<blockquote>
'The bone I have to pick with the bulls relates to their view that buoyant markets are signaling the emergence of a sound and sustainable recovery. I see instead a desperate policymaker crisis response reigniting Credit Bubble excesses and fomenting only deeper systemic distortions. This week, Chairman Bernanke suggested that the strong market environment is confirmation of the soundness of policymaking and market trust that Washington will get its fiscal house in order. Fed officials are again deluding themselves and, in the process, indulging asset market inflation and destabilizing speculation.
But I’ve been to this movie before. I’m familiar with how the plot develops. And I have an abundance of gray hair and wrinkles as evidence of the number of reflations I’ve observed. I know how asset inflation fosters optimism in the bullish camp and discredit to bearish analysis.
Loose “money,” as has been the case throughout history, breeds excess and malfeasance. The Wall Street/mortgage finance Bubble was a fiasco, and today’s allegations are a reminder of how ugly things turned in the waning days of the subprime mortgage scheme. Clearly, there was way too much “money” sloshing around – so much to be made so quickly gaming the system and fleecing the less informed.'</blockquote>
It's About TrustBy Doug Noland
April 16, 2010
SourcePerhaps today will provide somewhat of a needed market wakeup call: Washington may have orchestrated a powerful reflationary backdrop throughout the financial markets. There are, however, myriad financial and economic aspects to the bust that will not be disappearing anytime soon. Trust in Wall Street and the marketplace is these days anything but impenetrable.
Irrespective of today’s allegations and market pullback, reflationary forces have attained considerable momentum; massive government borrowings and ultra-loose financial conditions have incited a self-reinforcing stampede into risk assets. Almost $50 billion exited money market funds the past week alone, boosting the 15-week outflow to $380 billion. Money Fund assets are down an incredible $900 billion in just 12 months, a historic wall of finance unleashed upon global risk markets.
The Morgan Stanley Retail index closed yesterday above its previous all-time high set all the way back in April, 2007. From its low of 68.41 in November of 2008, the Morgan Stanley Retail index has tripled in price. While down almost 3% today, the S&P500 Regional Bank index sports a 2010 gain of 34.8%. During the height of the Credit crisis, I wrote that I believed the U.S. economy was heading into a depression. I was wrong.
A commentator on CNBC the other day suggested that the Credit crisis had only interrupted an ongoing bull market. He explained that the complexion of the marketplace traditionally changes after a true bear market. New leadership emerges, while the old favorites tend to languish during the market recovery. This commentator argued that market leadership has changed little, and I can’t disagree. I just don’t share his sanguine interpretation of market dynamics.
The Fed’s and Treasury’s historic reflation interrupted the U.S. (and global) economy’s sorely needed period of adjustment and rebalancing. I would argue that market leadership has not changed specifically because government intervention precluded economic restructuring. Massive government Credit inflation has, at least for now, sustained the existing economic structure – buy retailers, regional banks, homebuilders, restaurants, etc. It’s back to Bubble Economy business as usual.
The bone I have to pick with the bulls relates to their view that buoyant markets are signaling the emergence of a sound and sustainable recovery. I see instead a desperate policymaker crisis response reigniting Credit Bubble excesses and fomenting only deeper systemic distortions. This week, Chairman Bernanke suggested that the strong market environment is confirmation of the soundness of policymaking and market trust that Washington will get its fiscal house in order. Fed officials are again deluding themselves and, in the process, indulging asset market inflation and destabilizing speculation.
But I’ve been to this movie before. I’m familiar with how the plot develops. And I have an abundance of gray hair and wrinkles as evidence of the number of reflations I’ve observed. I know how asset inflation fosters optimism in the bullish camp and discredit to bearish analysis.
Loose “money,” as has been the case throughout history, breeds excess and malfeasance. The Wall Street/mortgage finance Bubble was a fiasco, and today’s allegations are a reminder of how ugly things turned in the waning days of the subprime mortgage scheme. Clearly, there was way too much “money” sloshing around – so much to be made so quickly gaming the system and fleecing the less informed.
The destruction and inequitable redistribution of wealth are the hallmarks of financial Bubbles. Today, Trillions of securities are created globally on the basis of the creditworthiness of the borrowers coupled with perceived adeptness of policymakers. It is quite amazing how quickly Trust has been restored. A new bull market is celebrated, while another bout of Monetary Disorder has unfathomable amounts of “money” sloshing around for the taking.
At the center of it all, policymaking at home and abroad has distorted market perceptions and market pricing mechanisms. The unsuspecting again have little notion of the underlying risks they are accepting. Fleeing zero rates and chasing inflating securities prices, investors have been left again dangerously exposed to another financial Bubble and a postponed economic restructuring. It may never be called “fraud” or “misrepresentation. The outcome will be about the same. At the end of the day, markets are made or broken on Trust.