BEST OF DOUG NOLAND

November 23, 2005

Dr. Bernanke informs us that he is basically ok with $800 billion Current Account Deficits, unprecedented derivative positions and myriad Bubbles as long as “core CPI” inflation is contained - over the long-term. He is Content with the Status Quo. He believes the world will always fancy our dollar-denominated financial claims, demonstrating yet again his total disregard for the harsh lessons of financial history. Surely he appreciates that the Bubble-induced explosion of suspect dollar financial claims – largely backed by exceedingly vulnerable real estate (Bubble) loans - guarantees future foreign creditor disappointment, disenchantment, liquidation and revulsion. He must, let’s hope, understand the paramount role today played by global “carry trades” and the “repo” market in both fostering demand for U.S. securities and fueling The Unwieldy Global Liquidity Glut.

For now, global speculators are content to play interest-rate differentials (borrowing cheap in Japan and throughout Europe) and to ride the dollar bear market rally. But to finance a massive Current Account with conspicuous “hot money” flows is very, very risky business that will end badly, debt denominated in our own reserve currency not withstanding. Recall how abruptly marketplace sentiment turned against technology stocks and telecom debt and how rapidly market dynamics evolved from spectacular Bubble to market collapse. Truth be told, it is a Bubble Perpetuation Calamity that – after years of the Fed accommodating enormous Current Account Deficits – the global liquidity backdrop is today such that (belated) Fed rate increases incite an irrepressible deluge of “hot money” (interest-rate differential and other speculative) flows.

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