Zeev's Turnips Patch-No Politics (ZEEV)

[Joe Stocks]

>>>I believe that the reason behind that is primarily due to the very high debt situation for both businesses and for consumers, which prevents further expansion by the normal means of creation of new debt.<<<

Mlsoft, From Doug Noland's weekly commentary:

"The perception is growing that acutely stressed securities markets have now commenced a financial recovery similar to the post-LTCM and post-9/11 experiences. We’re skeptical. Keep in mind that the reliquefied and over-stimulated post-LTCM Credit system hit a U.S. economy poised to fire on all cylinders and a technology/stock market Bubble hankering to go into speculative blow-off. In other words, the expansive NASDAQ Bubble was teed up and the economy momentum-driven on the upside. The reliquefication and over-stimulated post-9/11 Credit system fed perfectly into a financial system and mortgage sector raring to go to unprecedented excess. The expansive mortgage finance Bubble was teed up and the leveraged speculators ready.



We are today at a loss to recognize a new Bubble lying in wait for the latest round of reliquefication. Certainly, there is nothing on the horizon of the dimensions necessary to mollify a receding historic mortgage finance Bubble. It is also our impression that the leveraged speculators are fully loaded. Sure, corporations will line up to borrow and American governments of all shapes and sizes will finance expanding deficits. And in the short-run – while mortgage borrowings remain enormous – combined Credit creation is sufficient to sustain the Great Credit Bubble. Money supply growth is certainly indicative of continued rampant monetary excess and over-liquefied conditions. But looking out past a few months, things are not so clear. Our hunch is that a negative surprise on the consumption side lurks: As goes the mortgage finance Bubble, so goes the consumer spending Bubble. And after years of over-consumption and mal-investment, the consumption/service-sector U.S. economy is addicted to household over-borrowing and over-consuming. The vulnerable U.S. economy could easily prove “out of the woods” for now, but we fully expect unrelenting money and Credit excess to prove only more distorting to the fragile U.S. financial system and hopelessly maladjusted economy.



Whether it is mortgage refinancings, auto sales, retail sales, durable goods orders, business confidence, or GDP growth, we have been witnessing extraordinary economic volatility. The pundits would like us to believe that these unsettled conditions are only evidence of a sound although “uneven” recovery. We tend to see things differently. In our view, the economy has become hostage to an unstable securities and speculation-driven U.S. Credit system. When bullishness flows, easy Credit availability stokes spending and economic “output.” The relative degree of stimulation is determined by whatever is the hot sector (NASDAQ stocks and telecom debt, or agency and mortgage-backs, for example). But when bullishness ebbs and risk aversion holds sway, the Credit spigot can rather abruptly run dry for many sectors (but apparently never in mortgage finance). With the contemporary Credit system absolutely dominated by leveraged speculation, “structured finance,” and sophisticated hedging strategies, weakening Credit market conditions fosters enormous securities selling and a self-reinforcing contraction of Credit availability for many companies and sectors. Faltering Credit conditions incites additional selling (“Delta-Hedging”), with declining bond and asset prices fostering a self-feeding mountain of short-positions. Liquidity then vanishes for most companies and many sectors.



But despite the gross debt overhang and acute financial fragility, market dynamics will necessitate intermittent reversals of these hedging programs. During these periods, the semblance of abundant liquidity will return almost as if by divine intervention. Surging stocks and the return of liquidity to the corporate bond market are reinforcing, especially in over-liquefied financial markets. And most will interpret market action as a confirmation of rapidly improving fundamentals, when in fact rising financial asset prices have almost everything to do with market dynamics. The performance chasing money managers and speculators will jump on board.



We see good reason today to make reference to The U.S. Delta-Hedged Economy. Speculative trading strategies have come to dominate the Credit system, thus assuring a destabilizing roller-coaster ride of speculation, sophisticated hedging-related securities trading, Credit availability, and attendant economic “output.” We have no idea how long this upward ride will last this go around, but we are confident that there is a steep and potentially breathless decline waiting on the other side. We have absolutely no doubt that maintaining Credit, speculation, and spending Bubble excesses are simply not going to rectify the problem. It’s a roller coaster from here on out. Let’s not forget that it takes enormous amounts of unrelenting Credit creation and leveraged speculation to sustain the Great Credit Bubble. And we certainly don’t expect rampant excess to all of the sudden turn stabilizing. In fact, we are expecting a rather wild ride from here on out as a confluence of unprecedented monetary and speculative excess - along with an unstable Bubble-impaired economy - creates an especially unpredictable and volatile mix. Going forward will require that we study the intricacies of the maladjusted U.S. economy very carefully."

http://www.prudentbear.com/creditbubblebulletin.asp

Joe