That was already posted earlier. I even went to the source and emailed a bigger excerpt of it to my brother who's Pres. at a US manufacturing company so he might keep a closer watch on raw material prices. I did like the part about melting down the coins.
This monetary/liquidity mechanism gained deserved credibility from rectifying the tumultuous market episodes of 1994, 1998, 1999, 2001, and 2002 experiences. Over the past several months, this “mastery” has been absolutely flaunted. Credit, liquidity and speculative excesses were taken to a whole new level. Interest rates began to shoot higher in July. Quickly, the highly leveraged and speculation-rife bond and interest-rate derivative markets faltered in near dislocation. But from July through September, Fannie and Freddie expanded their mortgage portfolios by the unprecedented $160 billion (compared to the 2nd quarter’s $13.3 billion increase). Problem “resolved.”
It is worth briefly rehashing the dynamics of GSE “liquefication.” Today, the system is acutely vulnerable to rising interest rates. For one, we face unprecedented leveraged speculation that would be forced into problematic liquidation in the event of a significant and sustained rise in interest rates. Second, there is great systemic risk associated with asset Bubble dynamics (especially throughout mortgage finance) and exceptionally weak debt structures after years of poor and excessive lending (Minsky’s “Ponzi Finance”). Third, there is this incredible interest-rate derivatives monster that expands with each new day of Credit and speculative excess. The GSEs, speculators, and other financial operators have purchased derivative protection against rising rates. Sellers of unfathomable quantities of “insurance” must “dynamically hedge” their exposure in the event of rising rates -- they are forced to sell/short Treasuries, agencies and other debt instruments into a declining market to establish positions that would generate the required cash-flow to pay Fannie, Freddie and all the rest in the event of a sustained jump in rates.
It is simply difficult to comprehend how our Credit system could avoid dislocation (a liquidity crisis) in the event of sharply higher rates. Everyone knows as much. Yet there is apparently no cause for concern. The Fed, GSEs and Wall Street have mastered the art of manipulating market rates and liquidity. With the first serious episode of spiking rates/speculator liquidation/derivative-related selling, the GSEs immediately commence the ballooning of their balance sheets (buying mortgages and other debt instruments). This accomplishes several crucial things; I’ll touch quite briefly on a few. First, it provides the leveraged players a “Buyer of First and Last Resort,” thus emboldening the community and keeping them in the game (no liquidation allowed!). Second, by aggressively acquiring mortgage-backed securities, GSE operations mitigate the amount of (duration) hedging that would otherwise be required by holders of these securities in a rising rate environment. And, most importantly, by capping the interest-rate rise, GSE liquidity operations greatly allay the amount of systemic derivative selling that would be necessary if rates were to jump sharply. Or, stated differently, the JPMorgans and Citigroups of the world, with their huge and growing interest-rate derivative positions, can sleep soundly at night with the confidence that the Fed and GSEs enjoy the capacity to manipulate rates lower at their discretion. With this – a guarantee of continuous and liquid markets, along with “pegged” low rates – a flourishing interest rate derivative market becomes viable. The key Credit Bubble perpetrators - the expansive Fannie, Freddie and speculator community - are advanced the cheap insurance necessary to ensure continued rapid growth. It's like buying flood insurance in an environment where the insurance community can carefully control the amount of rainfall.
A truly amazing system has evolved over time. And, let there be no doubt, “The Community” has ably and repeatedly demonstrated its capacity to regulate the amount of “rainfall”/interest rates/liquidity. The Fed can peg short-term rates at 1% and orchestrate a steep yield curve; the GSEs can sit back with the capacity to create enormous liquidity on demand; the leverage speculators can bet with reckless abandon; the financial sector can expand without limitation; inexhaustible liquidity can fuel real estate and securities inflation and resulting economic expansion; and the interest-rate derivative players can write unbounded policies with confidence that rates will simply not be allowed to shoot higher. All the while, the Credit system can expand aggressively with little concern for the endless supply of new dollar financial claims created. A Trillion here and a Trillion there, and there’s no downside. Speculative demand for securities will meet the ballooning supply, with little if any impact on the “controlled” interest rate markets. Cheap and plentiful Liquidity on Demand Forever!! A truly historic “achievement.”
This manipulation has an enviable track record, working so splendidly so many times. But there is a flaw and this failing is and will remain the focal point of my analysis. And this serious flaw goes right to the heart of A True Paradigm Shift. Yes, U.S. interest rates are today controllable and this reality does wonders for the entire fragile financial system and hopelessly distorted U.S. economy. And domestic demand for the endless supply of new Credit – inflated dollar financial claims - can be orchestrated by an expanding U.S. financial sector. But the flaw? Its Wildness Lies in Wait out there in the increasingly distrustful and less compliant global financial arena. The Almighty Fed, the Commanding GSEs and A Powerful Wall Street are today simply not well endowed when it comes to the capacity to manipulate global demand for Bubble Dollar Balances.
The bottom line is that, despite its repeated “successes,” this New Age Financial Control Mechanism (“The Great Experiment”) has not really been tested. Contemporary U.S. interest-rate/liquidity manipulation basically evolved over the King Dollar period 1995 through early 2002. The confluence of inflating U.S. asset prices, an outperforming economy, international high regard for the U.S. generally, and the impaired global financial system, worked to effortlessly recycle the rising flood of U.S. dollar balances right back to U.S. markets. There was absolutely no limit – no domestic or global constraints – on the amount of Credit creation (dollar claims inflation) generated during these U.S. liquefications. The liquidity jubilantly found its way right back to U.S. assets: the late nineties direct investment boom; the technology and U.S. stock market mania; and the Treasury/agency/”structured finance” securities Bubble. The ease of “recycling” dollar balances – of which everyone has grown so accustomed - was a most seductive aberration.
There are a few dynamics worth pondering. First, with the demise of King Dollar comes significantly reduced private demand for U.S. real and financial assets. Nowadays, relative performance of Non-dollar assets gains by the week, exacerbating Non-dollar financial flows. Second, Credit Bubble dynamics dictate (and recent GSE balance sheet ballooning provides evidence) that Credit excess (dollar financial claims inflation) must expand at an accelerating pace to support both levitated U.S. asset prices (real and financial) and an increasingly distorted Bubble economy. Thus, the dynamic of ebbing global demand and the accelerating flow of dollar claims pose a not inconspicuous dilemma. Importantly, however, global central banks have for the past year filled the void. This is not sustainable, and it is worth noting that dollar demand has been supported during this period by strong financial markets and a strengthening economy. Things can easily get much worse, and I would warn that there is a major problem with the markets complacency regarding the risk associated with dollar weakness.
(snip, probably should have snipped but I'll leave you to wade through it)
Granted, the U.S. does not today have a vulnerable currency peg. I would argue, however, that unprecedented foreign central bank dollar purchases have to this point played the pivotal role in stemming currency dislocation. But these extreme measures have only bought some time. Importantly, U.S. domestic interest-rate/liquidity manipulation ensures an unrelenting flood of new dollar balances to be accumulated by our foreign Creditors. This is growing exposure that they would surely prefer to hedge against. Meanwhile, the Great U.S. Credit Bubble dictates that gross excess goes to only more unimaginable extremes. And all of this guarantees that the ballooning mountain of dollar derivative positions becomes only more intractable. All the Fed, GSEs and Wall Street can do at this point is make things worse. And are they ever doing it.
Any other Credit system would impose higher interest rates to help support their faltering currency. Higher market rates would work to quell financial excess and Credit inflation, the forces of currency devaluation. The Big Flaw in our New Age system of manipulated interest rates/liquidity creation is that we have mindlessly sacrificed the capacity to rein in Credit and liquidity excess. We simply can’t turn down dollar devaluation and have no intention of doing so. “It’s our currency, your problem.” The Fed and market players apparently believe that the dollar will calmly find some level commensurate with "fair value." But low rates and Credit Bubble dynamics dictate dollar devaluation as far as the eye can see. Such dynamics simply beckon for an eventual run on the dollar. And such a scenario would quickly overwhelm global central bankers already with massive dollar holdings they don’t know what to do with. I believe acute dollar vulnerability is here for the duration: A True Paradigm Shift in Global Finance, and certainly not one for the faint of heart.
October 22 - MarketNews International quoting ECB Chief Economist Otmar Issing: “There would be nothing worse than if monetary policy were to undertake and try to influence the economy directly.”
Exactly the point I was trying to make! Buying copper mines is one of many ways to make money.
One can also buy funds that invest in China, or Chinese (and Hong Kong) stocks. NTES and SOHU (internet), but also oil (CEO and PTR), a diesel manufacturer (CYD), many others.
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