Capital Intoxication

The Fed's Fisher coined today's title while referencing "a lot of liquidity sloshing around the system." The contribution of energy (and its in-elasticity) to the price pressure was noted by Pinalto. The UK inflation figures showed that oil and the VAT can make for a nasty couple.

Fisher's comment brought back memories of  Sam Zell's 2006 Christmas card, "Capital Keeps raining on My Head." Wrong on timing but spot on for analysis (and dumping the world's largest property co.!) Zell pointed out that "growth was to low to soak up the liquidity free fall." A financial system devoted to alchemy was converting illiquid assets into currency at an alarming rate. This process puts competitive downward pressure on returns. Aging demographics act to shift asset allocations toward fixed returns that are artificially lower than optimal. Welcome to post-crisis 2007.

The Plutonian orbits that the PIIGS now circulate around Germany/France cannot withstand the above outlined system. Pundits hyperventilated the US Treasury risk to Japan last week. The EU sovereign bailouts, and EFSF lending, are much more vulnerable to Japan's domestic tragedy. The FT points out that BarCap, Nomura (and Morgan Stanley by my reading) do not really understand or agree how the ELA and ECB are accounting for liquidity operations. (As I write Irish 2 years are getting plowed on talk of missed coupon) We are in the "their printing their own Euros" camp but a more complex shell game may be under way.

I do know this: The odds that either too much or too little money is being created is far greater than "just right." The artificially low cost of capital in the US should be viewed as a pox and not good policy. It's time for the Fed to step aside and see where Mr. Market thinks the price should be.



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