Credit Bubble Bulletin


Liquidity came back to the stock market this week, with a major rally throughout the technology sector. Recovering stock prices were not good news for the Treasury market, in what continues to be a unsettled credit market quite. Today Treasuries came under heavy selling pressure. For the week, although 2-year yields remained unchanged, 5-year Treasury yields jumped 7 basis points and the key 10-year yield surged 11 basis points. Long-bond yields increased 12 basis points.

Mortgage-backs and companies again outperformed, with yields rising between 3 and 7 basis points. The benchmark 10-year money swap spread narrowed 6 basis points to 108. Junk relationship spreads narrowed a few basis factors generally, while high-quality corporate and business spreads narrowed just as much as 8 basis points. Global currency markets are extraordinarily volatile also, this week arriving under the most selling pressure in a few time with the money. Today the European central bank or investment company intervened to support the euro again.

The buck index fell almost 2% this week. Emerging markets, in Latin America particularly, appear to experiencing a problematic loss of liquidity. “Every period of speculation brings a crop of ideas made to justify the speculation forth, and speculative slogans are seized upon easily. The term “new era” was the slogan for the 1927-1929 period. As I previously have written, it is my view that people are at the precipice of a financial and financial turmoil unlike anything seen in this country because the collapse of the 1920’s bubble. Obviously, today is tantamount to lunacy in the eyes of the unwavering bullish consensus to possess such a view.

That’s fine. After all, leading economists, Wall Street prognosticators, media pundits, government officials and Federal Reserve members could not have been more incorrect in their evaluation of the late 1920s increase. So, how could they have only envisaged “permanent prosperity” when the financial teach was steamrolling directly into the Great Depression? A crucial problem, during intervals of prominent financial asset inflations especially, is that rising financial wealth (inflation) is so alluring, and nobody has a vested fascination with determining the inflationary source, let alone getting it to a finish. Of course, it is exactly the opposite, with huge vested interests determined to perpetuate asset bubbles. Certainly, Wall structure Street and Washington come with an passionate romance with asset inflation overly.

I feel almost ridiculous writing such a notion – that someone would endeavor to stop asset prices from increasing. But thwarting asset inflation is a fundamental prerequisite to financial and economic stability, and precisely why we seek an “independent” central bank or investment company. Obviously, with a culture of “optimism,” new notions or technologies of New Eras give a seductive description for inflating asset prices; apparently, and quite problematically, for current central bankers even.

So, to answer fully the question: How could so many intelligent and knowledgeable individuals have completely misunderstood the 1920’s increase? “Stock prices were already saturated in the summertime of 1927. There is an unhealthy tone. There was a growing belief that stocks and shares, though high, were heading much higher. There was a growing readiness to use cheap money in stock speculation. The situation was manageable still. The intoxication was manifest, not so much in violent behavior as with heightened color and increasing loquacity somewhat.

The delirium was yet to come. Our current experience is a circumstance like the events resulting in the fantastic Depression disconcertingly. The apex of the 1920’s U.S. “Investor’s Money vs. Bank or investment company Expansion. It was challenging to convince investment bankers and bond dealers in the time 1925-29 that it was commercial bank or investment company expansion that was generating the demand for the securities which they were offering. They insisted, and correctly, that real traders’ money was coming in, and that lots of securities were being bought outright.

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This is a powerful paragraph, although it may take more than one reading to appreciate (another “dense quotation from a long-dead economist”). 15.5 billion “poured” into shared money this week. this year 400 billion, while the household savings rate has transformed negative and our overall economy runs substantial trade deficits. What’s the source of all this “money” when households aren’t conserving and dollars leave the country in droves?

Well, the foundation is blatant and unrelenting credit and money extra. The GSEs (like Pavlov’s dogs) aggressively expand holdings at any sign of financial distress, a situation that has basically remained in effect throughout a lot of the past two years. This is a key exemplory case of how, particularly in today’s environment, underlying (and intensifying) systemic problems actually foster only heightened excess that manifests into increased system-wide money and credit creation. As the GSEs purchase home loan securities and other debt musical instruments aggressively, mortgage rates (and market rates generally), as we have seen, decrease sharply.

This “intervention,” importantly, sets off some processes. First of all, open market buys of mortgage loans, mortgage-backs and other debts securities provide the earlier holders (banking institutions, Wall Street firms, hedge money, etc.) liquidity to lower debt and/or to buy other securities (credit credit card and other asset-backed securities?). Forceful home loan buys by the GSEs also encourage the leveraged speculators to consider positions, although it also leads to active speculative and hedging-related trading in the interest-rate derivative market.