Riffing Off of a Typically Excellent 'Credit Bubble Bulletin'
Doug Noland has a nice take on global liquidity (as usual) in the latest Credit Bubble Bulletin, "Vintage 2007". This is the first CBB I have read in many months due to an acute case of "no free time" syndrome. I realize I miss his take on things and will try to read weekly, even if just the main article which usually starts at the end of all the stats maybe 3/4 down the page. Mr. Noland is focused on the alternate methods of Ponzi finance in light of the sub-prime meltdown that has hogged the headlines even as the stock market and economy (see most recent jobs report - we will need to evaluate the bond market curves here with regard to our gold miner stance) continue rise and boom, respectively. He mentions M&A and the ongoing commercial building boom, two pillars of the "corporate finance" bubble.
Every bear and his brother is demanding that the sub-prime meltdown is a contagion that will spread throughout the leveraged mortgage industry and of course, the general economy that depends on leveraged credit/debt creation. And of course they are bound to be right. But as usual, our furry friends do not have a handle on the timing. Think of this image... you are at a carnival or town fair. You are playing that whack a mole game where the little critters pop up from several different holes and it is your job to smash them on the head. The problem is you don't know which hole the next one will pop out of. So it is best to relax, don't focus on any one hole and just try to react as needed. I am not saying to avoid preparing for the ultimate meltdown of Ponzi finance, as I have been doing as best I can for years now. But what I am saying is it is wise to avoid the 'Armageddon right here, right now' (ie, aggressively short the market/economy) stance because these infernal moles keep popping up and "markets can stay irrational longer than you can stay solvent". A quick anecdote from the real world...
As I mentioned here on the blog last month, my company paid off a huge debt note recently. It was my ultimate goal fulfilled; DEBT FREEDOM in business. What did I do? Within 2 days we were back in debt for my new baby. Productive, sensible debt. "No such thing!" the bears roar? "There is a credit contraction in the wake of the sub-prime meltdown!" they insist. "It's ALL over!!" Well, setting aside the fact that the new purchase was for a well defined company need, there were also 'no brainer' government-sponsored capital equipment incentives and get this, extreme competition among lenders despite the supposed credit contraction now in force. Not only did we get an excellent interest rate (thanks to the myth that inflation is under control), but for the first time ever I did not have to personally guarantee a loan. I simply said "No $#!@ way... been there, done that." and the most competitive lender wrote the loan, no doubt due in part to our exemplary credit rating but also because institutions need to place loans somewhere, and business is the logical post-consumer destination. This little example can be magnified and extrapolated to the macro economy and maybe it is not so hard to see a picture of corporate liquidity continuing in the face of other areas that are melting down. It is not to say this can go on forever, but commercial real estate, M&A, corporate finance; these are moles popping their heads up. Take it for what it's worth.
Meanwhile, the real sign posts may be provided by the bond market. It says here that if the longer dated rates establish strong up trends vs. the shorter, contraction will indeed be on the way. With any luck this will help us stay focused while the remaining moles pop up and get smashed back down.