<blockquote>'2008 was not the “big one.” Rather, it was the crisis response that was the biggest ever, setting the stage, I fear, for the really problematic crisis. And if our policymakers had learned anything from the terrible mortgage boom and bust experience, they’d be especially careful with these implicit market backstops (and the distortions they promote).
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The “Granddaddy of All Bubbles” thesis rests on the premise of a deeply systemic Bubble throughout debt and equities markets and asset prices more generally, on a globalized basis. In contrast to GSE market distortions that impacted pricing most significantly in mortgage Credit, today’s global central bank distortions impact virtually all asset prices. Market risk distortions now basically permeate all markets – stocks, bonds, Credit and any asset that provides income/yield virtually anywhere in the world. Assets include collectible art, Manhattan apartments, farm property and NBA franchises.
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As such, the critical question that should be asked today is whether the unprecedented global response to the 2008 crisis set loose only more pernicious global market distortions, Bubbles and economic maladjustment? Despite all the bullish propaganda, the answer is an emphatic “absolutely.”
As I’ve attempted to explain in the past: 2008 was essentially a private debt crisis. It was resolved through massive deficit spending, central bank Credit, zero interest rates and an assortment of government guarantees and assurances. “Too big to fail” evolved to encompass securities markets around the globe.
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The “global government finance Bubble” thesis rests on the premise that an unprecedented simultaneous expansion of government debt and central bank Credit has basically distorted risk perceptions, market pricing and resource allocation everywhere. The appearance of "stability" is a huge deception.'
- Doug Noland,
He's Back, May 30, 2014</blockquote>
'..We are, after all, in the midst of the “Granddaddy of all Bubbles” – and when and how this all concludes nobody knows..'<blockquote>'I have repeatedly drawn parallels between the current extraordinarily protracted Credit Cycle and that from the WWI to 1929 period. Both share similar characteristics of profound technological advancement, “globalization,” financial innovation, experimental activism in monetary management and resulting prolonged Credit, speculative and economic cycles.
Late during the “roaring twenties” Bubble period, prices, finance and economic performance all began functioning abnormally. There was confusion. In hindsight, there were obvious warnings. Yet at the time they were so easily drowned out by a boisterous financial mania. There was the camp that accurately recognized and feared the consequences of historic Credit excess. They argued unsuccessfully for policy-makers to rein in the Bubble to save the financial system and economy from catastrophe (Bernanke’s “Bubble poppers”). The Federal Reserve repeatedly acted to reinforce the boom – in the end believing downward pressure on prices and associated economic vulnerability dictated ongoing monetary accommodation.
Our central bank at the time was certainly not unaware of the stock market Bubble. The Fed’s focus turned to trying to ensure Credit was allocated to productive endeavors in the real economy – rather than to the market exchanges. There were two sides to this debate. The “Bubble poppers” were again correct in stating that it was fallacy to expect that Fed measures could ensure Credit was used productively, not when the pricing and profit backdrop in the real economy was so weak compared to the enormous gains being achieved in the booming securities markets.
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Back in 2007, with cracks forming in mortgage finance, I spent a lot of time pondering how the system could possibly generate sufficient Credit to fuel such an unbalanced and maladjusted economic structure. I have similar concerns today. If Fed Credit growth disappears, I just don’t see how the necessary $2.0 TN of non-financial sector debt growth will be sustained. There is little indication that mortgage Credit expansion will provide much help. Federal deficits are supposed to continue to decline, while state & local government borrowings remain minimal. Corporate Credit growth could continue to boom, although the marketplace appears more late-cycle euphoric to me.
Yet there remains a critical unknown. We are, after all, in the midst of the “Granddaddy of all Bubbles” – and when and how this all concludes nobody knows. It’s an important aspect of Bubble Theory that leverage associated with speculative Bubbles creates its own self-reinforcing liquidity. So I will posit that so long as this Bubble continues to inflate at such a fervent pace, the tapering of Fed Credit has little impact. However, the bigger these Bubbles inflate the greater the risk of a destabilizing “risk off” bout of de-risking/de-leveraging. What is a leading catalyst for puncturing a speculative market Bubble? The unsustainability of parabolic “blow off” speculative excess.
The next “risk off” period will find participants contemplating a marketplace without constant Federal Reserve liquidity injections. The markets will fret about life without an open-ended Fed QE backstop. Will the Fed be there with its typical timely reinsurance – or might a divided Fed struggle to live up to Dr. Bernanke’s promises? For now, it’s exuberance – emboldened by the notion that persistent “deflation” risks will keep global central bankers in an accommodating and experimental mood.'
- Doug Noland,
Credit Allocation, June 6, 2014</blockquote>
Context<blockquote>
'Jürgen Stark .. says "The System is Out of Control".'</blockquote>