Tuesday, May 29, 2007

Central banks tightening?

Excerpt from fund manager John Hussman's weekly essay on the U.S. market:

Interest rate trends are pushing higher not only in the U.S., but globally. One might wonder -- if there is so much "global liquidity," why are interest rates rising everywhere? Credit spreads are perking up modestly too, but haven't yet exploded higher in a way that would reflect an oncoming recession or an easing of general inflation pressures.

What's really going on is not the creation of "global liquidity" -- central banks worldwide are generally tightening. What investors have misconstrued as "global liquidity" is nothing but a combination of a) risk blindness among investors, and b) the U.S. going deep into debt to finance current consumption (both private and government spending), while China and other developing nations run huge surpluses to sell us that consumption. They then take the proceeds and buy a) Treasury securities, and b) our means of production.

From the same linked post:

Ray Dalio of Bridgewater Associates, who manages about $160 billion in assets for clients including central banks and foreign governments, quoted in Barron's:

"Hedge funds and private-equity firms today are like the dot-coms in 2000: Ask for money and you'll get it. They bid up the prices of everything. The amount of money flowing is almost out of control, and it's making everything overvalued. A client of mine said it's like there are 11,000 planes in the sky and only 100 good pilots -- an accident is bound to happen. Just like the dot-com bust, the winners and losers will be sorted out but the technological advances won't stop. There is a greater differentiation of managers now than ever before."

Nothing really new in these comments other than Hussman rejecting the inflationists' idea that central banks are pumping liquidity...the US government's debt isn't that out of the ordinary...see my previous posts, particularly the chart of US debt as a proportion of GDP...

1 comment:

rubyfan said...

So you don't think the US government debt is that big of a deal?

I can see that the so-called liquidity is really just "risk blindness" - the whole subprime mess seems to be the poster-child for it.

With all the LBOs and hedge fund madness it seems like we're headed for some real trouble. It would seem that most of our current "prosperity" is really built on debt - there's nothing solid to support it.

Nothing really new in these comments other than Hussman rejecting the inflationists' idea that central banks are pumping liquidity

What about the hiding of M3 a few years back? We don't really have a very good idea of what the money supply is doing at this point, do we? Other than trying to reconstruct M3 from other sources.

I would tend to think that all of this doesn't bode well for the US$. Thoughts?