<blockquote>'Overall, 2015 is destined to be a fascinating and challenging year for macro Credit and flow analysis. After six years of extraordinary monetary stimulus, the U.S. asset markets and Credit system have attained a degree of momentum. Thus far, the conclusion of Fed QE has had little apparent liquidity impact. I believe ongoing liquidity abundance owes much to global “hot money” flowing into (hot) king dollar securities markets. Faltering Bubbles at the Periphery have incited self-reinforcing robust flows to the “Core.” But as bursting EM Bubble contagion now gathers momentum, there’s potential for a more globalized Risk Off dynamic to surprise U.S. markets with a bout of destabilizing de-risking and de-leveraging. This week did see a modest widening of Credit spreads. I continue to believe a reversal and strengthening yen would likely incite more aggressive speculative de-leveraging.'
- Doug Noland,
EM Contagion & A New Z.1 , March 13, 2015</blockquote>
'..Years of central bank market intervention, manipulation and monetization have cultivated a massive pool of global speculative finance..'<blockquote>'I have argued for a number of years now that it was imperative for the Fed to begin extricating itself from market intervention and manipulation. It was never going to go smoothly, but when it comes to dealing with market distortions and Bubbles the earlier the better. The scope of the Bubble has now grown to unprecedented dimensions – throughout virtually all securities and asset markets – and it's global: stocks – small caps, mid-caps, large-caps – risky and “defensive” – growth and income; bonds – sovereign, corporate, “developed” and “developing”; and all varieties of derivatives. Anything providing a yield.
The fundamental issue is a desperate need for the Fed to commence a process of normalizing the pricing of market risk. Savings needs to generate a positive real return. The enormous ongoing flow of (unsuspecting) savings into grossly inflated risk markets only exacerbates systemic risk. The Bubbling corporate debt market needs to be tested – and some market discipline reinstated. The ETF and “bond” fund complexes, recipients of Trillions of flows, need to be tested – and market discipline allowed to run its course. The self-reinforcing stock buybacks, M&A and other “financial engineering” need to be tested by a period of tighter finance and associated risk aversion. Will they stand up?
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There’s another problem that’s not going away anytime soon. Years of central bank market intervention, manipulation and monetization have cultivated a massive pool of global speculative finance. So long as global speculators were contently positioned leveraged long across global markets, there was the appearance of peace and prosperity for all. Those days are long gone.'
- Doug Noland,
True Ultra-Dovishness, March 20, 2015</blockquote>
'..targeting and manipulating “financial sphere” prices ensures inevitable “economic sphere” instability and dislocation.'<blockquote>'There’s another profound flaw in today’s monetary experiment: The historic inflation in market-based finance and securities markets has not – will not - translate into a stable rise in the general price level. Indeed, there are sound arguments as to why policies that target inflating risk markets ensure a problematic divergence between securities prices and a general price level. Generally speaking, the global nature of Bubble distortions ensures spending and investment patterns inconsistent with some general increase in consumer prices. Wealth redistribution distorts spending patterns, with much of the U.S. and global population not enjoying spending-inducing increases in incomes and wealth. In short, I contend that targeting and manipulating “financial sphere” prices ensures inevitable “economic sphere” instability and dislocation.'
- Doug Noland,
A Progressively Maladjusted “Economic Sphere”, March 27, 2015</blockquote>
'..the Fed and global central bankers have responded to this instability with progressively more experimental intervention and manipulation only ensures a momentous calamity..'<blockquote>'The Chinese Credit Bubble has been historic, dwarfing the fateful Japanese Bubble from the eighties. Arguably, China’ Bubble today even exceeds its mirror image U.S. Bubble. I have also referred to the Chinese renminbi link to the dollar as the King of All Currency Pegs. The bullish consensus scoffs at notions of Chinese fragility. With an international reserve position of $3.8 TN (and shrinking), the belief is that China has more than sufficient “money” to stimulate the economy, recapitalize the banking system and support the renminbi. Yet with anecdotes suggesting mounting outflows and heightened nervousness, a destabilizing dislocation in renminbi trading becomes a real possibility.
..
Market-based Credit and discretionary monetary policy mix dangerously. Over this long cycle, market-based finance (as opposed to traditional bank lending) has come to dominate system Credit – along with market and economic performance. Policymakers have responded to resulting serial booms and busts with ever more obtrusive activism – including interest rate, liquidity, communication and monetization policies. Policy measures have reached previously unimaginable extremes - pro-speculation, pro-leverage, pro-Credit cycle and pro-maladjustment. It’s not that “the transmission of monetary policy to the real economy is more variable and uncertain.” The critical issue is instead that market-based Credit is inherently highly unstable. That the Fed and global central bankers have responded to this instability with progressively more experimental intervention and manipulation only ensures a momentous calamity. A rules-based policy approach incorporating disincentives for leveraged speculation and financial excess would over time work to restrain speculative cycles and resulting Credit booms and busts.'
- Doug Noland,
Periphery Fragility List, February 27, 2015</blockquote>
'..There arrives a Tipping Point where market illiquidity becomes a serious concern..'<blockquote>'Meanwhile, the global situation – markets, economies and geopolitics - turns progressively unstable. At this point, I am highly confident in my thesis that the global Bubble has been pierced (with profound ramifications!). This view is supported by the self-reinforcing nature of the collapse in energy and commodities prices along with faltering EM currencies.
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The King Dollar Tipping Point comes when EM markets turn disorderly – currencies and bonds. Disorderly is spurred by the prospect of companies, financial institutions and countries not having the wherewithal to service dollar-denominated obligations. And be mindful of critical market psychology: King Dollar ensures that investors in dollar-denominated debt are for a while willing to overlook a lot of EM fundamental deterioration. There comes, however, a Tipping Point where investors begin to fret the ability of the EM debtor to service debts and stabilize economies while avoiding the printing press. There comes a time when nervous speculators move to hedge exposure. There arrives a Tipping Point where market illiquidity becomes a serious concern.
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And there’s another King Dollar wildcard worth pondering: China’s renminbi. As I touched on last week, King Dollar creates a serious dilemma for Chinese officials. Chinese exporters became less competitive again this week. And there is increasing focus on the possibility of destabilizing outflows from China. Meanwhile, Chinese officials admitted to expanding difficulties, including rising inequality. An ongoing parabolic dollar move might force their hand on de-pegging their currency from King Dollar.
While U.S. stock and bonds were under pressure this week, for the most part spreads were well-behaved. The yen was also under pressure, weakness that supports the “yen carry trade” and global leverage more generally. For Risk Off to attain momentum, I would expect to see spreads widen and the yen to catch a bid. And with Brazil, Mexico, Turkey, South African and others under pressure late this week, markets are on the brink of a full-fledged EM problem - a King Dollar Tipping Point.
- Doug Noland,
King Dollar Tipping Point, March 6, 2015</blockquote>
'..the analysis does come back to money. Fundamental to sound money is that debts do settle. One cannot just accumulate debt and expect confidence in the underlying obligations to hold forever. Yet in today’s world debts don’t settle – they just keeps expanding and expanding – Greece, the U.S., China, Japan, Brazil, EM and “developed.”..'<blockquote>'The nineties saw the age-old issue of fractional reserve banking completely turned on its head. The “evolution” to market-based Credit fashioned what I refer to as the “infinite multiplier effect” – “money” and Credit created, miraculously, out of thin air like never before. With their implicit government backing, the GSEs enjoyed unlimited capacity to issue new debt liabilities – fed by insatiable demand from both home and abroad. During the mortgage finance Bubble, Wall Street relished in the capacity for seemingly limitless issuance of “money”-like mortgage- and asset-backed securities, most guaranteed by the GSEs that were backed by the federal government.
The phenomenal policy response to the bursting of the mortgage finance Bubble unleashed the “global government finance Bubble”. The world has now seen the evolution of unfettered electronic “money” advance to its final act, with profound yet unappreciated ramifications. For the past twenty-five years, each new Bubble has seen the scope of “money” widen to the point of ensuring Credit expansion sufficient to reflate increasingly impaired financial and economic systems. Yet each reflationary episode only compounded global financial imbalances and economic maladjustment (in the process increasing the amount of new Credit necessary to keep the game going). These days, concerted desperate reflationary measures see perilous expansion at the heart of “money” and at the very foundation of global Credit.
When, in the early-nineties, the U.S. banking system (impaired from “decade of greed” excess) had lost the capacity to create sufficient “money” (largely deposits), an extraordinarily accommodative Greenspan Federal Reserve ensured that non-bank “money” (largely “repo” and short-term GSE liabilities) creation took up the slack.
In the post-tech Bubble landscape, the notion that policymakers would be willing to condone “helicopter money” and the “government printing press” ensured “money” creation broadened to the realm of the securitization marketplace. Since the bursting of that historic Bubble, it has been left to unprecedented expansion of central bank Credit to provide the necessary “money” to keep the ever-rising mountain of global debt from imploding. For something so important, it’s stunning how little attention is paid to the saga of contemporary “money.”
Over the years, I’ve argued that booms fueled by high-risk “junk” bonds don’t warrant undue concern. Invariably, the marketplace’s response to over-issuance includes a waning appetite for risk. Demand for new junk debt begins to dissipate, ushering in a period of Credit tightening and risk aversion. Importantly, attention to risk and attendant finite demand for increasingly risky debt instruments work to limit the duration of the boom cycle. This ensures that excesses and resource misallocation have insufficient time to impart deep structural maladjustment. The market pricing mechanism promotes self-regulation and adjustment.
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In desperation, the world’s major central banks have resorted to the “nuclear option” of issuing Trillions of new “money” backed by nothing more than their willingness to create endless additional quantities. Also unique from a historical perspective, central banks inject this new “money” directly into securities markets. Distortions to global markets and economies have been unparalleled. Having evolved incrementally over decades, the previously unimaginable is today accepted as reasonable and rational. Central bank “money” – along with pledges to print as much as necessary - dictates market behavior like never before.
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Growth in the global leveraged speculating community took off in the early-nineties. The Greenspan Fed had slashed rates and aggressively intervened in the government debt market. As Greenspan willingly manipulated rates, the yield curve and marketplace liquidity, longer-dated government and mortgage bonds began to reap the benefits of “moneyness” like never before. After more than twenty years of incremental policy activism, market intervention across all classes of assets has become commonplace for central bankers around the world. I have referred to this anomaly as “The Moneyness of Risk Assets.”
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The latest and (to that point) greatest U.S. Credit boom burst in late-2008/2009, unleashing only more egregious monetary inflation. By this point, monetary mismanagement and ongoing massive Current Account deficits ensured a deeply flawed global “reserve currency”. This extraordinary backdrop was fundamental to the perception of “Moneyness” for China’s currency and Chinese Credit more generally. Only in a highly abnormal global monetary backdrop would the marketplace afford a strong Chinese currency in the face of a four-fold surge in Chinese bank Credit (not to mention “shadow” liabilities) to $28 Trillion. Only a dysfunctional global financial system would ascribe “Moneyness” upon Credit instruments fueling the greatest economic maladjustment, asset inflation and systematic corruption of all-time. The ongoing historic Chinese Credit boom has forever changed the world.
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And, interestingly, the analysis does come back to money. Fundamental to sound money is that debts do settle. One cannot just accumulate debt and expect confidence in the underlying obligations to hold forever. Yet in today’s world debts don’t settle – they just keeps expanding and expanding – Greece, the U.S., China, Japan, Brazil, EM and “developed.” Greece does not have the economic wherewithal to service its huge debt load. The inflationists call for the Germans and the eurozone, more generally, to use the “Moneyness” of their obligations to provide additional assistance to Greece. The Germans and others understand that additional wealth transfers risk impairing EU Credit more generally – the old “throwing good money after bad.” The problem these days is that it’s quite difficult to identify good money to throw – or, better yet, to save for a rainy day.'
- Doug Noland,
The Curse of Moneyness, February 20, 2015</blockquote>
Context<blockquote>
' “Monetary policy… after all, is extremely important” – is an understatement.' - Doug Noland(Praxeology) - Savings - Economic Growth - 'We Need More Wealth, Not Necessarily More Employment' - Entrepreneurship(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'</blockquote>