Tuesday, September 9, 2014

02/10/2006 Blow-off Analysis *

Global markets were unsettled, and U.S. equities were mixed. For the week, the Dow gained 1.2%, and the S&P500 added 0.2%. The Transports rose 1.4%, and the Utilities gained 0.3%. The Morgan Stanley Cyclical index increased 0.4%, and the Morgan Stanley Consumer index gained 0.7%. The broader market gave back a portion of its recent out-performance. For the week, the small cap Russell 2000 fell 1.0% (up 6.5% y-d-t), and the S&P400 Mid-cap index lost 0.9% (up 3.7% y-t-d). The NASDAQ100 was unchanged, while the Morgan Stanley High Tech index gained 1%. The Semiconductors rose 2% (up 12.7% y-t-d). The Street.com Internet Index added 1.5%, and the NASDAQ Telecommunications index jumped 3.7% (up 10.6% y-t-d). The Biotechs declined 1%. Financial stocks were mixed. The Broker/Dealers declined 0.6%, while the Banks gained 1.4%. With bullion declining $17.9, the HUI gold index dropped 7%.

Fed has more work to do… For the week, two-year Treasury yields jumped 9 bps to 4.68% (3-wk gain of 53 bps). Five-year government yields rose 7 bps to 4.58%, and bellwether 10-year Treasury yields gained 6 bps to 4.58%. With the successful return of the 30-year Treasury auction, long-bond yields declined 7.5 bps to 4.55%. The spread between 2 and 10-year yields inverted three additional bps to 10. Benchmark Fannie Mae MBS yields rose 5 bps to 5.85%, this week performing generally in line with Treasuries. The spread (to the new 10-year Treasury) on Fannie’s 4 5/8% 2014 note increased to 35, and the spread on Freddie’s 5% 2014 note increased to 36. The 10-year dollar swap spread (to the new 10-year) widened to 53.5. Investment-grade and junk spreads were generally little changed this week. The implied yield on 3-month December ’06 Eurodollars jumped 11 bps to 5.065%.        

Corporate debt issuance increased to $16 billion (from Bloomberg). For the week, investment grade issuers included Verizon $3.5 billion, Morgan Stanley $2.25 billion, and Citigroup $2.0 billion.

Junk issuers included Linens ‘N Things $650 million, Drummond Co. $400 million, Equinox $290 million and Windsor Financing $220 million.

Convertible issuers included Pier 1 Imports $150 million.

Foreign dollar debt issuers included National Australia Bank $2.25 billion, European Investment Bank $2.0 billion, Rentenbank $1.25 billion, Korea Export-Import Bank $600 million, MMG $300 million, Fondo $250 million, Stratos Global $150 million, Canadian Satellite Radio $100 million, and Centrais Electric $100 million.

Japanese 10-year JGB yields rose 2 bps this week to 1.60%, as the Nikkei 225 index fell 2.4% (up 0.9% y-t-d).  Emerging markets were mixed. Brazil’s benchmark dollar bond yields sank 28 bps to 6.25%. Brazil’s Bovespa equity index dipped only 0.8% (up 10.5% y-t-d). The Mexican Bolsa dropped 4%, with y-t-d gains falling to 2.8%. Mexican 10-year govt. yields added 2 bps to 5.47%. Russian 10-year dollar Eurobond yields gained 2 bps to 6.53%.  The Russian RTS index rose 4%, increasing 2006 gains to 21% (one-yr gain of 120%).

Freddie Mac posted 30-year fixed mortgage rates added one basis point to 6.24% (up 67 bps in a year) to a 7-week high. Fifteen-year fixed mortgage rates added 2 bps to 5.83% (up 73 bps in a year). One-year adjustable rates increased one basis point to 5.34%, an increase of 123 basis points from one year ago. The Mortgage Bankers Association Purchase Applications Index declined 2.4% last week. Purchase Applications were down 5.3% from one year ago, with dollar volume down 1.3%.   Refi applications were up 0.2%. The average new Purchase mortgage increased to $232,600, while the average ARM rose to $338,800.

Broad money supply (M3) dipped $1.8 billion (week of Jan. 30) to $10.272 Trillion. Over the past 37 weeks, M3 has inflated $646 billion, or 9.4% annualized. Over 52 weeks, M3 has expanded 8.8%, with M3-less Money Funds up 8.2%. For the week, Currency gained $1.5 billion. Demand & Checkable Deposits jumped $18.7 billion. Savings Deposits dropped $43.6 billion, while Small Denominated Deposits gained $4.0 billion. Retail Money Fund deposits added $1.3 billion, while Institutional Money Fund deposits dipped $0.9 billion. Large Denominated Deposits gained $14.2 billion. Over the past 52 weeks, Large Deposits were up $279 billion, or 24.7% annualized. For the week, Repurchase Agreements slipped $0.4 billion. Eurodollar deposits rose $3.4 billion.    

Bank Credit increased $6.6 billion last week (4-wk gain of $96bn) to a record $7.584 Trillion. Over the past 52 weeks, Bank Credit has inflated $679 billion, or 9.8%. For the week, Securities Credit slipped $0.6 billion. Loans & Leases were up 12.0% over the past 52 weeks, with Commercial & Industrial (C&I) Loans up 15.3%. For the week, C&I loans added $1.8 billion, and Real Estate loans increased $5.0 billion. Real Estate loans have expanded at a 10.6% pace over the past 20 weeks and 14.4% during the past 52 weeks. For the week, Consumer loans declined $4.6 billion, and Securities loans fell $4.1 billion. Other loans rose $9.1 billion.  

Total Commercial Paper declined $7.9 billion last week to $1.689 Trillion. Total CP is up $39.9 billion y-t-d (6wks), while having expanded $265 billion over the past 52 weeks, or 18.6%. Last week, Financial Sector CP borrowings fell $7.6 billion to $1.550 Trillion, with a 52-week gain of $267 billion, or 20.8%. Non-financial CP slipped $0.3 billion to $138.7 billion, with a 52-week decline of 1.3%.

Asset-backed securities (ABS) issuance jumped to $22 billion last week, including $15 billion of Home Equity ABS (from JPMorgan).

Fed Foreign Holdings of Treasury, Agency Debt rose $4.0 billion to a record $1.544 Trillion for the week ended February 8th. “Custody” holdings were up 15.7% annualized during the past 20 weeks and $204 billion (15.2%) over the past 52 weeks. Federal Reserve Credit declined $5.2 billion to $809 billion. Fed Credit has expanded 2.8% annualized over the past 20 weeks and 4.2% over the past 52 weeks.

International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $457 billion, or 12.3%, over the past 12 months to a record $4.166 Trillion.  Turkey’s reserves were up 45% over the past year to $50.5 billion.

Currency Watch:

The dollar index gained 0.8% for the week. On the upside, the Brazilian real gained 2.2%, the Romanian leu 1.0%, the Japanese yen 0.9%, and the Philippines peso 0.8%. On the downside, the Norwegian krone fell 1.65%, the Australian dollar 1.5%, the New Zealand dollar 1.4%, and the Swedish krona 1.3%.  

Commodities Watch:

This week saw March crude oil fall $3.53 to $61.84. March Unleaded Gasoline sank 13%, and March Natural Gas dropped 15%. For the week, the CRB index dropped 4.1%, reducing y-t-d performance to about unchanged. The Goldman Sachs Commodities index sank 4.9% this week, with a y-t-d decline of 3.0%.

China Watch:

February 10 – Bloomberg (Carlos Torres): “The U.S. trade deficit with China ballooned to $201.6 billion last year, setting a single-country record for a third consecutive year… The gap jumped 25 percent from last year’s $161.9 billion… China surpassed Japan as the country with the biggest U.S. trade imbalance in 2000.”

February 6 – Bloomberg (Vicki Kwong): “Shanghai International Port Co., which operates China’s busiest port, handled a record number of containers in January as rising trade increased shipments. Cargo volume last month was 1.63 million standard 20-foot boxes, an increase of 15 percent from a year earlier…”

February 10 – Bloomberg (Rob Delaney): “China’s exports of technology products such as computers and semiconductors jumped by a third last month, the commerce ministry said. Technology exports rose 33 percent from a year earlier to $17.6 billion…”

February 6 – MarketNewsInt: “China’s retail sales over the week-long New Year holiday rose 15.5% over last year to an estimated 190 bln yuan ($23.6 bln), the Ministry of Commerce said. Sales over the holiday, which began this year on 29 January and ended 4 February, compared with last year’s 16% growth.”

February 9 – XFN: “China’s passenger car sales for January rose 70% year-on-year to more than 330,000 units, the Shanghai-based Oriental Morning Post reported.”

February 6 – Bloomberg (Yanping Li): “China should cut its foreign-exchange reserves by more than half to ease pressure on the yuan to appreciate and reduce holding costs, the Financial News said, citing an official at the Bank of China. The government ideally should hold $300 billion to $400 billion in its foreign-exchange reserves, compared with $818.8 billion as of the end of last year, the central bank-affiliated newspaper reported, citing Wang Yuanlong, a doctor of economics and a board member of Bank of China’s Australian operation.”

Asia Boom Watch:

February 9 – Financial Times (Stephen Schurr): “Hedge funds have become a significant force in Asian equity markets, accounting for 30 per cent of all commissions generated by brokers in the region during the past year, according to a US study. The survey indicates that the $1,200bn hedge-fund industry, which has become influential in mature European and US markets, is now strengthening in Asia. Commissions from the funds in Asian stock trading have climbed 20 per cent a year in the past two years, the survey, by Greenwich Associates…found. Total equity commissions grew to $900m in the 12 months to the end of the third quarter of 2005.”

February 10 – Bloomberg (Lily Nonomiya): “Japan’s machinery orders posted their longest run of gains in more than two years, adding to signs that corporate investment will sustain growth in the world’s second-largest economy… Private machinery orders, excluding shipping and utilities, rose a seasonally adjusted 6.8 percent in December, the third straight month of gains…”

February 9 – Bloomberg (John Brinsley): “Japan’s households in January were more confident than they have been for the past 15 years as job prospects improve and wages rise. Consumer confidence among households with two or more people rose to 49.5 in January, the highest since June 1990, from 46.5 in December…”

February 8 – Bloomberg (Lily Nonomiya): “Japan’s bank lending stopped falling for the first time in eight years in January, adding to signs the deflation that's been plaguing the world’s second-largest economy is coming to an end. Outstanding loans were unchanged from the year earlier, the first time the value hasn’t dropped since December 1997…”

February 7 – Bloomberg (Cherian Thomas): “India’s economic growth may accelerate to 8.1 percent in the year ending March 31 on improved harvests and record gains in manufacturing and financial services. The government statistics bureau’s prediction…is higher than the 7.5 percent expansion a year earlier and the central bank’s January forecast…”

February 10 – Bloomberg (Jun Ebias): “Philippine exports rose in December at the fastest pace in more than a year as companies shipped more electronics to overseas customers. Overseas sales rose 16.8 percent from a year earlier to $3.83 billion…”

Unbalanced Global Economy Watch:

February 10 – Bloomberg (Greg Quinn): “Canada’s trade surplus unexpectedly widened to the second largest ever in December, reaching C$7.69 billion ($6.69 billion) on higher exports of natural gas and crude oil…”

February 8 – Bloomberg (Brian Swint): “German exports rose in December to lift last year’s foreign sales to a record, led by demand from Asia… In 2005, exports rose 7.5 percent to a record 786 billion euros.”

February 7 – Bloomberg (Jacob Greber): “Switzerland’s unemployment rate stayed at the lowest in almost three years in January and the previous month’s figure was revised down as an accelerating economy prompted employers to hire more workers. The jobless rate stayed at 3.6 percent…”

February 9 – Bloomberg (Jacob Greber): “Swiss consumer confidence rose in January to the highest in more than four years, as a broadening economic expansion prompted companies to increase hiring.”

February 10 – Bloomberg (Halia Pavliva and Zoya Shilova): “Russia’s trade surplus widened to A preliminary $120 billion in 2005, the widest in more than a decade, the central bank said. The trade surplus rose 40 percent in 2005…”

February 9 – Bloomberg (Todd Prince): “Russia, the world’s second-largest oil producer, boosted its 2006 economic growth forecast as it revised upward its estimate for oil prices this year. The ministry increased its estimate to 6 percent from 5.8 percent…”

February 8 – Bloomberg (Mark Bentley): “Turkey’s industrial output rose 8.6 percent in December from the same month last year, above economists’ expectations, meaning that the government probably exceeded its 5 percent economic growth target for the year.”

Latin America Watch:

February 7 – Bloomberg (Romina Nicaretta): “Brazilian new vehicle registrations jumped 25 percent in January from a year earlier, the country’s automakers association said…”

February 7 – Bloomberg (Alex Kennedy): “Venezuelan vehicle sales soared 90 percent in January from the same year period a year earlier as increased government spending fueled consumer demand.”

Bubble Economy Watch:

February 8 – Bloomberg (Elizabeth Hester): “The busiest January for U.S. initial public offerings in six years may prompt more companies to take advantage of a rising stock market. Chipotle Mexican Grill Inc. and 13 other companies raised $2.16 billion last month… Ten more rolled out $1.28 billion of IPOs so far in February.”

February 9 – Bloomberg (Thom Weidlich): “New York law firms including Sullivan & Cromwell and Simpson Thacher & Bartlett raised base pay for salaried lawyers, or associates, by $20,000, the first increase in five years. Sullivan & Cromwell, the leading legal adviser to buyers and targets in global mergers and acquisitions, told its attorneys last week that salaries for first-year associates, an industry benchmark, will increase to $145,000.”

February 8 – Financial Times (Roger Bray): “Travellers to New York face sharp rises in hotel rates this year. The average price paid for a room in Manhattan is predicted to rise by 13 per cent – following an increase of 14.3 per cent recorded in the first nine months of 2005, which took the average room rate to $214. The forecast comes from Ernst & Young, which blames the increases on ‘a decrease in supply due to the popular trend of converting existing hotel properties into condominiums in return for higher yields’.”

February 6 – Bloomberg (Matthew Fletcher): “Royal Caribbean Cruises Ltd. commissioned the world's largest cruise ship, agreeing to pay a record 900 million euros ($1.1 billion) for a vessel that will carry 5,400 passengers. The ship, codenamed Project Genesis, will be almost as long as four football fields and 43 percent bigger than the next-largest cruise liner…. Project Genesis will be a ‘remarkable ship,’ whose ‘bold design, daring innovation and technological advancements’ will help win new customers and keep current ones…”

February 9 – American Banker (Patrick Rucker): “Bank lenders expect credit quality – across all asset classes, but especially in nontraditional mortgages – to hold steady or deteriorate this year, according to a survey the Federal Reserve Board released Wednesday. Yet the lenders also told the Fed they are continuing to ease terms on commercial real estate and commercial and industrial loans…”

“Project Energy” and Crude Liquidity Watch:

February 10 – Bloomberg (Harris Rubinroit): “Calpine Corp., the bankrupt power plant owner, will get $2 billion in debtor-in-possession financing including $600 million at a lower interest rate than initially proposed, said a person involved in the transaction….”

February 7 – Bloomberg (Steve Rothwell and Svenja O’Donnell): “For investors in Russia’s international bonds, oil washes all sins away. Russia’s leaders battered bondholders in 1998, when the nation defaulted on $40 billion of debt and prices of government securities fell 80 percent... Record oil prices boosted the economy by more than 6 percent for the past four years. Credit ratings are improving at the fastest pace ever and the benchmark stock index is at an all-time high. Foreigners will own a record $58.8 billion of Russian company bonds by year-end, more than double the amount held two years ago…”

February 7 – Bloomberg (James Cordahi): “Dubai’s economy may surge as much as 15 percent this year, spurred by expansion in manufacturing, construction and hospitality industries, the Gulf News said, citing the Dubai Chamber of Commerce and Industry. The Dubai government and Dubai-based businesses are developing or planning $100 billion of real estate and other projects in 2006…”

Federal Reserve Watch:

February 10 – Bloomberg (Brendan Murray and Matthew Benjamin): “Most of President George W. Bush’s nominees to the Federal Reserve have earned accolades from across the economic and political spectrums. And then there’s Kevin Warsh. Bush’s nomination of the 35-year-old White House aide – a lawyer by training who would become one of only two members of the Fed’s seven-member board of governors without a Ph.D. in economics -- has been greeted by criticism and bewilderment by some former Fed officials and economists. They point to his political connections and inexperience… ‘Kevin Warsh is not a good idea,’ said former Fed Vice Chairman Preston Martin… ‘If I were on the Senate Banking Committee…I would vote against him.’”

Mortgage Finance Bubble Watch:

Countrywide posted a weaker January, normally the slowest month of the year. At $32.6 billion, Total Fundings were the lowest since February and up only 15% from January 2005. The Total Pipeline of $57.4 billion was up 20% from the year ago period. Curiously, the percentage of ARMs increased to 52%, the highest ratio since August. Purchase Fundings were up 14% from January 2005 to $14.4 billion, and “non-purchase”/refi fundings were up 17% to $18.2 billion. Home Equity Fundings were up 27% from a year ago, while Subprime Fundings were 21% below. Bank Assets increased $3.0 billion during the month to $76.1 billion, up 76% y-o-y.

February 8 – Bloomberg (Chris Cooper): “Freddie Mac is becoming increasingly dependent for financing on Asian investors, who bought up to 60 percent of some new securities sold last year, as they move away from Treasuries. The higher yields on U.S. agency securities may make them attractive to overseas governments and private investors. Overseas holdings of agency debt surged 53 percent to a record last year, according to Federal Reserve figures. The region is ‘very important’ said the agency’s new treasurer Timothy Bitsberger… Bitsberger, the Treasury's former assistant secretary for financial markets, is in Tokyo to meet investors seeking to buy the agency’s notes and mortgage-backed securities.”

February 5 – The Wall Street Journal (James R. Hagerty): “As home prices soared in recent years, so did the percentage-based commissions charged by agents. Residential real-estate commissions in the U.S. totaled $61 billion in 2004, up 42% from 2000, estimates Real Trends, an industry publication. That’s bad news for people who buy or sell homes. But isn’t this trend at least making Realtors happy? Alas, no. The number of real-estate agents has grown even faster than total commissions. Membership in the National Association of Realtors, the dominant trade group, totals about 1.25 million, up 63% since 2000.”

Speculator Watch:

February 6 – Bloomberg (Sree Vidya Bhaktavatsalam): “Hedge funds returned an average 3.7 percent in January, the biggest monthly jump in more than five years, led by gains in emerging markets, and energy and technology stocks, according to Hedge Fund Research Inc.”

“Blow-off” Analysis:

I too frequently use the terminology “Blow-off” when discussing this extraordinary Credit Bubble environment. An email from a reader has provoked an attempt on my part to place a little meat on the “Blow-off” Analysis bone. To be sure, “Blow-offs” are a prominent aspect of my Macro Credit and Credit Bubble analytical frameworks, as well as a key feature of today’s market and economic backdrop.

It is tempting to simply exclaim, “We know it when we see it!” And, yes, “Blow-offs” are rather obvious in hindsight. One can explore market history and easily identify the manic behavior of stock market speculators such as what transpired in the U.S. during 1928/29, Japan in 1988/89, and global technology stocks in 1999/early-2000. To note a few in other markets, there was the spectacular precious metals run in 1979/80, the U.S. bond market in 1992/93, South East Asian financial markets in 1995/96, and 2004-to-present in U.S. housing markets. A shallow analysis of market “Blow-offs” would have us focus on end-of-cycle bouts of marketplace irrationality, where the full-throttle pursuit of perceived easy speculative gains comes at the expense of disregarding mounting risks. Market psychology is certainly a critical facet, but there is much more to these fascinating processes than simply The Crowd going nuts.

I have repeatedly declared that we are in the midst of historic “Blow-off” dynamics throughout U.S. and global Credit systems, and that these forces are behind myriad asset market and economic Bubbles. Well, first of all, it is critically important to appreciate that a major systemic “Blow-off” period, virtually by (my) definition, is a manifestation of deep-seated Monetary Disorder fostered by a confluence of factors. It is my view that financial historians have focused mostly on the (engrossing) irrationality and the “madness of crowd” aspects at the expense of more fruitful (but hopelessly plodding) analysis of underlying financing mechanisms.

When a “Blow-off” is in full bloom, The Crowd will never look in the mirror and appreciate that things are getting out of hand. At the same time, the curmudgeons will always be easily dismissed when fortunes are being made and finance is deluging those most aggressively profiting from “Blow-off” inflationary manifestations. “Blow-off” analysis is unconventional and has no hope of becoming mainstream. Let’s face it, there is no constituency for analyzing, identifying or dealing with “Blow-offs,” while the (increasingly) powerful interests will go to great lengths to rationalize and sustain them.

There will be little inclination to understand the typical proliferation of new types of Credit instruments, methods of Credit intermediation, and avenues for speculation; not with the propensity for bullish obsessions with New Paradigm and New Economy hyperbole. It will be the wonder of the real economy’s productivity and new technologies - and not evolving Credit system nuances and excesses - that receives distinction and glory. Nonetheless, a focus on Credit creation mechanisms, the nature of system-wide liquidity generation (“Monetary Processes”) and speculative dynamics provide a sound framework for analyzing and appreciating an atypical and risky environment destined to bamboozle the vast majority. Always, somewhere in the bowels of the Credit mechanism there are atypical developments fostering an extraordinary over-issuance of finance (“Credit Inflation”). But where, and what are its fragilities?

Fundamentally, “Blow-offs” arise inherently as a consequence of an extended period of overly abundant – and generally inexpensive – finance (“easy money”). End-of-cycle liquidity excess is as much A State of Mind as it is a State of the Credit System. They are about the powerful interplay of a broad consensus of bullish market perceptions and a well-oiled infrastructure for lending and financing speculation. There must be both wholesale Risk Embracement throughout the marketplace and a bountiful supply of finance made available through various Financial Sphere avenues.

Only after years of economic expansion and asset price inflation does the financial sector infrastructure evolve to the point of having the required capacity for a substantial step-up in issuance. For example, it took years of moderate expansion before the GSE’s had garnered the infrastructure and market confidence necessary for the commencement of the spectacular agency debt issuance boom in the late '90s. A period of gradual success was necessary before the more recent ABS issuance boom, as well as the current explosion of “private-label” mortgage-backed securities. Each year of fortune entices a firmer push of the risk envelope, nurturing progressively looser Credit Availability and higher-yielding risky loans for securitization. And, only following years of strong returns did finance inundate the leveraged speculating community. It required years of asset inflation and relatively uninterrupted economic growth before the financial sector was willing and able to accommodate a household sector that came to be eager to adopt no-down-payment, adjustable-rate and negative-amortization mortgages in a borrowing spree surpassing $1 Trillion annually.  

One cannot overstate the significance that the passage of time plays in nurturing Credit System “Blow-offs.” Major “Blow-offs” occur only after years of rising securities and real estate prices and, importantly, recoveries from various asset market stumbles, scares and serious set-backs. Each recovery works to embolden and empower, and multiple layerings of both are prerequisites for once-in-a-lifetime complacency. Those with the bullish determination to “buy the dips” are aptly and repeatedly rewarded, garnering ever greater control over marketplace assets and influence. The most bullish and aggressive risk-takers generally rise to the top levels of investment management, corporate management, lending, investment banking and finance generally (not to mention law, accounting, consulting and policymaking). And, importantly, each “redemption” solidifies the (inflating) reputations of policymakers, whether the Federal Reserve, the Administration, Congress or the broad regulator community. Only recently has the media so boisterously trumpeted the sublimity of the Federal Reserve and the incredible “resiliency” of the U.S. economy.

I believe the widespread perception that policymakers are prepared to bolster the boom - and will definitely not tolerate a bust - is an integral factor associated with major (throw caution to the wind) Credit System “Blow-offs.” And, as we have all witnessed, the more encompassing the effects of asset inflation and speculation, the more cowering policymakers become with respect to reining in excesses. Importantly, the confluence of late-cycle general Risk Embracement, lending and speculating excess, buoyant asset prices and (inflationary) boom-time economic “resiliency” ensure that only determined policy restraint will thwart the escalating whirlwind of “Blow-off” repercussions. Any timidity and pandering from the monetary authority will be readily rewarded with only greater Monetary Disorder and instability. And, I’ll add, typical monetary policy doctrine (certainly including perfunctory “rules”) is basically inapplicable once major “Blow-off” dynamics take hold.
Administering cautious “restraint” (a.k.a. Greenspan “baby-steps”) may indeed appear a reasonable approach. After all, such a policy prescription might in more normal circumstances actually orchestrate the coveted “soft-landing.”  Not, however, during Credit system “Blow-offs.” To accommodate Credit and speculative excesses is only to guarantee a protracted and highly dangerous Credit cycle culmination. Indeed, the intensity of financial and economic excess during major Credit System “Blow-offs” negates the potential for soft-landings. Rather, boom and bust dynamics govern; to prolong the boom is to secure a more problematic bust.

It is a central tenet of Credit Bubble and, more specifically, “Blow-off” Analysis that risk rises exponentially during the late, terminal stage of excess. At some point, Credit creation reaches a crescendo where a major Bubble attains size and scope to create system over-liquidity sufficient to spur the wholesale formation and expansion of myriad individual Credit and asset Bubbles (Mises's “crackup boom”?). Just such a circumstance was realized with the U.S. Mortgage Finance Bubble.  Resulting Massive U.S. Current Account Deficits have now become the major impetus for economic and asset Bubbles internationally, as well for as the major inflations throughout global energy and commodities complexes. Confirming Macro Credit Theory, Credit excess begets Credit excess and one Bubble begets the next. Market inflationary expectations have reached the extreme state where virtually all prices are expected to rise – stocks, bonds, real estate, energy and commodities. Both Credit expansion and (leveraged) speculative excess have become all-encompassing.  

At this precarious stage of excess, players across the broad array of inflating asset markets perceive unlimited liquidity. And as long as asset markets rise, additional liquidity will be forthcoming (asset Bubbles create their own liquidity). But there is no getting around the reality that to sustain the “Blow-off” phase demands enormous and unrelenting new finance. The nature of the “Blow-offs” ever greater appetite for additional finance leaves it inherently unstable annd highly vulnerable.

It was curious Tuesday and again today to observe the tight interplay between various markets. One can be pardoned for sensing that a rally in the yen was the catalyst for selling in a broad range of markets including energy, precious metals, commodity currencies, bonds, and global equities. There is certainly good reason to suspect that the “yen carry trade” (borrowing in yen and/or shorting low-yielding yen-denominated securities and using the proceeds to finance holdings in inflating markets) has ballooned to massive proportions and has, in the process, become a Seminal Source of “Blow-off” Finance.

To what extent the “yen carry” has been financing the leveraged speculating community, hence the U.S. securities markets, commodities, emerging markets and global M&A, I am in the dark. But the size of The Trade is undoubtedly enormous, while the Japanese recovery is demonstrating impressive momentum. There will be pressure on the Bank of Japan to (belatedly) normalize interest-rates, both increasing the global cost of funds and narrowing interest-rate and asset-return differentials. The BOJ today appears in little hurry to raise rates, but I nonetheless would not be surprised to see the seasoned speculators a bit anxious for the exits in what could be one of history’s most “crowded trades.” If so, we have a first crack in the fa├žade and a potential “Blow-off” antagonist. “Blow-offs” are especially dangerous for their capacity to surreptitiously inundate financial markets and economies with liquidity emanating from leveraged speculation. And they inevitably come to an end with speculator de-leveraging.