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On the one hand, there is significant stress in the U.S. CDO marketplace with the very real potential to expand into a serious liquidity event. On the other, energized Credit systems across the globe are today firing on virtually all cylinders. The debt markets are caught confounded and indecisive with respect to the nuances of this newfound global Credit and liquidity juggernaut, as well as to the scope of the liquidity-creating function undertaken by the CDO marketplace over the past couple years. There is today an unusually fine line between an unwieldy global liquidity Bubble and the mounting risk of a liquidity dislocation in the market for financing risky securities. Such uncertainty has become a distinguishing feature of the today’s Credit and speculation-induced Monetary Disorder.

The risks of a flight away from the CDO market are very real and won’t likely dissipate anytime soon. "Ponzi Finance" dynamics have created acute fragility. A run on these illiquid instruments would be immediately problematic, requiring re-pricing throughout. Since a large amount of these securities are financed through the Wall Street "repo" machine, lower prices would instigate margin calls and forced liquidation. The risk of a problematic deleveraging and marketplace dislocation is today quite high.

By their nature, prolonged Credit Bubbles concentrate incredible financial power in fewer and fewer bigger hands. Those most successful at financial innovation exploit their capacity to intermediate Credit and issue the debt instruments sought by the marketplace. The natural inclination is to capitalize fully on one’s financial prowess – to consolidate power and influence by outgrowing, acquiring, merging or linking with a dwindling cadre of "competitors." This dynamics melds well with the progressively arduous task of creating and distributing the ever-larger quantities of Credit instruments necessary to sustain the Bubble. Wall Street’s astounding "success" with electronic "money" owes much to its ability to have made a Monopoly out of the business of "structured finance" (i.e. contemporary "money" and money-like Credit).

When this Credit Bubble inevitably bursts, the large financial operators (the Wall Street firms, "money center" banks, hedge funds, financial guarantors, and rating agencies) will be anathema to the general public (and legislators!) as they were in the post-1929 crash environment. In the meantime, however, we should expect the "money" changers to go to great lengths to sustain the boom. Not only do Wall Street investment bankers today control the creation of debt instruments (contemporary "money" and Credit), these firms also dominate the entire risk intermediation (i.e. derivatives) and financial asset management business. I mention this only to remind readers that – as one should expect at this stage of a historic financial Bubble – we are not these days dealing with "free" or "efficient" markets. It doesn’t work that way.

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