DOUG NOLAND'S CREDIT BUBBLE BULLETIN

http://prudentbear.com/creditbubblebulletin.asp (LONG READ GOOD READ) just part below

Since the inception of this approach several years ago, the central bank has raised its Federal funds rate 25 basis points after each meeting of the [FMOC]. Fed officials have tried to reassure market participants through frequent public utterances. This approach has wrought several unintended consequences. For one, it has contributed to a massive carry trade… This is because investors have been conditioned to expect moderate and steady increases in money rates, which their quantitative analysis shows will pose limited risks, if any, along the yield curve.
This, in turn, has led them to conclude that the carry trade can be the source of substantial profits… Although spread compression typically yields smaller profits from carry trades, profits have remained high as investors have enlarged their positions. In short, the Fed’s recent monetary approach, combined with the US Treasury’s practice of confining much of its new borrowing to short- and intermediate-term notes, explains a great deal of what the Fed has dubbed a “conundrum”… The second unintended consequence of the Fed’s measured response policy has been the massive growth of debt. Investors have reacted to the assurance of a measured response by borrowing more. In highly securitised and innovative financial markets, which by themselves encourage entrepreneurial financial behaviour, rapid debt growth is a natural consequence of measured response policies…”

But Age-Old Credit Inflation Dynamics dictate that the longer boom-time psychology becomes ingrained in the financial and asset markets; throughout financial institutions; in businesses, governments and households, the greater the monetary tightening inevitably required to goad the system back on a more sustainable course. It is the case that the longer and more robust the inflationary boom, the more spectacular and problematic the unavoidable bust. The dilemma today is that we are long past the point of any possibility for an orderly return to stability. The interest-rate markets are now faced with the prospect of guessing if the Fed will actually attempt a true tightening and, if so, how high will rates have to go?

Things have all the sudden become more challenging for the leveraged player and bullish bond pundit. The inflationary boom has become hard to deny and the fanciful imaginary world increasingly easy to rebut.