HAPPY ENDING? OR SLOPPY SECONDS?

http://research.stlouisfed.org/publications/usfd/page3.pdf

Broad money supply (M3) jumped $20.1 billion (week of Jan. 23) to a record $10.274 Trillion. Over the past 36 weeks, M3 has inflated $649 billion, or 9.7% annualized. Over 52 weeks, M3 has expanded 8.0%, with M3-less Money Funds up 8.4%.

(doug noland http://www.prudentbear.com/archive_comm_article.asp?category=Credit+Bubble+Bulletin&content_idx=51224)

Earnings disappointments and higher rates…

The Mortgage Bankers Association Purchase Applications Index dropped 8.0% last week. Purchase Applications were down 2.3% from one year ago, with dollar volume up 2.6%. Refi applications fell 1.5%. The average new Purchase mortgage rose modestly to $230,600, while the average ARM slipped to $335,500.

The spread between 2 and 10-year yields moved 7 bps to an inverted 5 bps.

Slumping productivity and rising wage costs…

January 31 – Bloomberg (Alison Fitzgerald): “The U.S. government plans to borrow $188 billion from January to March, the most ever for a single quarter, as the Treasury sells 30-year bonds for the first time since 2001 to meet demand for longer-term debt.”

Bubble Economy Watch:

December Average Hourly Earnings were up 3.3% from the year ago period, the strongest y-o-y increase since February 2003.

February 2 – EconoPlay.com (Gary Rosenberger): “Recruiters are reporting a pop on the job front in January as companies squeezed the hiring trigger following a cautious December, with anecdotal accounts covering a range from modest, steady growth to “fun times are back.” Taken together, the comments suggest January job formation took something beyond a modest bounce higher, with all recruiters interviewed reporting increases in permanent placement. In some high-skill categories, like accounting, employers are running into a tight labor pool and increasing wage pressures…” (Gary Rosenberger’s new econoplay.com provides his excellent work on a subscription basis)

Under Greenspan’s stewardship of the world’s reserve currency and dominant Credit system, global imbalances went to unparalleled and unmanageable extremes. Nonetheless, The Crowd today showers Alan Greenspan with praise and glorifies his accomplishments.

I don’t believe Credit cycles should or can be prolonged indefinitely, so I naturally scoff at notions of Greenspan’s greatness. To nurture a system of unrestrained Credit and speculation is to jeopardize the market pricing mechanism. To abrogate the business cycle is to undermine a capitalistic system. To accommodate and prolong Credit booms is to ensure a problematic evolution of risk assessment and Embracement, not to mention deep structural economic impairment. To actively reduce uncertainty is to inflate expectations, and to guarantee liquidity is to promote market excess. From Main Street to wall street, there is too much faith in the capabilities - and too little appreciation of the limitations - of monetary policy. From the corporate board room to the Halls of Congress, there is a mistaken belief that recessions can and should now be avoided.

Never have so many had their expectations rise to lofty levels – the type of elevated expectations that leads to disappointment and disillusionment. For now, we have global competitors for limited energy and commodity resources liquefied like never before.

The Essence of the Ongoing Greenspan Era is one of an historic Credit Bubble. His legacy should be based upon future circumstances and developments with respect to this Bubble and not how things appeared the afternoon he paraded out the door.

D