FINANCIAL TSUNAMI

CREDIT BUBBLE by DOUG NOLAND

excerpt from above:

CPI may have remained tame, but massive Credit-induced Current Account Deficits and the depreciating dollar set in motion Credit and asset Bubble dynamics in economies around the globe.
Today, the Fed confronts bursting Credit Bubbles throughout Wall Street finance, with resulting acute asset market vulnerability. Yet the unusual structures that permeate the U.S. Financial Sector at this time foster continuing rampant inflationary Credit creation. First of all, “money-like” financial sector liabilities (i.e. agencies, “repos”, and bank/money fund deposits) are proving thus far sufficient to sustain Bubble economy excesses. Second, the global recycling of ongoing massive Current Account Deficits and speculative outflows ensures over-liquefied markets (and artificially low interest rates!), including key U.S. debt instruments such as Treasuries, agencies and other perceived low-risk securities. Bubble dynamics proliferate in the face of a Wall Street bust.
The extreme divergence in liquidity conditions between bursting Bubbles in Wall Street finance and still rapidly inflating Bubbles in “money-like” Financial Sector Liabilities poses both a major quandary and policy dilemma. Aggressive rate cuts would definitely further stoke the powerful Bubbles inflating in GSE, “repo”, money fund, and bank deposit liabilities. Such ongoing Financial Sector Debt expansion would likely sustain destabilizing liquidity outflows to the world, further fueling myriad global bubbles and worsening an already problematic global inflationary backdrop. A rapidly expanding U.S. Financial Sector (with the accompanying heavy risk intermediation burden associated with transforming highly risky loans into perceived safe liabilities) also significantly increases the risk of an eventual catastrophic breakdown in U.S. and international financial systems. Besides, it is likely that lower rates would have only minimal effect on the investor and speculator revulsion that has taken hold throughout the Wall Street securitization marketplace.
Those arguing for a Greenspan-style rate collapse fail to appreciate the extraordinary circumstances and risks that have accumulated from years of Reckless Credit Bubble Excess. The outcry for an audacious policy response to avert a recession is misguided. Importantly, today’s rampant Financial Sector expansion is unsustainable. There are today acute inflationary risks to go with major financial system stability issues. While the dislocation will be substantial, the sooner the Bubble in Financial Credit is reined in the better. We are today in the midst of dangerous “blow-off” excesses in “money-like” Financial Sector liability issuance. Few seem to appreciate that such a circumstance places the stability of the “bedrock” of the entire U.S. and global financial system at considerable risk. Wall Street is clamoring for a rate collapse and bold inflation in “money” to bailout its faltering securitization markets. At this point, this would equate to throwing massive (relatively) good “money” after bad - ensuring that a dreadful situation festers into a historic calamity. The least bad course for central bank policymaking would be to hold the line on rates, while injecting liquidity as necessary as part of a program to check Credit excess and permit the economy to commence its desperately needed adjustment period.

BDI price paid to ship BULK RAW MATERIALS (end up as finished goods) is correcting and has broken uptrend line.

NOV SHEPHERD INV NEWSLETTER Shows relationship of housing to economy at large.

Finiancials added to record SPX profits on way up, and ALL the trickle down industries and companies associated with mortgages, housing, and construction (commodities) and housing is most important component to our economy, as it unravels, what effect to economy do you think it will have? to SPX profits?

MAJOR US AND FOREIGN BANKS are reporting huge loan writedowns, and there is one of many questions remain.....how much more of this BAD PAPER, and OFF RECORD BOOKS BAD INVESTMENT remains?

DECEMBER usually a BULLISH month is running into trouble as we head for XMAS, my research show usually by late Jan market reaches at least a short term high and experiences a correction.

Buying enthusiasm has waned, volume on the rallies has fallen as it rises on the declines. Less and less SECTORS contribute to these same rallies and more and more have fallen into bearish looking trends.

I would argue my friends that the OLD BULL MKT has topped, even as theh FED tries to reflate, long interest rates instead are rising, dollar firms (for now) and in my best estimation we have enterred another Bear Market, where preservation of capital is more important than growing it.

I choose to take a very defensive posture, with little equity exposure, and mostly Treasury Money Market Funds (not the typical unguaranteed MM).

Talk to your financial advisor and look over what you are invested in and decide if their council is sound, voice your concerns if any. I don't think sitting around doing nothing will work out.

One could argue over time the market in last 100 years always goes up, but it also shows during long Bear Markets getting the right allocation can be critical over that period.

JMHO

Duratek