Weekly Commentary: Developing or Developed?
Bubbles always feed – and feed off of – good stories. Major Bubbles are replete with great fantasy. Even as China’s Bubble falters, the recent “risk on” global market surge has inspired an optimism reawakening. August rather quickly became a distant memory.
In the big picture, the “global government finance Bubble – the Granddaddy of all Bubbles” is underpinned by faith that enlightened global policymakers (i.e. central bankers and Chinese officials) have developed the skills and policy tools to stabilize markets, economies and financial systems. And, indeed, zero rates, open-ended QE and boundless market backstops create a “great story”. Astute Chinese officials dictating markets, lending, system Credit expansion and economic “transformation” throughout a now enormous Chinese economy is truly incredible narrative. Reminiscent of U.S. market sentiment in Bubble years 1999 and 2007, “What’s not to like?”
Never have a couple of my favorite adages seemed more pertinent: “Bubbles go to unimaginable extremes – then double!” “Things always turn wild at the end.” Well, the “moneyness of Credit” (transforming increasingly risky mortgage Credit into perceived safe and liquid GSE debt, MBS and derivatives) was instrumental for the fateful extension of the mortgage finance Bubble cycle. At the same time, Central banks and central governments clearly have much greater capacity (compared to the agencies and “Wall Street finance”) to propagate monetary inflation (print “money”).
