Hedgers at the Margin
 
Will Reishman, Editor - The UnDollar Digest, 09/20/06

The U.S. financial system is undergoing a profoundly unprecedented Monetary Disorder. This is the understanding one gains from a steady diet of the insights of Mr. Doug Noland, the chronicler of The Credit Bubble Bulletin found Friday evenings at www.prudentbear.com.

The primitive paper money system of John Law, the later calamity of the Great Weimar inflation, and all previous fiat monetary regimes have been trumped and are being trumped again in this era of Wildcat Speculative Finance. The successive waves of money madness on which the American, and now even world economy are riding, were nurtured by recently departed Fed Chairman Alan Greenspan, a catastrophe now continued by his successor, Mr. Ben Bernanke.

The genius of America is no longer her inventions or her industry. No, her crowning achievements are the presumed craft of finance. This is the flame to which "the best and the brightest" are drawn. And in the end, with all this talent, with the soaring ecstasy and agony of fortune, or its loss, nothing truly is created. Nothing is made but egos, and the pretense of wealth. The land prospers not. In fact, it is made poorer by the diversions, the squandering of the urgency of time for fundamental tasks.

We are witnessing the heightening build up to one of the great human crescendos of all time. The pace more frenetic, the illusion more compelling, the stakes counting higher, the ultimate tragedy more inevitable and damning. Wall Street has become an enormous bubble machine. Having leased the money fountains from a pathetically weak and debauched central bank, there is no longer any discipline, no restraint. No deal conceived by their brilliance that cannot be peddled.

They are mad in an orgy of faux wealth serving no purpose but to perpetuate the World's Greatest Ponzi Scheme. More, more, and more must be poured onto the bonfire of this insanity, else it collapse upon itself. It is a frightful time, for who knows what will follow. Who knows how the many "little victims" will fare, and where the many fearful souls will turn for aid and comfort.

One undeniable product of the late stages of the Credit Bubble is the exponential growth of hedge funds. They and their enablers on Wall Street, the Goldman's and Morgan's of the world, have achieved market dominance. They say what's hot and what's not, at least those in the Ring do. Other strivers swim in their wake hoping to enjoy the generous crumbs from the table of monetary excess. (But it can be dangerous in the cold, trading against "the house." Just ask the boys at Amaranth.)

However, a corner may have just been turned toward reason. According to a recent article in the Wall Street Journal, NY Fed President Timothy Geithner believes that "regulators need to examine whether banks and securities dealers are imposing adequate margin requirements on hedge funds." (WSJ, 09/15/06) These players operate with enormous leverage, but the flip side of that advantage can be a market meltdown with which the financial system was threatened in the unwinding of LTCM in 1997. The action then was literally child's play compared with today where untold trillions in credit related derivatives loom like a massive structure of uncemented concrete blocks over the increasingly fragile U.S. economy.

If there's any hope of bringing this baby in for a soft landing, it's going to have to begin with easing back on the throttle of leverage. And yet, it's the very leveraged finance that is keeping all the balls in the air as we write. Now there's your conundrum, Mr. Greenspan!

To aid us in our understanding of these unprecedented times, and gain insight into the phenomenon of this Credit Monster, I find the work of Mr. Doug Noland indispensable. More than anyone whom I am privileged to read, he "gets it." It is as if somehow he rides in the belly of the Beast, as Jonah did the Whale. And as this Phenomenon unfolds, he can somehow sense and detect its evolution with more subtle precision than others.

My purpose in this brief word is to commend him to you. We post "The Credit Bubble Bulletin" each week on this site. It is posted originally at www.prudentbear.com sometime Friday evening, and we put up an edited version the following Monday afternoon. (Our edits usually consist of highlighting some of Mr. Noland's more compelling insights; though sometimes we slice away some of the statistics which the truly diligent can always access in the original at the Prudent Bear site.)

To read Mr. Noland is not always easy. His subject is obtuse as well as opaque. But make the effort, stay with it a while. I believe those with some passion to grasp what's going on will be rewarded with a bit of wisdom to guide them on their way into what could be a perilous financial future. To encourage you in this pursuit please see below some of his more salient observations from his "Monetary Disorder" commentary posted on September 15th. (The full "edited" posting appears below.)

...If one area of the market falls somewhat out of favor, [Wall Street's dealmakers will] simply fashion and offer buyers the type of securities, instruments and/or derivative products with the return, risk and liquidity profile they [Buyers] demand.

...[E]nterprising Wall Street proprietary trading desks are the first to jump on whatever trend they and their clients labor to popularize...Have there ever been more powerful direct incentives to sustain a financial boom?

...These Monetary Processes and resulting Monetary Disorder are only reinforced by the Bernanke Fed's abhorrence of popping Bubbles.

...Runaway U.S. Financial Sphere excess and attendant massive U.S. Current Account Deficits are the primary (inflationary) factor spawning this unparalleled Ballooning Pool of Global Speculative Finance. And it is this increasingly Unwieldy Reservoir of Capricious Financial Flows and Leveraged Speculation that is spurring increasingly destabilizing volatility throughout global currency markets (i.e. New Zealand and Iceland), the emerging markets, energy and commodities, and U.S. and global bonds and equities.

...The longer rampant Credit Inflation is accommodated the larger the pool of speculative finance that is allowed to balloon, and the more spectacular the inevitable dislocations...

...[A] key aspect of Acute Systemic Monetary Disorder is the rolling nature of sector booms and price Bubbles. It is almost as if one can just pick an area and sit back and wait for the inevitable boom for easy enrichment. The perceived risk vs. reward of chancy endeavors becomes too enticing to resist. It is this Inflationary Psychology that leads to rolling spending booms - certainly including technology, housing, energy, capital goods, exports, healthcare, education, government, etc. - that ensure a Credit-induced Bubble Economy operates at near capacity...

If the Bernanke Fed is relieved by - or perhaps even celebratory of - the decline in energy and commodity prices in conjunction with gains in stock and bond prices, I suggest to them that they should instead be extremely concerned with the unprecedented degree of speculation now permeating U.S. and global securities markets. Rampant and unmanageable Credit Inflation and its myriad effects remain their chief worry. As such, a speculative run in U.S. equities would essentially culminate Monetary Disorder's worst-case scenario.