Category: central bankers

Greenspan sees no bubble

The Maestro’s crystal ball is the gift that keeps giving.  With an uncanny knack for completely missing most of the major inflections points in financial markets over the past five decades, Greenspan added this gem to his resume in a FOX Business News interview yesterday:

“There are a lot of things that can go wrong, but to say that the market is bubbly and in a position where it could conceivably create a serious problem, I think is overstating it.”

Let’s put this prediction in perspective by filling in some of his resume…

“It’s very rare that you can be as unqualifiedly bullish as you can now.”  ~ Alan Greenspan, The New York Times “Economic Survey”, January 7, 1973

1973 and 1974 turned out to be the worst years for economic growth and the stock market since the Great Depression.  (as noted in Jason Zweig’s commentary in The Intelligent Investor)

On October 2, 1990, then Federal Reserve chairman Greenspan made this prediction:

“At the moment it isn’t raining.  The economy has not yet slipped into a recession.”

It was later revealed that a recession had actually begun three months earlier, in July.

In April 2000 (one month after the NASDAQ peak), Greenspan was asked if rising rates would prick the stock market bubble.  His response:

“That presupposes I know that there is a bubble…  I don’t think we can know there’s a bubble until after the fact.”

From The Age of Turbulence (2007), Greenspan recounted his thoughts on the 2003-2006 housing bubble:

“I would tell audiences that we were facing not a bubble but a froth – lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy.”

The December 26, 2005 issue of BusinessWeek confirmed his complacency:

“The view of most economists, including Fed Chairman Alan Greenspan, is that a national home-price bust is highly unlikely.”

Greenspan also whistled past the subprime lending grave:

“With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . . As we reflect on the evolution of consumer credit in the United States, we must conclude that innovation and structural change in the financial services industry have been critical in providing expanded access to credit for the vast majority of consumers, including those of limited means. . . . This fact underscores the importance of our roles as policymakers, researchers, bankers and consumer advocates in fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”  ~ Alan Greenspan, from a speech given April 8, 2005

Housing prices peaked in Q1 2006 and by Q4 were in full retreat, yet Greenspan was unconcerned:

“Most of the negatives in housing are probably behind us.  The fourth quarter should be reasonably good, certainly better than the third quarter.”  ~ Alan Greenspan, October 26, 2006

Even as late as Q2 2008 he thought the worst was over:

U.S. financial markets, roiled by the collapse of the subprime-mortgage market, have shown a pronounced turnaround since March. The worst is over for the credit crisis, or will be soon, and there’s now a reduced possibility of a deep recession.  ~ Alan Greenspan, June 13, 2008

The S&P 500 plunged nearly 45% over the ensuing five months.

Alan Greenspan is a stark reminder that central bankers have only one productive use: as contrary indicators.

Fed officials give their imprimatur to stock market bubble


Last Friday former Fed chairman Alan Greenspan gave support that the 4-year bull market in stocks has room to run:

And right now, by historical calculation, we are significantly undervalued.  The reason why the stock market has not been significantly higher is there are other factors compressing it lower.  But irrational exuberance is the last term I would use to characterize what’s going on at the moment.

On March 4, Fed vice-chair Janet Yellen assured investors:

At this stage, there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability.

And on February 26, chairman Ben Bernanke gave stocks his stamp of approval:

I don’t see much evidence of an equity bubble.

Not to question these all-knowing masters of the universe, but there does seem to be a trifle of evidence to the contrary, that perhaps their zero interest rate policy (ZIRP) has stampeded savers into anything hinting at a yield.  Exhibit A: Over $1 trillion has poured into bond funds over the past 4 years (out of money market funds).  Exhibits B and C: Junk bond yields are at record lows and margin debt near record highs.  Exhibit D: Total credit market debt is a record $56.1 trillion (352% of GDP) compared to $49.8 trillion (also 352%) at the top of the credit bubble 5 1/2 years ago.

After the tech bubble burst, The Maestro admitted that when it came to detecting bubbles investors were on their own:

We at the Federal Reserve considered a number of issues related to asset bubbles–that is, surges in prices of assets to unsustainable levels. As events evolved, we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact–that is, when its bursting confirmed its existence.  (August 30, 2002)

Five years later those words proved prescient (one of the few times) as the Fed-heads missed the housing bubble and failed to recognize how it had metastasized into a full-blown credit bubble.  While still at the helm of the Fed, Greenspan weighed in on his 6-year experiment to contain the bursting tech bubble (which he failed to see coming):

Most of the negatives in housing are probably behind us.  (October 26, 2006)

Right before the subprime bubble burst, Janet Yellen was oblivious to any impending trouble:

I’m waking up less at night than I was [over the slowdown in housing].  So far, there’s been remarkably little effect on the rest of the economy.  (February 21, 2007)

After taking the reins at the Fed, Bernanke did his own Alfred E. Newman impersonation:

We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.  (May 17, 2007)

The Federal Reserve’s crystal ball does not do asset bubbles.  When its wizards begin to feel they possess such power (that is, denying the presence of a bubble), contrarians take notice.

Greenspan defends his legacy

On Tuesday, the Wall Street Journal published an abridged version of several interviews with Alan Greenspan in which he defended his actions from 2001-2005 which many believe fomented a massive credit bubble (present company included). In addition, interviewer Greg Ip ran a front page story on the critique and defense of post-millenial Greenspan. Ip framed the debate along the interventionist paradigm with this line:

The Fed’s low rates and laissez-faire regulatory oversight during his final years are widely blamed for sowing the seeds of today’s financial crisis — one that began in the U.S. housing market and is now battering banks, stock markets, borrowers and consumers around the world.

According to the prevalent interventionist mindset, we’re allowed to criticize the policies of the Fed, but never the institution or the system itself. Strange, Greenspan is supposed to be a disciple of Ayn Rand, complete with free market pedigree. Yet he was a lousy forecaster in both the private and public sector, and did stints as a government employee before taking the position as arguably the most powerful central planner in the world for 19 years. Is it not a total contradiction for anyone to use “Fed” and “laissez-faire” in the same sentence?

The Fed is like a broken candy machine and the chairman’s job is to dispense candy. By definition, a policy of lowering rates to 1% is intended to crank up the machine; sugar highs among the kiddies are the predictable result. Regulating the distribution of candy either limits the amount of candy (contrary to the stated policy) or attempts to means test the recipients (an exercise in futility). Keep in mind, the Fed chairman is a child himself, and owes his priviledged position to the other children hooked on chocolate. As Greenspan said in the Q&A:

I have always seriously questioned [bank examiners’] ability to do more than what counter-party surveillance would do. What evidence do we have that this actually works? Because I know that internal auditors of a bank have significant difficulties in spotting problems and malfeasance within a bank, and the outside auditors obviously have less than the inside auditors. The capabilities of regulators are still less. The problem is not the lack of regulation, but unrealistic expectations about what regulators are able to anticipate and prevent.

How ironic that Greenspan is concerned about moral hazard here (and rightly so), yet was guilty of creating the mother of all moral hazards by attempting to suppress every crisis, beginning with the ’87 Crash. He adopts humility when attempting to regulate the activity of lenders and borrowers, yet very little with regard to the pricing of short-term credit.

Greenspan, Bernanke and every other central banker see the world through an interventionist lens. The boom-bust cycle is never caused by their manipulations of the credit markets, but always seen as an unsavory side effect of capitalism or a “dynamic economy.” The role of central bankers is to mop up the mess and prevent its spreading. They honestly believe this was the lesson of the Great Depression and Japan during the 1990s (even though central bank induced credit expansions caused both bubbles and massive government intervention prolonged and deepened each correction.) This is why Greenspan flooded the system with cheap credit during the tech bust (an insurance policy against the possibility of a Japan-style deflation), and why Bernanke is doing the same today. As Jim Grant wrote in his latest issue, “Who better to manage crises than the institution that instigates them?”

How can the cure be more of what caused the disease in the first place? Einstein defined insanity as “doing the same thing over and over again and expecting different results.”

Were friends of the Fed tipped off?

According to an article on Bloomberg today, a phone call from none other than Robert Rubin to Ben Bernanke in early August set in motion a series of private sector conversations that culminated in the surprise discount rate cut on August 17:

The Federal Reserve’s Aug. 7 decision to keep interest rates unchanged set off a chain of high-level discussions with Wall Street executives, money managers and cabinet officials that culminated in Chairman Ben S. Bernanke’s public about-face 10 days later, according to records of his schedule.

Starting with a phone call from former Treasury Secretary Robert Rubin the day after the August rate meeting, Bernanke’s appointments included Lewis Ranieri, founder of Hyperion Capital Management Inc., and Raymond Dalio, president of Bridgewater Associates.

Of course, Bernanke also consulted with Hank Paulson:

Bernanke was also in frequent contact with Treasury Secretary Henry Paulson, who said in an interview last month that he meets the chairman regularly.

Hmmmm. Let’s establish a time line here, keeping in mind Rubin and Paulson are ex-Goldman Sachs CEOs in direct communication with the head of the Fed…

Aug. 7 – The Fed stands firm, keeping rates unchanged.

Aug. 8 – Rubin calls Bernanke.

Aug. 9 – Bernanke calls some Wall Street bigwigs including Ray Dalio at Bridgewater Associates, the 4th largest U.S. hedge fund with $32 billion under management (Dalio is personally worth $4.0 billion according to latest Forbes 400). The WSJ reports, “the Fed twice entered the market today to pump a total of about $24 billion of liquidity into the system, more than its typical daily open-market activities.”

Aug. 10 – A Goldman Sachs “quant” hedge fund, Global Equity Opportunities, suffers a brutal week, losing about 28% of its value to $3.6 billion. Its North American Equity Opportunities fund and Goldman’s flagship, Global Alpha, are also taking significant losses.

Aug. 13 – Goldman Sachs injects $2.0 billion into its Global Equity Opportunities fund. The company is joined by a group of big-name investors, including AIG’s Hank Greenberg and Eli Broad, who pony up $1 billion. (Greenberg, 82, is worth $2.8 billion; Broad, 74, is worth $7.0 billion.) Goldman reportedly cuts its fees to entice investors.

Aug. 16 – In a wild day, the Dow rallies back to unchanged in the final hour to 12,846 after being down nearly 400 points intraday.

Aug. 17 – Before the market opens, the Fed drops the discount rate by 0.50% to 5.75%, timed on an option expiration Friday for maximum bullish effect. The Dow rallies 233 points to 13,079. Global Equity Opportunities rises 12% for the week.

Aug. 31 – Global Alpha loses 22.5% in August, its worst month ever. Year-to-date, the fund has lost a third of its value. According to Bloomberg, “Investors last month notified… Goldman, the most profitable securities firm, that they plan to withdraw $1.6 billion, or almost a fifth of the fund’s assets as of July 31… Global Alpha will have to return 80 percent before the managers can resume collecting 20 percent of investment profits from clients who were in the fund at the beginning of last year.” Global Equity Opportunities finishes the month down 23%.

Sep. 14 – Global Equity Opportunities is reportedly down 1.9% so far for the month. Global Alpha is down 2.8% (and off 46% from its March 2006 peak). “People aren’t going to keep suffering losses,” said Brett Barth, a partner at New York-based BBR Partners, which invests in hedge funds. “These funds are supposed to do well with risk management. Something has gone badly awry.”

Sep. 18 – The Fed surprises the market with 0.50% cuts in both the fed funds and discount rates. The Dow rockets 336 points, its best day in 5 years, to 13,739.

Sep. 20 – Goldman reports much better than expected 3rd quarter results. Trading and principal investments revenue was $7.6 billion, up 21% from the 2nd quarter and up 73% from a year earlier. “The numbers are great,” Glenn Schorr, an analyst at UBS AG in New York, wrote in a note to investors today. The earnings demonstrate Goldman’s “ability to not only navigate choppy waters, but make a ton of money doing so,” he said.

Oct. 3 – Goldman Sachs stock hits an intraday high of 230.63, up 46% from its mid-August lows and within 2% of its all-time high.

It is no secret that Goldman Sachs has plenty of friends in high places. It is no secret that the company, as well as the rest of Wall Street, was on the ropes in August. In mid-August, politically-connected Hank Greenberg wrote a big check and a week later he was 12% in the black. By the end of August, the firm reported its second best trading results ever. All along, those friends seemed to be doing everything in their power to rescue them.

Is it a stretch to imagine this is more than mere coincidence? Was Goldman and some of its cronies privy to what is essentially inside information? Where is the outrage?

Lew Rockwell is right: politics – especially when applied to finance – is a rich man’s game.

Grading the Bernanke Fed

Here is the Fed’s report card since attempting to preempt asset deflation on August 17th with a surprise 50 basis point rate cut in the discount rate:

Lowering long-term borrowing costs: D
– 10 year Treasury yield: -0.02%
– 30 year Treasury yield: -0.10%

Saving the homeowner: C-
– Countrywide Financial: +0.3%
– Fannie Mae: -6.7%
– Housing Index (HGX): -2.7%

Bailing out banks and Wall Street: B-
– Banking Index (BKX): -0.4%
– Broker/dealer Index (XBD): +8.2%

Encouraging speculation: A
– S&P 500 Index: +8.2%
– Nasdaq 100 Index: +13.3%

Fanning the flames of inflation: A+
– Gold: +13.7%
– Crude oil: +16.7%
– CRB Index: +10.7%

Trashing the dollar: A+
– Trade-weighted U.S. Dollar Index: -4.8%

Congratulations, Ben. You’ve just earned your honorary degree from the Greenspan School of Monetary Madness. You are a quick study and more than worthy of the distinction.

Fleckenstein: Bernanke is the anti-Robin Hood

On MSN Money, Bill Fleckenstein explains how the Bernanke Fed is stealing from the poor to bail out Wall Street’s fat cats.

Bernanke’s printing press drives gold stocks to all-time highs

U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Since Ben Bernanke gave his fateful deflation prevention speech on November 21, 2002, the Greenspan/Bernanke Fed has succeeded beyond its wildest dreams. The value of the dollar has dropped 26%, commodities – as measured by the CRB Index – have risen 44%, and gold has vaulted 130%. Corn is +52%, silver +200%, and crude oil +205%. Meanwhile, the official measure of inflation, the CPI, is only up 14.9% (+3.0% per annum).

Let’s review their combined track record:
  1. Preventing deflation: Commodity prices for American consumers have risen 8.1% per year, for foreigners just 1.4%/year.
  2. Keeping inflation expectations contained: Official inflation is only up 3.0%/year, even less after subtracting volatile food and energy prices. The 10-year TIPS spread shows fixed income investors expect CPI reported inflation over the next 10 years of just 2.31%, up from 1.64% in November, 2002.
  3. Keeping asset inflation stoked: The investor class is happy, with the S&P 500 up 64%, or 11.2% per year.
  4. Lining the pockets of their banking constituents: The total return for bank stocks is roughly 10% per year, while the total return of brokerage stocks is about +23%/year. The Bernanke Fed in particularly has done everything in its power to rescue Wall Street and the commercial banks from their ill-conceived investments.
Great job, guys. But before you accept your Central Banker of the Century awards, you might want to pay closer attention to 27-year highs in gold prices and inflation creeping into every nook and cranny except where you most need it – in real estate prices. Right now, inflation expectations are contained. (For example, the Rydex Precious Metals Fund has experienced a steady stream of outflows the past 4 years, despite the recent breakout in gold stocks. See graph below.) But what happens as investors begin to wake up, as they inevitably will? You are in a box. Lower short-term rates and you unleash inflation expectations, driving up long-term rates and ultimately short-term rates. Do nothing – your best course of action – and you let your banking cronies suffer the consequences of their recklessness, ineptitude, and fraudulent behavior of the past 7 years.

We wish you well.

Greenspan sees parallels to ’87 crash

The WSJ reported on a speech given by Greenspan last night:

“The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907,” Mr. Greenspan told a group of academic economists in Washington, D.C., last night at an event organized by the Brookings Papers on Economic Activity, an academic journal.

He then went on to blame the boom/bust cycle on emotion, or what Keynesian economists refer to as “animal spirits:”

Mr. Greenspan, Fed chairman from 1987 to 2005 and now a private consultant, said business expansions are driven by euphoria and contractions by fear. While economists tend to think the same factors drive expansions and contractions, “the expansion phase of the economy is quite different, and fear as a driver, which is going on today, is far more potent than euphoria.”

Too much optimism leads to bubbles, regardless of what central bankers do to throw cold water on them:

The euphoria in human nature takes over when the economy is expanding for several years, and leads to bubbles, “and these bubbles cannot be defused until the fever breaks,” he said.

Bubbles can’t be defused through incremental adjustments in interest rates, Mr. Greenspan suggested. The Fed doubled interest rates in 1994-95 and “stopped the nascent stock-market boom,” but when stopped, stocks took off again. “We tried to do it again in 1997,” when the Fed raised rates a quarter of a percentage point, and “the same phenomenon occurred.”

“The human race has never found a way to confront bubbles,” he said.

So let me see if I have this straight:

  1. Artificially low interest rates provided by central bankers have nothing to do with bubbles.
  2. Responding to every crisis with artficially low rates doesn’t lead to moral hazard.
  3. I acted responsibly during my reign as Fed chairman from 1987-2005.
  4. Unfortunately, investors let emotions get the better of them from time to time during those 18 years.
  5. I should go down as the greatest Fed chairman in history.
  6. The Fed can take credit for saving capitalism from itself.
  7. Don’t forget to buy my upcoming book.

Azimuth: Recurring themes

Why the Azimuth blog? Our primary reasons were to get organized (observations and ideas), create an audit trail of our thinking and decision making – right or wrong, and chronicle the ebb and flow of financial markets from fear to greed and back. We also wanted to create a resource for a select group of like-minded people we respect and hope will contribute to this interchange of ideas. And lastly, we wanted to give our clients a window into the investment process.

As you are surely aware from even a cursory glimpse of this blog, there are several recurring themes. In a business where portfolio managers with fully-invested mandates are stuffed into confining style boxes, the performance game is played out in months and quarters, conformity is rewarded, and sound economics and historical perspective are considered career liabilities, we take a different tack: big picture generalists and contrarians, with a strong sense that history and economics actually matter.

As I write this, we are in the midst of perhaps the greatest credit mania the world has seen. How did we get into this mess? Who is responsible? How will it play out?

Manias, by their nature, are collective detachments from reality. Traditional norms of behavior are abandoned, standards eroded, egos inflated, and dissent muzzled. We like this definition found on “a form of mental illness in which the sufferer is over-active, over-excited, and unreasonably happy.” The boom phase is where sins are committed; bust exposes those sins and forces a return to sanity and health.

We believe the current mania in credit has at its core four related frauds:

    1. Artificially cheap and abundant credit. The root problem is the central bank’s license to essentially print money out of thin air and the banking system’s ability to pyramid credit a multiple of times on top of this. Not only is this scam inherently inflationary (sometimes of the asset variety), but leads to what the Austrian economists call “malinvestment.” This newly created money and credit found its way into the “New Economy” during the late 1990s. As that bubble burst, another much greater wave of new money ignited first a housing bubble (which hit a wall in 2005), followed by a professional speculator bubble.
    2. Drive to expand homeownership. For the past two decades, inviting more people to live “the American dream” has been a matter of public policy. Government-sponsored enterprises, such as Fannie Mae and Freddie Mac, ramped up their activities to the point where several years ago these businesses owned or insured roughly half of the residential mortgage market in this country. Banks, through “community lending” initiatives, have also been coerced into providing cheaper credit to lower income borrowers. What has taken place is a quasi-socialization of the mortgage market.
    3. Lack of true market pricing in the securitized loan market. In the structured finance arena, the over-reliance on “mark to model” pricing short-circuited a re-pricing of credit that should have taken place as the housing bubble started unwinding in the second half of 2005. The securitization assembly line was kept humming and the credit spigot left open much longer than it should have. Essentially, problems were swept under the rug and the day of reckoning put off.
    4. Belief in ability of authorities to regulate economic activity. There is a pervasive feeling that markets are incapable of regulating their own activity and that government bureaucrats are necessary, if not perfect. However, reality has fallen short of theory. E.g., the original whistleblowers of Enron were capital-risking, profit-seeking short sellers like Jim Chanos and critically thinking journalists like Fortune’s Bethany McLean. The SEC not only missed the problems at Enron due in part to negligence (last review of their financials was in 1997, four years prior to the blowup), but also Tyco International in which they did an extensive investigation during the early 2000s, then rendered a clean bill of health right before the stock collapsed. The government sanctioned rating agencies (especially Moody’s, S&P) also have a long history of being pervious gatekeepers.

If there is one overriding theme to this blog, it is our appreciation for the free market and disdain for government intervention into peaceful, voluntary, and – by definition – mutually beneficial activity. The interventionists, throughout history, have been motivated primarily by two groups: passionate ideologues and scoundrels looking to use the gun of the state to their unfair advantage. As guest author of this blog, Phil Duffy (also my dad), likes to say, “the greatest enemy of capitalism is the capitalist.” What he is really referring to is the “political capitalist.” (In a wonderful book on the subject, The Myth of the Robber Barons, Burton Folsom distinguishes between true “market entrepreneurs” and “political entrepreneurs” during the early days of mercantilism (or cronyism) from the mid- to late-1800s.) The most influential and harmful political capitalists today reside within the financial establishment. Unlike you and me, they expect to live in a world of asymmetric risk in which they are bailed out when making poor bets.

Unfortunately, when the easy money fueled tech/telecom/dot-com boom of the late ’90s met its maker, very few fingers were pointed at the true causes. Capitalism got the blame and the financial enablers, finaglers, and gatekeepers largely got off the hook. In fact, the regulatory apparatus was expanded with the passage of SarbanesOxley, for example. At the time, we felt there was plenty of unfinished business and that we were setting ourselves up for greater problems down the road. Little did we know…

We will profess a certain fascination with the whole sordid affair. This is one grand Greek tragedy with a colorful cast of characters, including Alan Greenspan, Ben Bernanke, Jim Cramer, Larry Kudlow, Franklin Raines, Hank Paulson, Angelo Mozilo, and Ken Fisher. As this play moves from spectacle to farce to disaster, our hope – and belief, is that we will learn from this and be better off. Ultimately, we are all human and susceptible to human failings. The road to true recovery begins not just by rounding up the culprits, but laying blame where it really counts: by looking in the mirror.

Todd Harrison chronicles cluelessness of central bankers

Minyanville’s Todd Harrison penned an article on MarketWatch today about the role of central bankers in the credit bubble and their assurances that matters are under control:

At the beginning of the summer, when “collateralized debt obligations” and subprime mortgages” were first introduced into the mainstream vernacular, Treasury secretary Hank Paulson was quick to assure us that the problems were “contained.”

To be fair, Mr. Paulson wasn’t alone. In fact, he was in very good company. See Minyanville article. San Francisco Fed President Janet Yellen, Federal Reserve Chairman Ben Bernanke, Dallas Fed President Richard Fisher and Federal Reserve Governor Fredric Mishkin were unanimous in their assuring voices that we had nothing to fear but fear itself.

When the credit cockroaches began streaming out of the closet, the world’s central bankers went into crisis mode:

Fast forward a few months. That’s when things really started getting strange.

The European Central Bank, in an “unprecedented response to a sudden demand for cash,” injected $130 billion into the financial machination.

The U.S., Japan and Australia also stepped up to the plate with piles of dough, upping the ante to more than $300 billion.

Even Canada — Canada! — chimed in to “assure financial-market participants that it will provide liquidity to support the stability of the Canadian financial system and the continued functioning of the financial markets.”

We wondered aloud at the time: What do they see that we don’t? See Minyanville article. Why, with the mainstay averages still up nicely for the year, was there a coordinated global agenda in calm investors and stabilize a system that we were told was strong, normalized and fluid?

Just how bad is this?

On Monday, we learned that Deutsche Bank (DB) borrowed money from the FOMC’s 5.75% discount window. While the amount wasn’t disclosed, sources say that the move was orchestrated to show support for the Fed as it continued to combat the credit squeeze. I don’t claim to be an expert on these market machinations, but it’s my understanding that banks traditionally tap the discount window only as a measure of last resort.

Harrison concludes that central bankers will be impotent in the face of market forces, and that their charade will be revealed:

As we continue to listen to the vernacular from the powers that be around the world, the onus is on us to assimilate the cumulative dynamic that has evolved over the past five years.

The Federal Reserve attempted to buy time on the back of the tech bubble with fiscal and monetary stimuli that encouraged risk-taking, reward-chasing behavior. It was a grand experiment of sorts, and it continues to brew.

While debt is front and center as the issue at hand, credit of a different breed — credibility — has emerged as the issue at hand for markets at large.

If and when investors begin to perceive that central banks are no longer larger than the markets — and this, in my opinion, is simply a matter of time — a crisis of confidence will ensue.

My comments:

  1. This credit cycle is playing out, with unswerving faith in central bankers at the top to utter contempt at the bottom. The CBs are in desperation mode. If their latest attempt to plug the dike fails, the crowd will turn against them… with a vengeance.
  2. This is a global credit bubble and the world’s CBs are all in this together, points the U.S. dollar perma-bears seem to miss. All fiat currencies are in a race to the bottom.

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