Bear Mountain Bull

From Doug Noland:

I want to commend David Malpass for his spot-on op-ed piece in today’s Wall Street Journal, “Near-Zero Rates are Hurting the Economy” (link here).

From the article: “The Federal Reserve implemented an emergency monetary policy after the 2008 Lehman bankruptcy to salvage the world financial system. In his testimony yesterday… Ben Bernanke said, ‘We must be prepared to withdraw the extraordinary policy support in a smooth and timely way as markets and the economy recover.’ This leaves all-out emergency monetary stimulus in place, but with a different, much weaker justification. With the system stabilized, the Fed hopes that artificially low interest rates and its purchases of mortgage-backed securities will spur growth. Instead they are pushing dollars abroad and wasting precious growth capital in asset and commodity bubbles… more than a year after the heart of the panic, the Fed is still promising near-zero interest rates for an extended period and buying over $3 billion per day of expensive mortgage securities… Capital is being rationed not on price but on availability and connections. The government gets the most, foreigners second, Wall Street and big companies third, with not much left over. The irony of the zero-rate policy, coupled with Washington’s preference for a weak dollar, is a glut of American capital in Asia (as corporations and investors shun the weakening U.S. currency) and a shortage at home… Much of its current stimulus is being diverted to commodities and foreign economies — hence Asia’s complaint about bubbles… Wall Street will threaten a tantrum if the Fed even thinks about damping the air-raid sirens. The Street utterly loves the Fed’s largess…”

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Mr. Malpass recognizes that the world has changed in fundamental ways. Today, “capital” flows first and foremost to Asia and commodities rather than to job-creating U.S. businesses. The more liquidity created here the more things inflate there. In my nomenclature, predominant Inflationary Biases and related Monetary Processes have been radically altered. Importantly, mania has given way to U.S. housing depression, while faith in sophisticated Wall Street Credit instruments has been shattered. The dollar has been severely impaired. There is no returning to previous cycle dynamics.

The reliable old Monetary Process – where Federal Reserve and GSE reflationary measures would immediately stoke rapid (and self-reinforcing) mortgage Credit growth, housing inflation, inflating household net worth, equity extraction, spending and government receipts – is no longer operable. Reflationary liquidity that for years gravitated predictably to our MBS and agency debt now prefers “undollar” asset classes, including emerging debt and equities, gold and metals, and commodities more generally.

The Fed’s capacity for domestic monetary stimulus has been greatly diminished, with U.S. and global economic systems these days responding altogether differently to reflationary policymaking. Yet the Bernanke Fed refuses to respond to the altered landscape. Dangerously, the Fed adheres steadfastly to its old policy approach – only implementing it more radically. Our central bank balloons its balance sheet with mortgage-backed securities, while pegging interest rates all the way down to zero. Worse yet, the Fed has signaled that the markets can bank on near zero percent for a protracted period. Global dynamics have changed, yet the Fed has locked itself into a precarious policy approach. Dr. Bernanke testifies that U.S. asset prices don’t appear overvalued. Meanwhile, price distortions and Bubble dynamics engulf the world.

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While perhaps not obvious from an asset price perspective, there are unmistakable Bubble and Ponzi Dynamics at work. The entire U.S. financial and economic recovery rests on a flimsy foundation of a highly distorted Treasury and agency market Bubble. I am the first to appreciate that Bubbles notoriously survive longer and grow larger than we Bubble analysts would expect. At the same time, the world has moved up the Bubble analysis learning curve. I find it disconcerting that many that recognize the unfolding Bubble landscape still believe they have plenty of time to profit and then get out before the bust. But I also sense the more sophisticated players are following developments with an increasing degree of angst.