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This remains the most incredible period in financial history. A strong case can be made that the traditional Credit Cycle has turned – an especially momentous development considering the scope of previous Mortgage Credit Bubble Excesses and attendant economic imbalances. Can we, then, infer that the Liquidity Cycle has similarly turned? Are they not one and the same? Well, in the age of contemporary Wall Street securities finance, they are not. And the case that the Liquidity cycle has turned is not yet as convincing. To this point, there are few indications of waning derivatives growth; or a slowdown in financial sector expansion; or a meaningful moderation in global Credit growth. Worse yet, there is ample evidence of Wall Street’s keen desire to push the envelope of leveraged speculation in preparation for the (non-financial) Credit slowdown-induced Fed easing cycle. Perhaps U.S. and global markets this week demonstrated to the Fed why Liquidity and speculative excesses should be the focus. Central bankers should be in no rush to appease. Cutting interest rates would likely temporarily accomplish a few things, but promoting a Smooth Flow of Credit would definitely not be one of them.

Doug Noland is a market strategist at Prudent Bear Funds. Their website is www.prudentbear.com.