G'day Andrew,
> Some highlights from the piece: the short-term price spikes (in US
> energy commodities) will be resolved through ordinary operations of
> the free market.
Heh heh ... what ordinary operations would that be? And the *what* market?
> ... the Bush and Cheney plan is anti-free market.
So's the world's belief that a central banker's ambiguous utterances and
boringly repetitive panic cuts are all that matters in valuing stocks ... And
its implicit corollary that the finance sector is too big to be allowed to
take its overdue bath ... And its implicit corollary that an American central
banker will always have a few hundred basis points available for pruning.
Indeed, I see this credit-induced faith in limitless credit has affected
Bloomberg, too - they greeted yesterday's news that the US trade deficit had
blown out (thanks mainly to consumer goods, of course, no-one's actually
buying capital goods any more) as evidence of recovered health ...
> In my view, the energy subsidies and environmental rollbacks open the
> door to a widespread, populist attack on the Administration. I'll
> guess that 4/5ths of Americans will be greatly offended by the energy
> subsidy plan once they know the details.
Not as offended as they will be when they wake up bankrupted by the bankrupts
who hawked 'em bankrupt funds in a system that bankrupted itself coz there was
nowhere left to hedge ...
Apposite excerpts from *Feeding the Financial Beast* by Doug Noland
May 18, 2000
Complete article at:
http://www.prudentbear.com/Comm%20Archive/markcomm/051801.htm
...
If the Fed is truly targeting faltering capital spending and profitability,
especially within the highly maladjusted technology sector, it is making a
major policy error. It was specifically the enormous financial bubble that
developed post-1998 that led to massive and unsustainable over spending
throughout the expansive high tech
industry. It is also worth again addressing (as somewhat of a follow-up to
last week�s commentary) the powerful interplay between financial and
technological innovation that has certainly not been given its proper due
elsewhere. The unusually large margins afforded new and innovative products
and services throughout the technology sector not surprisingly garnered
extreme business and speculative interest. This keen attraction, combined with
a contemporary credit system with a newfound capability and penchant for
creating virtually unlimited money and credit, provided an absolute financing
and spending powder keg. Consequently, a flood of money was available to throw
at virtually any technology enterprise. This, not surprisingly, led to scores
of negative cash flow and hopelessly unprofitable ventures receiving funding,
whose expenditures provided enormous revenues that sustained
artificially outsized industry revenue and profit growth. The more profits,
the larger the flood of finance, and the greater the over spending. It was a
textbook bubble, with monetary excesses fueling the boom through funding both
uneconomic enterprises (that would not survive come the bursting of the
financing bubble) and over investment that would ensure an abrupt margin
(profitability) collapse at the first sign of business slowdown. A bust in
proportion to the historic excesses of the previous boom was unavoidable. In
sum, increasingly dysfunctional monetary processes that were both creating and
directing massive financial excess at the sector assured its eventual collapse.
Most unfortunately, the Greenspan Fed absolutely fails to address the true and
clearly potentially disastrous underlying dilemma for the U.S. system:
entrenched monetary processes that hopelessly perpetuate financial excess,
self-reinforcing market distortions and dangerous economic maladjustments. The
Federal Reserve simply refuses to govern a dysfunctional wildcat financial
sector that has grown to momentous size and power, and whose self-serving
pursuits propagate unrelenting and increasingly precarious lending and
speculative excess. The great danger comes not from a slowdown in capital
spending or a consumer who wisely chooses to temper his unsustainable
borrowing and spending after many years of binge, but to the gross financial
excess that runs unabated with the acquiescence and extreme accommodation of
the Federal Reserve. Instead of moving to harness an out of control credit
system that assures recurring credit-induced booms and busts, failed Fed
policy only Feeds the Financial Beast. Indeed, this is a financial system, and
leveraged speculating community especially, that blossomed directly from the
Fed�s early 1990s accommodation and hasn�t looked back since. The resulting
enormous speculative and banking profits afforded the financial players in the
early 1990s, however, looked like a pittance compared to the windfall
following the Fed�s 1998�s "reliquefication." Not only is the Fed loath to
control this monster that it has been so instrumental in nurturing, it has now
reached the point where the Fed is granting additional rewards for previous
reckless excess. This has gone much beyond an issue of moral hazard. This is
outright negligence.
It is now simply a sad case of waiting to see when, where and how big and
destabilizing the next bust; unrelenting monetary excess assures it.
Certainly, nowhere are the excesses more pronounced than throughout the real
estate sector. And like the gas that was thrown on the smoldering technology
boom back in 1998/99, the Fed today fosters even more outrageous excess
throughout mortgage finance. It is certainly worth noting that with the
adopted Greenspan strategy of cutting rates early and quickly, there will be
few bullets left when the massive real
estate bubble bursts, taking consumer spending and the general economy down
with it. We are today in the quite early stages of what will eventually prove
a protracted period of economic decline.
For now, the contemporary mortgage finance sector and real estate markets with
ingrained inflationary expectations provide the Fed a powerful policy tool.
Countrywide Credit made the following release Tuesday afternoon: "Countrywide
Home Loans national call centers have seen a 400 percent spike in calls from
consumers immediately following the Federal Reserve�s announcement this
morning. This is the fifth rate drop by the Federal Reserve this year. Recent
rate decreases have generated significant interest from consumers who are
purchasing or refinancing their homes. In addition, many homeowners see this
as a chance to open home equity lines of credit many of which are based on the
declining Prime Rate."
Borrowing against home equity is clearly playing a critical role in sustaining
the consumer-spending boom. Today�s larger than expected trade deficit of
$31.2 billion saw record consumer goods imports. MarketNews International
reported that March imports into the Port of Los Angeles were up 15% year over
year. Quoting the port�s director of business development: "I�ve been to the
shopping centers and everybody
still has bags and bags -- at least in Southern California." The article
continued, "His retail clients have already suggested that the port should
prepare for strong activity in the third and fourth quarters. (The director)
argues that whatever consumer spending has been lost to higher energy prices
may well be offset by the recent surge in mortgage refinancings.
�Unfortunately, all that does is give consumers a second chance to get into
debt since they don�t stop spending.�"
...
The unfolding California energy crisis certainly illuminates some
very fundamental and critical misunderstandings. First, the popular notion
that the marketplace (almost like magic) creates stability and prices that
tends toward equilibrium is patently false in an environment dictated by
rampant money and credit excess. Indeed, credit-induced bubble economies are
specifically dominated by forces
cultivating disequilibrium. Second, the perception that the mechanisms and
strategies of contemporary finance reduce risk is absolutely fallacious.
Derivatives, in particular, provide a mechanism for individual players to
mitigate/hedge risk. It is a completely different proposition, however, for
the system as a whole ("fallacy of composition"). There is no way an entire
market can hedge, as outside of the market there are no parties with the
wherewithal to remunerate in the event of large system-wide losses.
The general perception (actively marketed by Wall
Street) that risk can be mitigated by derivatives has and continues to play a
major role in this bubble. As we have witnessed repeatedly in various markets,
the availability of derivative "protection" changes behavior, inducing
participants toward riskier activities that significantly augment risk for the
system as a whole. Furthermore, credit bubbles foster exponential debt growth,
asset inflation and resulting speculative excess, as well as severe
marketplace and economic distortions that as well grow exponentially over
time. It is critical today to appreciate that Credit Bubbles generate risk
exponentially, and Fed policy is greatly exacerbating this process. And while
there is much finger pointing today in California, the State�s energy crisis
is very much the consequence
of boom-time erroneous notions and credit bubble excess. It is as incredible
as it is alarming to see how quickly California went from expecting huge
budget surpluses, as far as the eye could see, to financial crisis.
...
And with the system under considerable stress due to the collapsing of the
technology bubble, the aggressive financial players have unwavering (and
justified) confidence that the Federal Reserve will continue to accommodate
history�s Greatest Credit Bubble. This is the Fed locked in policy disaster.
Monetary policy has been left to court a dysfunctional
relationship with the masters of financial excess, a circumstance that to this
day fosters momentous financial and economic distortions that absolutely
assures financial and economic crisis.
...
It is certainly our view that the Fed is pursuing the course of greatest risk,
the senseless perpetuation of the Great Credit Bubble.
