 million, Controladora $200 million, and Cablemas $175 million. Japanese 10-year JGB yields declined 4 basis points this week to 1.565%.  Emerging debt and equity markets were mixed.  Brazil’s benchmark dollar bond yields fell 11 basis points to 7.63%.  Brazil’s Bovespa equity index declined 1.2% (up 16.5% y-t-d).  The Mexican Bolsa gained 1.5% (up 24.9% y-t-d).  Mexican govt. yields sank 19 basis points to 5.60%.  Russian 10-year dollar Eurobond yields dipped 2 basis points to 6.49%.  The Russian RTS equity index was about unchanged (up 58% y-t-d).  Freddie Mac posted 30-year fixed mortgage rates rose 5 basis points to 6.36%. Rates were up 65 basis points in nine weeks to the highest level since September 2003, and were up 60 basis points from one year ago.  Fifteen-year fixed mortgage rates increased 4 basis points to 5.89% and were up 73 basis points in a year.  One-year adjustable rates added 3 basis points to 5.12.  One-year ARM rates were up 64 basis points in seven weeks and 96 basis points from one year ago.  The Mortgage Bankers Association Purchase Applications Index jumped 6.4% last week.  Purchase Applications were down 3.3% from one year ago, while dollar volume was up 4.5%.   Refi applications increased 3.4% during the week.  The average new Purchase mortgage was little changed at $242,600, while the average ARM declined to $363,900. The percentage of ARMs increased to 31.6% of total applications.    Broad money supply (M3) dipped $1.4 billion (week of October 31) to $10.075 Trillion.  Over the past 24 weeks, M3 has surged $450.1 billion, or 10.1% annualized.  Year-to-date, M3 has expanded at a 7.4% rate, with M3-less Money Funds expanding at an 8.2% pace.  For the week, Currency added $0.3 billion.  Demand & Checkable Deposits gained $7.0 billion.  Savings Deposits fell $15.5 billion. Small Denominated Deposits rose $2.2 billion.  Retail Money Fund deposits increased $2.6 billion, and Institutional Money Fund deposits added $0.9 billion.  Large Denominated Deposits gained $2.3 billion.  Year-to-date, Large Deposits are up $265.5 billion, or 29.1% annualized.  For the week, Repurchase Agreements declined $7.7 billion, while Eurodollar deposits rose $6.5 billion.      November 10 – Bloomberg (Vincent Del Giudice):  “The Federal Reserve announced today it will discontinue reporting data on the broadest measure of the money supply, M3, effective March 23, 2006.”         No Bank Credit data this week due to the holiday. Total Commercial Paper surged $19.3 billion last week to a record $1.661 Trillion.  Total CP has expanded $247.5 billion y-t-d, a rate of 20.2% (up 21.4% over the past 52 weeks).  Financial CP jumped $14.6 billion last week to $1.496 Trillion, with a y-t-d gain of $211.7 billion, or 19.0% annualized (up 21.3% from a year earlier).  Non-financial CP increased $4.7 billion to $165.3 billion (up 31.9% ann. y-t-d and 22.5% over 52 wks). ABS issuance slowed to $11 billion (from JPMorgan).  Year-to-date issuance of $661 billion is 18% ahead of comparable 2004.  Home Equity Loan ABS issuance of $429 billion is 19% above comparable 2004. Fed Foreign Holdings of Treasury, Agency Debt was about unchanged at $1.478 Trillion for the week ended November 9.  “Custody” holdings are up $142 billion y-t-d, or 12.3% annualized (up $171.9bn, or 13.2%, over 52 weeks).  Federal Reserve Credit declined $2.6 billion to $799.3 billion.  Fed Credit has expanded 1.3% annualized y-t-d (up $24.6bn, or 3.2%, over 52 weeks).  International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – surpassed $4 Trillion for the first time.  Reserve assets were up $579 billion, or 16.9%, over the past 12 months to $4.06 Trillion.  Brazil’s reserve assets were up 28% over the past year to $60.08 billion. Currency Watch: The dollar index rose less than 1%.  On the upside, the Chilean peso jumped 2.7%, the Brazilian real 2.3%, and the Philippines peso 1.3%.  On the downside, the Iceland krona fell 2.4%, the Uruguay peso 1.6%, the Hungarian forint 1.4%, and the Polish zloty 1.4%.    Commodities Watch: November 9 – Bloomberg (Danielle Rossingh):  “Platinum surpassed $950 an ounce for the first time since 1980 on speculation that European automakers’ need for the metal in pollution-control devices and jewelry demand will surge...  Demand for the metal, which is also used in computer screens, is increasing in countries such as China as the fastest growth of any major economy boosts wealth and demand for consumer products.” December crude oil fell $3.05 to $57.53.  And while December Unleaded Gasoline declined 8%, December Natural Gas rose 3%.  Copper traded to another record high.  For the week, the CRB index declined 1%, reducing y-t-d gains of 11.2%.  The Goldman Sachs Commodities index dipped 0.9%, with 2005 falling to 34.7%.  China Watch: November 10 – Market News International:  “China’s exports for October alone rose 9.7%  year-on-year to $68.09 bln and imports were up 23.4% at $56.08 bln… Exports for the first 10 months of this year rose 31.1% to $614.49  bln and imports were up 16.7% at $534.12 bln for the 10-month period.” November 11 – Bloomberg (Philip Lagerkranser and Yanping Li):  “China’s money supply expanded in October at the fastest pace in more than a year, exceeding the official 15 percent target for a fifth straight month. M2, which includes cash and all deposits, grew 18 percent from a year earlier to a record 28.8 trillion yuan ($3.6 trillion)…” November 9 – Market News International:  “China’s central bank is likely to allow asset-backed commercial paper to trade in the interbank market as early as the end of this year, offering local companies better access to debt financing, the China Business News reported.” Asia Boom Watch: November 7 – Bloomberg (Theresa Tang):  “Taiwan’s exports rose to a record in October as a weaker currency made the island’s semiconductors, cell phones and laptop computers cheaper for foreign buyers. Shipments rose a more-than-expected 16.6 percent to $17.9 billion from a year earlier, after gaining 8.5 percent in September…” November 10 – Bloomberg (Young-Sam Cho and Seyoon Kim):  “South Korea’s jobless rate declined from a four-year high in October, reinforcing expectations a recovery is taking hold in Asia’s third-largest economy. The seasonally adjusted unemployment rate fell to 3.9 percent from 4 percent in September…” November 8 – Bloomberg (Stephanie Phang):  “Malaysia’s industrial output expanded at the fastest pace in six months in September… Production at factories, utilities and mines rose 4.9 percent from a year earlier…” November 11 – Bloomberg (Patricia Kuo):  “Las Vegas Sands Corp., owner of the Venetian casino in Las Vegas, plans to borrow more than $2 billion to build a new resort in Macau...  Las Vegas Sands said in August it may spend $2.75 billion to build a Venetian casino and develop three hotels in a 200-acre area known as the Cotai Strip in Macau, which may overtake Las Vegas this year as the world’s largest gambling center by revenue.” Unbalanced Global Economy Watch: November 9 – Bloomberg (Brian Swint and John Fraher):  “European Central Bank Council member Axel Weber said that it has become more likely that inflation will accelerate in the 12 countries sharing the euro. ‘The risks to price stability have increased notably in recent weeks,’ Weber, who is also President of the Bundesbank, said… ‘We have a very abundant supply of liquidity, which signals very strong inflation risks over the medium and long term.’” November 7 – Bloomberg (Ben Sills and John Fraher):  “European Central Bank council member Nicholas Garganas said money supply growth is a ‘serious risk’ to inflation and may tip the bank toward its first increase in interest rates in five years. ‘There is no question that the recent acceleration of M3 growth poses some serious risks to long-term inflation,’ said Garganas… Should the ECB see ‘any indication that the risks to inflation are likely to materialize, we will act.”’ November 9 – Bloomberg (Sam Fleming):  “U.K. consumer confidence fell to the lowest in at least 18 months in October as economic growth faltered and unemployment rose, a Nationwide Building Society survey showed.” November 10 – Bloomberg (Bradley Cook):  “Russia’s budget surplus soared to 1.42 trillion rubles ($49.3 billion) in the first 10 months of the year on higher-than-expected prices for oil, Interfax reported… The surplus is equal to 8.2 percent of gross domestic product…” November 8 – Bloomberg (Ben Holland):  “Turkey’s industrial production leaped a larger-than-expected 9.3 percent in September from the same period last year, helped by an increase in exports. Output was expected to increase by 5 percent…” November 10 – Bloomberg (Tracy Withers):  “New Zealand’s jobless rate unexpectedly fell to a record in the third quarter as companies hired the most full-time workers in five years, suggesting wages will rise and prompt the central bank to raise interest rates. The jobless rate fell to 3.4 percent from 3.6 percent in the second quarter…” Latin America Watch: November 11 – Bloomberg (Andrea Jaramillo and Helen Murphy):  “Colombia’s economy will expand this year between 4.5 percent and 4.7 percent, above the previous target, said central bank chief Jose Dario Uribe. ‘We expect similar growth levels in 2006,’ Uribe said…” Bubble Economy Watch: November 7 – Bloomberg (Patrick Cole and Brian K. Sullivan):  “The compensation of recent business school graduates from Harvard, Dartmouth and Stanford rose at least 9.5 percent from a year earlier, fueled by increased hiring at investment banks and consulting firms. The average compensation of June graduates of Harvard Business School’s Master of Business Administration program increased 11 percent to $174,580, spokesman Jim Aisner said. For MBAs from Stanford University’s Graduate School of Business in California, the average totaled $149,913, up 9.5 percent. Graduates of Dartmouth College’s Tuck School of Business received $150,000, a jump of more than 15 percent. ‘We got all the way back to bubble-level’ salaries last year, Dean Paul Danos of Tuck…said, referring to the rapid expansion of Internet companies in the late 1990s. ‘I was surprised at how fast that happened.’” November 9 – Bloomberg (Gregory Cresci):  “After paying more than $12 billion in fines and settlements over four years, Wall Street firms including Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. are headed for their biggest profits since 2000. The U.S. securities industry will earn at least $24 billion before taxes in 2005, said Frank Fernandez, chief economist at the Securities Industry Association.” November 8 – The Wall Street Journal (Andy Pasztor):  “Global demand for new business jets, which has been gaining momentum in the past two years, is projected to reach a record of about 850 aircraft deliveries in 2006, according to the latest projections by parts supplier Honeywell International Inc. In its latest annual business-aviation forecast…the company said world-wide deliveries of business jets are expected to accelerate next year and into 2007…the previous record was 769 aircraft in 2001. For this year, the report forecasts deliveries of about 745 business jets, or nearly 30% higher than 2004. Through 2015, it forecasts deliveries of about 9,900 business aircraft, generating industrywide sales of more than $156 billion.” November 8 – Dow Jones (John Connor):  “Defense spending by the U.S. government  rose by 7.7% in fiscal year 2005 on an adjusted basis after averaging 14% growth in the preceding three years, the Congressional Budget Office said.  CBO said the increase in 2005 was concentrated in the Army, which is heavily involved in operations in Iraq and Afghanistan, up by 17%, while spending by the Navy and Air Force each rose by about 5%.  ‘Military spending has risen by almost 70% since 2000, growing from 2.9% of GDP in that year to 3.9% in 2005,’ the budget office said…” Speculator Watch: November 8 – Bloomberg (John Dooley):  “The growing use of credit derivatives by hedge funds is adding risks to global credit markets at a time when bankruptcies at companies such as Delphi Corp. have raised concerns about declines in credit quality, according to Fitch Ratings. ‘Hedge funds are punching above their weight,’ said Roger Merritt, senior credit officer at the ratings company… The use of leverage and active trading strategies has increased their ability to influence markets and may change the behavior of credit markets during the next downturn.’” “Project Energy” Watch: November 7 – Bloomberg (Stephen Voss):  “Oil consumers will be more reliant on Middle Eastern supplies in coming years and vulnerable to higher prices and slower economic growth should investments be delayed, the International Energy Agency said. Some $17 trillion in spending is expected through 2030, including $3 trillion in each of the oil and gas industries and more than $10 trillion in power plants and transmission lines, the Paris-based IEA, an adviser to 26 consuming nations, said today.” November 7 – Bloomberg (Bill Murray):  “Oil companies and governments worldwide will need to spend $487 billion during the next 25 years to keep pace with demand for products such as gasoline, diesel and jet fuel, the International Energy Agency said. Global refining capacity needs to increase by 42 percent to 118 million barrels a day by 2030, the IEA, an adviser to 26 nations, said in its World Energy Outlook 2005 report…” November 8 – China Knowledge:  “China plans to spend about US$180 billion over the next 15 years to increase its renewable energy from the current 7% to 15% of the total energy generated, said Zhang Guo Bao, Vice Minister of the National Development and Reform Commission…  Besides renewable energy like solar, wind and hydro power, China also plans to develop biomass energy.”  (Pollyanna) Poole on the Current Account: Late-cycle booms are inherently exulting, precarious affairs.  Resiliency prevails throughout.  Seductively, the boom-time economy comes to be viewed as irrepressible, while abundant marketplace liquidity waxes only more intoxicating.  Increasingly specious analysis evolves to justify the Credit-induced prosperity that a receptive audience is thirsty to indulge.  And, over time, issues that were of real concern no longer seem to matter much in the marketplace or elsewhere.  After all, how many years can we expect the ballooning U.S. Current Account Deficit to be a cause of serious concern?  Policymakers similarly change their tune.  The foreboders are discredited and silenced, creating a void the opportunistic Pollyannas cordially utilize.  In the end, investors, speculators and policymakers (not to mention bankers, the business community and consumers) unite to extrapolate the unsustainable. We reside in the salad days of global liquidity and speculative excess.  Global financial markets are enjoying a backdrop of abundant liquidity like few periods (if any) in history, emboldening market participants and bullish analysts alike.  At the same time, the dollar is enjoying its strongest rally in several years, running roughshod over the dollar bears and hedgers.  The markets could not have cared less about yesterday’s record $66 billion September Trade Deficit.  And why should they?  Amazingly, the Federal Reserve is positioning itself to approach the Current Account Deficit Blow-off carefree and fancy-free.  Bill Poole, President of the Federal Reserve Bank of St. Louis, has moved quickly to fall right in line with the Bernanke Fed’s sanguine view. Excerpts from Dr. Poole’s Wednesday evening speech: “How dangerous is the U.S. current account deficit?” The first thing to note is that many of the economic forces driving capital flows are very long term. Portfolio reallocations occur as home bias declines, but over years rather than quarters. Firms build operations in other countries based on plans extending many years in the future. Demographic developments unfold over decades. What may appear to be an imbalance from a short-run perspective may make perfect sense over a long-term horizon. “To the extent that adjustment of the current account will involve changes in the foreign exchange value of the dollar, it is quite likely that such changes will take place gradually over time in orderly markets. There is no inherent reason that such changes would lead to a financial market crisis; as a stable, diversified and growing economy, the United States is not likely to suffer from a sudden lack of confidence by investors. Of course, sustained confidence does depend on sound economic policies, as I have already emphasized.  It is sometimes said that the United States has become a “net debtor” nation, and that this situation increases the risk that currency depreciation might lead to financial crisis…” “The word “debtor” is extremely misleading in this context, for the U.S. assets owned by foreigners include equities and physical capital located in the United States, in addition to bonds issued by U.S. entities. Moreover, the part of the U.S. international financial position that is debt, by which I mean bonds and other fixed claims such as bank loans, is predominantly denominated in dollars…” “…We should consider the possibility that aggregate patterns of international trade flows may be the by-product of a process through which financial resources are seeking their most efficient allocations in a worldwide capital market. That is, instead of thinking that capital flows are financing the current account deficit, it may well be that the trade deficit is driven by—is financing, so to speak—capital flows determined by investors seeking the best combination of risk and return in the international capital market.” “The international capital markets view suggests that the United States is more like those countries that have experienced high levels of debt without obvious ill effects than those that have suffered crises. Moreover, the U.S. case is unique in a number of respects. The central role of U.S. financial markets—and of the dollar—in the world economy suggests that capital account surpluses, and therefore current account deficits, are being driven primarily by foreign demand for U.S. assets rather than by any structural imbalance in the U.S. economy itself.” “The international financial markets view of U.S. international capital account determination that I have described today highlights the dynamic role of international capital adjustments as investors exploit the opportunities of globalized financial markets. Because the technological progress and capital-market liberalizations that have driven this process have evolved over time, the process has been protracted…” “If the capital markets view is correct—and I obviously think it is—the forces driving the U.S. capital account represent a persistent, but ultimately temporary, process that might result in a higher negative level of net claims without necessarily posing any threat to the long-run sustainability of the U.S. current account. Nor will the transition to a sustainable long-run path necessarily require wrenching adjustments in domestic or international markets or in exchange rates. "We can all benefit from our good fortune in having access to increasingly safe, liquid and transparent financial markets. The United States has created for itself a comparative advantage in capital markets, and we should not be surprised that investors all over the world come to buy the product.”  St. Louis Federal Reserve Bank President Poole’s analysis is deserving of attention and contemplation.  It is my view that the U.S. Current Account Deficit is today the most problematic imbalance in a world of gross imbalances and that it is poised to be the most pressing and intractable economic issue over the coming months and years.  It is also my view that Dr. Poole has surpassed even Professor Bernanke as the framer of the most specious and dangerous analysis to originate from our Federal Reserve System. Dr. Poole subscribes to his own “international capital markets view” – “international asset markets play a central role. Capital flows, determined by the motivations of foreign and domestic investors, are a driving force. We should think of capital flows as the equilibrium outcome of investors worldwide seeking to acquire portfolios that balance risk and return through diversification.” I have many problems with his framework. It is reasonable to approach global imbalances from an “international markets view.”  Importantly, however, such an analytical framework must be fashioned from the analysis of trade flows as well as from the sources, uses and the nature of global finance.  The focal point must be, first and foremost, directed at individual domestic Credit systems and the sources of financial claims creation, the types of instruments created, the nature of intermediation and, importantly, the uses of this added purchasing power.  It is, after all, these financial claims that finance trade imbalances. If global trade were of the balanced – goods for goods - variety, the scope of the global pool of finance would be a fraction of what it is today.  In the case of the U.S., several consecutive years of double-digit mortgage debt growth is the conspicuous driving source of spending excess.  Credit induced expenditures have driven mounting trade deficits, the ballooning Current Account Deficit, and the resulting bulge in global dollar liquidity.  To analyze and construct an analytical viewpoint for the Current Account while disregarding the nature of U.S. Credit creation and spending patterns is a terribly flawed approach.  Not only does Dr. Poole fail to link “capital flows” with U.S. asset-based lending excesses, he thinks in the academic terms of an “equilibrium outcome of investors.”  Yet the current market environment has all the characteristics of a problematic market “disequilibrium.” And to what extent investors (as opposed to speculators and central banks) are the driving force is very much in question.  It is amazing to me that the Fed has failed to do an exhaustive investigation and study of the actual holders of all the dollar financial claims held by foreign sources.  Dr. Poole conjectures that “the current account adjustment will be fairly slow and orderly, and that it may not begin for quite some time.” Real world analysis would rather forcefully argue the contrary.  A key dynamic of contemporary finance over the past decade or so has been the expanding and destabilizing role of “hot money” speculative flows.  And with the global pool of speculative finance having so ballooned over the past few years (along with derivatives markets!), why should we not now expect especially abrupt and disorderly marketplace adjustments going forward? From Poole:  “The recent depreciation of the dollar can be seen as part of the normal adjustment process of the economy and markets have not shown any signs of becoming disorderly.”  Yet the reality of the situation is all together different:  There is surely nothing “normal” when it comes to the dollar’s significant decline failing to initiate an adjustment process.  This is explained by the fact that the falling dollar had absolutely no restraining impact on U.S. Credit Availability or marketplace liquidity.  And it is true that the markets and economy have thus far demonstrated a proclivity of avoiding disorderly behavior, but this comes as no real surprise as long as excesses run interrupted.  That they have run uninterrupted owes a great deal to the massive global central banker accumulation of dollar financial claims.  For me, it is difficult to analytically reconcile the unprecedented ballooning of official dollar holdings over the past few years with any notion of a marketplace “equilibrium outcome of investors.” From Poole:  “The globalization of financial markets—spurred by technological advances and liberalization of capital flow restrictions worldwide—has created entirely new investment opportunities for investors in both the United States and abroad. These new opportunities have undoubtedly given rise to a re-balancing of portfolios, and there are reasons to believe that this process might be associated with a net export of claims on U.S. assets, yielding a current account deficit.” If he is implying that portfolio “re-balancing” is responsible for greater flows to the U.S., might I ask who has been on the losing end?  Yet there is no denying the momentous effects associated with the “globalization of financial markets.” In the same vein, no analysis of international flows or our Current Account Deficit is complete without delving into the complex influence imparted by contemporary Wall Street finance.  The ballooning U.S. Financial Sphere has capitalized tremendously both from globalization and the proliferation of securitizations, derivatives, and securities market-based Credit instruments.  We obviously hold a tremendous global competitive advantage in the process of transforming risky loans into perceived safe financial claims denominated in the world’s reserve currency (as well as trading them!).  And, clearly, this capacity to create endless quantities of readily tradable top-rated securities has played a momentous role in our capacity to finance previously unimaginable deficits.  Never in the history of finance has a Credit system so luxuriated in a “Moneyness of Credit” capacity for transforming endless risky private sector debts into instruments perceived throughout the international marketplace as both safe and highly liquid.  Historically, there was a tight link between the “twin” expanding government deficit and a mounting Current Account Deficit.  International accumulation of Treasuries would accommodate U.S. trade deficits until heightened risk aversion and liquidation would then push U.S. market rates higher (and restrain the Credit system and spending generally).  These dynamics no longer apply.  Today, Treasuries, agencies, MBS, ABS and "structured finance", along with Wall Street derivative hedging strategies, combine to provide limitless quantities of perceived top-quality (“money”-like) Credit instruments.  To this point, Wall Street has created the coveted instruments and trading strategies that have avoided general global dollar security revulsion - and with it avoided any financial sector restraint whatsoever. I would be exceedingly careful in extrapolating the extraordinary success of Wall Street finance.  There is overwhelming evidence supporting the Bubble thesis.  And it’s one thing enjoying a competitive advantage in the production of goods or the development of new technologies, but it is quite another when one’s advantage is transforming the perceived risk profile of pools of (increasingly risky) loans.  The latter nurtures Credit, speculation and marketplace liquidity excesses.  The latter cultivates marketplace distortions that reinforce excesses, while circumventing market adjustment and self-correction.  The latter breeds spectacular asset Bubbles, booms and busts. I would also be careful when forecasting a “slow and orderly” current account adjustment and the unlikelihood of a “hard landing.”  That the system has demonstrated such a propensity for excess and adjustment avoidance portends quite the opposite.  And it is the character of Bubble processes that the system becomes only increasingly vulnerable to any slowdown in Credit growth, moderation of liquidity, rise in risk aversion and/or reversal in asset prices.  Indeed, the defining feature of this incredible subterfuge of Wall Street finance is that it foments unrecognized financial and economic fragility.  Our currency’s reserve status does afford us the opportunity to borrow in dollars, but this does not mitigate the risk associated with the massive and unprecedented foreign accumulation of perceived safe and liquid dollar claims.  And it is the widening gulf between perceptions and reality that ensures future tumult, revulsion and dislocation.  Moreover, the reality of the situation is that monetary - and not economic - forces are driving this Bubble, further nullifying the likelihood of a prolonged adjustment period and sanguine outcome. The rallying dollar, sinking crude, and surging financial stocks do today create a rather inspiring backdrop for the optimists and Pollyannas.   But I caution that we do live in an age of 8,000 hedge funds, unprecedented Wall Street and global proprietary trading, and unfathomable amounts of derivatives and sophisticated trading strategies.  Markets will fluctuate and the big trades – whether long or short – will have a tendency to on occasion catch the crowd especially poorly positioned - and soon positioned poorly in any number of trades concurrently.  And when the “dollar system fragility” trade is being unwound it does give impetus to further Bubble excess. A lot of things are uncertain these days, but as long as the world accommodates $800 billion U.S. Current Account Deficits – and the Fed is more than ok with it - it’s a safe bet that there will be heightened global inflationary pressures, increasingly unwieldy financial flows, and only greater Monetary Disorder.  And, I might add, the word “debtor” (nation) is not the least bit misleading.