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A lot of financial innovation has taken place over the past 50 years. Let me just add that the 2007-08 financial collapse did not kill off a lot of the innovation. Maybe one could argue that the collapse created a "winter" in which some of the financial instruments receded into hibernation.

In the new spring of the current credit inflation many of these hibernating instruments are making a comeback, signaling that, once created, financial innovation never really goes away. As the financial markets continue to thaw, we can expect that more and more use will be made of these instruments as the credit inflation spreads to more and more areas of these markets. And, where the new rules and regulations hinder a return to exactly what was before, financial institutions will find ways to further innovate in order to take advantage of all the funds being injected into the markets by the central banks of the world.

One should not expect, however, that these funds will necessarily find their way into the real production of economic goods and economic growth. In fact, if we learned anything from the 1990s it is that credit inflation can cause a lot of "inflation" in the financial sectors without much overflow into the real sectors of the economy and price inflation. The result was something called the Great Moderation, which set the stage for the above-mentioned financial collapse. (For more on this, see my review of the book Profiting From Monetary Policy.)

Well, the credit inflation of the Federal Reserve and the European Central Bank and the Bank of England is showing up in the financial markets, as many of the former "financial innovations" of the 1980s and 1990s. And, as I have reported in quite a few of my posts, they are showing up in more and more areas. The latest report comes from Michael Stothard writing in the Financial Times about the "comeback" of collateralized loan obligations in Europe. The "comeback" has already picked up steam in the United States. In 2011, only about $14 billion in CLOs were issued in the United States, but this picked up to a total of $56 billion in 2012. So far this year, there have been $32 billion in CLOs issued in the U.S. and the expectation is that the volume will far exceed the 2012 total. Things have been slower in Europe given all its financial troubles this past year. But, now, steam is beginning to pick up in CLOs. "In February, Cairn Capital launched the first new European CLO since the financial crisis, which was worth €300 million."

Following a €300 million deal was put together by Pramerica, Apollo Global Management put together a €325 million deal. Now, Intermediate Capital Group is talking with Lloyds Bank about an even larger deal, a transaction worth €400 million, which is expected to close this summer. All of this action is good news to the European market because there are about €70 billion in CLOs that are outstanding that are reaching their five- to seven-year maturities this year and next year. Much of this debt will have to be refinanced because many corporate borrowers are not expected to be able to repay all this debt when it matures.

One should note that this borrowing in not from "investment" grade companies. Investment grade companies have access to the capital markets these days and can issue debt at extraordinarily low interest rates. One should also note that Intermediate Capital Group is a "London-based provider of sub-investment grade financing." The CLOs being constructed are "mainly sub-investment grade corporate loans" that are bundled into a single investable package. Additionally, one can note that CLOs like these "were once the main source of funding for the European leveraged loan market and pre-crisis corporate buyouts."

A CLO analyst at JPMorgan, Rishad Ahluwalia, is predicting that the new issuance in Europe this year will be in the €3 to €4 billion range. He goes on to say that "it now looks like new sources of financing are starting to be found." This is what is taking place in the United States -- and now is moving to other places in the world. High-profile financial institutions -- in this case, Lloyds Bank with Intermediate Capital Group, a "shadow" financial organization -- are providing sub-investment grade loans to another financial institutions to create an instrument that will be sold throughout the world.

This is the way the world is moving now. The Federal Reserve, the European Central Bank, and the Bank of England are underwriting the resurgence of the "shadow" banking. Whereas, at least in the United States, the banking sector component of the financial industry and the "shadow" banking part of the financial industry are approximately of the same asset size, I see the future tilting toward "shadow" banking.

Financial innovation came of age in the latter part of the 20th century as governments and central banks created an almost continuous environment of credit inflation. Credit inflation is back again and is stirring up all the old components of earlier period of financial innovation. I can hardly wait to see what new financial innovation will take place over the next decade or so. But, financial innovations do not just stay "on shore." Recently, the IMF has reported of the flow of funds from the western world that has shown up in Asia. "Asset prices in many parts of Asia have risen rapidly over the past few years, thanks to ultra-loose monetary policy in developed economies and strong domestic growth."

Specific examples of how thee fund flows have impacted Asian markets include the following:

Hong Kong property prices have more than doubled in the past four years alone, returning to the peaks of the late 1990s, while portfolio investors have looked to the consumer-driven economies in the Association of Southeast Asian Nations.

Stock prices in southeast Asia have repeatedly hit all-time highs, while currencies such as the Philippines peso and the Thai baht have risen sharply against the U.S. dollar. Borrowing costs for both companies and governments across the region have also been grinding ever lower as debt issuance has ballooned.

The money the central banks have created is going somewhere, not necessarily where the officials of these institutions have wanted them to go. "Shadow" banking is playing a big part here. You can rest assured, however, that these flows -- both into innovative financial instruments and the rest of the world -- will not stop. They are a very clear result of the financial environment created by the Federal Reserve -- and others.

My suggestion here is to watch what is going on in "shadow" banking. This is where a lot of the action will be in future years. "Shadow" banking is once again gaining momentum as the quantitative easing of the central banks continue. Its growth rate will exceed that taking place in the "regulated" financial institutions over the next decade. Therein lie some interesting investment opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Financial Markets Are Picking Up, Just Not Where You Might Expect