January 20, 2006

When it comes to Excess Begetting Excess, few manifestations are more conspicuous than those emanating from our federal government’s finances. Massive mortgage and Treasury Credit creation run unabated, in the process inflating asset prices and generating enormous corporate cash flows/profits (along with global liquidity). Three months into fiscal 2006, total federal government receipts are running almost 9% above 2005 levels (that were up 14.6% from 2004!). Yet the White House now projects that the 2006 deficit will surge to $400 billion. Total expenditures have thus far expanded 7.3% above comparable 2005 levels (that were up 7.9% from 2004). Spending on hurricane recovery is one factor, but expenditures (including interest payments!) are rising generally, which induces greater levels of borrowing, more spending, higher costs and additional borrowing. And when it comes to the Credit system monetizing surging energy and healthcare costs, it is helpful to think in terms of the federal government simply inflating the quantity of Treasury bills in the global economy to pay for inflating expenditures.

December Hourly Earnings were up 3.1% from the year ago period, the strongest y-o-y increase since March 2003. I expect both wages and personal income growth to surprise on the upside until the Bubble bursts. Corporate America was well-positioned to provide generous year-end bonuses. Is the recent surge in M3 and, more specifically, money market fund assets, indicative of unusually large bonus payments? Clearly, Wall Street’s $21.5 billion year-end bonus pool will stimulate income gains for real estate agents, luxury goods salespersons, and summer camp operators in the Northeast and elsewhere. There are as well indications that the market for technology employees has tightened significantly over the past year, and we will have to wait and see how much the bubbling energy sector - facing a dwindling-to-non-existent talent pool - is willing to pay up. The paucity of trained truck drivers, nurses and accountants has not been rectified, and there is evidence of skills shortages throughout services industries.

As for this week’s anecdotes of Excess Begetting Excess, it is certainly worth noting Boone Pickens’ "largest-ever single gift to U.S. college athletics." His $165 million donation will set in motion a $300 million upgrade to athletic facilities at Oklahoma State University. Asset inflation, including higher prices of crude oil, energy stocks and securities (at home and abroad) generally, continues to provide a quite favorable backdrop for higher education spending across the nation.

And from Dow Jones’ ace financial journalist, Christine Richard: "When the Pilgrim Rest Baptist Church in Phoenix, Arizona looked to fund a facility for its members with on-site fitness equipment, a gymnasium, a spa and Jacuzzi, a beauty salon and a culinary studio, it didn’t just pass the plate. Much of the church’s $10 million expansion plan, which includes a ‘wellness center,’ an education center and an expansion of the church, was funded by selling bonds through the Phoenix Industrial Authority. ‘Bond financing enabled us to complete a project that otherwise wouldn’t have been possible,’ said Richard Yarbough, administrator for the 3,500-member church. The church sold $2.1 million in taxable bonds, which are backed by church revenues, and $6.8 million in tax-exempt bonds, backed by proceeds from the non-religious activities at the new facilities. And, they’re not alone in turning to the bond market to finance increasingly ambitious expansion and building plans."

Again, if overheated markets are keen to provide liquidity, it will be spent. This week saw a record $38 billion of corporate debt issuance. To this point, the bond market has shrugged off what will be ongoing record corporate and Treasury issuance. One would think that the marketplace would have some concern with supply or perhaps even fear of an overheated economy. There is little fear and lots of greed. And this market dynamic is, indeed, the greatest Anecdote of Excess Begetting Excess. You see, the greater the excesses – mortgage finance, commodities, global equity markets, Credit derivatives, leveraged lending, leveraged speculation, and so on – the more the markets anticipate bursting Bubbles and a zealous Bernanke "reflation."

Appreciating that Dr. Bernanke scorns "Bubble Poppers," there is today every incentive to play myriad Bubbles for all their worth. After all, wealth is there for the taking and fortunes for the making. Everyone should be rich. And, at this manic phase of systemic liquidity excess, the more fragile and vulnerable the system becomes to Bursting Bubbles, the more timid the policymaker and the greater the bias for bond yields to decline - Begetting only greater excesses. Moreover, when circumstances now develop that pose potential systemic risk – the Iranian nuclear issue, for example, knee-jerk bond rallies work only to stoke speculative impulses and buttress Bubbles. Years of incredibly rewarding Credit and speculative excess, recurring Bubbles, and repeated central bank marketplace interventions have irreparably distorted risk perceptions and marketplace dynamics.