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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
January 9, 2012
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Bubbles are complex and forever tricky.  I believe the European debt crisis created major fissures in the “Global Government Finance Bubble.”  Yet it is also clear that the U.S. Treasury market has to this point been a major beneficiary.  There is a strong case to be made that the unfolding global crisis granted an extended lease on life for the Treasury Bubble, fostering only greater risk mispricing and fiscal profligacy accommodation.  Importantly, global de-risking/de-leveraging (not to mention Fed policymaking) actually incited a dramatic loosening of financial conditions in anything and everything U.S. government finance-related (Treasuries, agency debt, MBS, municipal debt, etc.). 

Keep in mind that since the ’08 crisis Treasury Credit has been the dominant source of finance (and associated spending power) fueling the U.S. economy.  It is also helpful to appreciate that U.S. mortgage finance has essentially been nationalized (with borrowing costs held artificially low).  This year’s collapse in U.S. bond yields benefited the sputtering U.S. economy through various channels.  First, our Washington policymakers enjoyed the opposite of “austerity,” with ongoing borrowing and spending underpinning economic expansion.  Massive deficits continued to bolster incomes, consumption, GDP and corporate profits (while doing little to stimulate investment and job creation).  Record low mortgage rates were also much responsible for recently trumpeted signs of a pulse in our moribund housing markets.  And, finally, there were not insignificant wealth effects associated with the collapse of market yields. 

With the consumption-based U.S. (“Bubble”) economy relatively immune to slowing global growth, it became easy for those of a bullish persuasion to view the U.S. economy and markets as the envy of the world.  To each his own, but for me the degree of complacency has been rather astounding.

The year was also notable for Chinese Bubble nuances.  Consumer inflation surpassed 6.0% mid-year.  Facing rising inflationary pressures and an increasingly precarious housing (apartment) Bubble, Chinese policymakers increased bank reserve requirements and implemented other timid “tightening” measures.  China’s equities markets performed poorly and fissures appeared in many real estate markets.  Issues of over-indebted local governments, unscrupulous real estate developers and various shenanigans seemed to take their toll on confidence.  With global growth slowing, the manufacturing and export sectors showed increasing vulnerability.  There were even hints of susceptibility to a reversal of “hot money” flows.  Nonetheless, bank lending will post another year of Trillion-plus growth.

Year 2011 was most notable for the increasing impotence of government policymaking.  European policymakers appeared incompetent, although the salient issue is that government policy measures will be markedly less successful in resolving a sovereign debt crisis than they have been in solving private debt problems.  When a crisis of confidence in government debt and policy becomes the critical issue, aggressive monetary and fiscal measures will tend more toward instigating unintended consequences than fostering stabilization.  Warren Buffet has said that “you only find out who is swimming naked when the tide goes out.”  After swimming in Credit and speculative excess, you soon find out the areas of vulnerability when Credit growth decelerates.  This year saw Europe’s myriad vulnerabilities in full view, while U.S. (Treasury debt) and China (bank lending) Credit growth largely shrouded what I believe are serious mounting instabilities.

As 2011 was coming to its end, the list of the vulnerable seemed to lengthen by the day.  Despite the year-end rally in U.S. equities, December was a notably rough month for many “developing” currencies.  Faltering confidence in the euro – with ramifications for European bank stability, lending to emerging markets and global “hot money” flows more generally – saw the Hungarian forint drop 7.1%, the Czech koruna 4.6%, and the Russian ruble 4.5% during the month.  For the year, the Turkish lira fell 18.4%, the South African rand 17.9%, the Indian rupee 15.8%, the Hungarian forint 14.4%, the Polish zloty 14.0%, the Mexican peso 11.7%, the Brazilian real 11.0%, and the Chilean peso 9.9%.  While the final verdict will come later, I have seen some confirmation of the thesis that the “developing” markets and economies will prove less robust and resilient than they were throughout the ’08/’09 crisis.  

There is no doubt that de-risking/de-leveraging is taking its toll.  It is an inhospitable environment for leverage.  The MF Global fiasco proves that too little has changed here at home.  And I take the drubbing unleashed upon the major U.S. financial stocks as confirmation of festering problems throughout U.S. and global finance.  While the stock market ended little changed for the year, the extraordinary volatility connotes inherent instability.  Yet even on this the final trading day of the year, much is left unclear, uncertain, unresolved and open to interpretation.  Has impressive U.S. market and economic resiliency been signaling inherent strength and a stage set for a banner 2012?  Or have complacency and the market’s inability to discount troubled waters ahead once again set the marketplace up for disappointment?  Next week:  “Issues 2012”