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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 19, 2010
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Fiscal Watch:
January 6 – Bloomberg (Matt Townsend):  “GMAC Inc., the auto and home lender that became majority-owned by the U.S. government last week after a third bailout, may post a loss of more than $10 billion for 2009 as more borrowers defaulted on mortgages.  GMAC, based in Detroit, said yesterday that it expects to report a fourth-quarter loss of about $5 billion. Both the quarterly and annual losses would be records for the primary lender for General Motors Co. and Chrysler Group LLC dealers.”
January 8 – Bloomberg (Dan Levy):  “Office vacancies in the U.S. surged to a 15-year high in the fourth quarter and rents fell the most on record … according to Reis Inc.  The vacancy rate climbed to 17% from 14.5% a year earlier…” 

January 7 – Bloomberg (Brian K. Sullivan):  “U.S. state tax collections fell the most in 46 years in the first three quarters of 2009 as the recession shrank revenue from sources including personal income, the Nelson A. Rockefeller Institute of Government said. 

January 7 – Bloomberg (Michael B. Marois and William Selway):  “California Governor Arnold Schwarzenegger faces a $20 billion deficit in his final budget proposal tomorrow, his last chance to shape the fiscal policies of the most populous U.S. state before he leaves office. 

January 6 – Bloomberg (Dan Levy):  “Silicon Valley is beset by the biggest office property glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents.  More than 43 million square feet… -- the equivalent of 15 Empire State Buildings -- stood vacant at the end of the third quarter,

January 6 – Bloomberg (Oshrat Carmiel):  “Manhattan apartment prices fell for a third consecutive quarter as Wall Street job losses drained demand and the decline in co-op and condominium values reached 21 percent since the market peak. 

Issues 2010:

Let’s start by setting the backdrop.  The world is operating without a stable monetary regime.  There is no gold standard.  There is no functioning Bretton Woods currency stability regime.  There is no longer even an ad hoc dollar reserve “system” that tended – at least on occasion - to discipline foreign Credit systems and restrain excesses.  Like never before, Credit systems around the world operate unrestrained.  It is my long-held view that pricing mechanisms – and Capitalism generally – function poorly in a backdrop of unrestrained (inherently mis-priced) Credit.

Most importantly, there is today no common understanding that stable international finance is wholly dependent upon individual Credit systems being operated with discipline and restraint.  Quite the contrary, as the universal policymaking view these days is that aggressive stimulus and monetary looseness are essential for supporting financial and economic recoveries.  The world is devoid of a monetary anchor and operating in a unique monetary environment that foments speculation, financial excess, imbalances, economic maladjustment, and potent bubble dynamics.  As we begin 2010, inflationism is still seen as the solution instead of the problem.

The year 2008 marked the collapse of the Wall Street/mortgage finance Bubble.  It specifically did not mark the end of the Chinese Bubble, the global Credit Bubble, or even the greater U.S. Credit Bubble.  Last year saw the emergence of the Global Government Finance Bubble – quite possibly a monumental development.  Accordingly, 2010 should be viewed as a Bubble Year.  This implies a bipolar perspective when contemplating probable outcomes:  On one end, the Bubble expands and makes it through the year.   Or, on the other, the Bubble bursts and financial systems and economies sink right back into crisis.  As a long-time analyst of Bubbles, I caution against predicting the timing of their demise.  

Last year saw intense speculation reemerge in U.S. and global financial markets.  It is the nature of speculation to intensify as long as it is accommodated by loose financial conditions.  Similarly, it is the nature of Bubbles to expand and become more robust unless inflation dynamics are quashed through some type of monetary tightening.   Excess begets excess… And the more protracted – hence powerful – the Bubble the greater the degree of tightening necessary to eventually rein it in.  The more heated and expansive the Bubble the greater the dislocation associated with its bursting.  I see no appetite anywhere in the world this year to aggressively suppress Bubbles. 

The unfolding Bubble in China is historic, and their policymakers appear poised to tinker.  Tinkering doesn’t quell Bubbles – certainly not seasoned ones.  I have espoused the view that the Chinese Credit Bubble has entered the dangerous “Terminal Phase” of excess.  How this dynamic and the course of policymaking play out is a Major Issue 2010.  I expect Chinese authorities to work diligently in an effort to ration the amount of Credit available for real estate speculation.  At the same time, the stated goal of stimulating domestic consumption implies huge growth in Chinese household debt.
I am generally skeptical in the efficacy of Credit rationing.  This was a focal point of a great debate in the U.S. back in the late-twenties.  One (dovish) camp believed that the focus should be on limiting the flow of Credit financing stock market speculation, while at the same time working to maintain ample Credit to fuel the booming economy.  The problem is generally that years of expanding Credit create a (financial and economic) system with both a huge Credit appetite and a potent propensity for inflating the quantity of new Credit.  Attempts to limit speculative Credit – or even lending to certain sectors – is generally ineffective in itself and fails to address the major issue of runaway total system Credit growth.  Indeed, after Bubble dynamics have taken firm hold, attempts to restrict Credit by the nature of its use will tend to distract policymakers and delay efforts to contain systemic excesses.  From my point of view, determined, decisive and independent monetary management provides the only hope for reining in “terminal phase” Credit Bubble excess.  Such an approach seems in very short supply these days, and I’ll be surprised if much of it emerges in China in 2010.

Here at home, Chairman Bernanke apparently doesn’t discern Bubble risk.  Incredibly, in his Sunday morning speech he even argued that Fed rate policy was about right during the 2002-2006 period – and that a low Fed funds rate wasn’t the cause of the U.S. housing Bubble.  And we can also assume the he believes his speeches (including his November 2002 - “Helicopter Ben” - “Deflation: Making Sure ‘It’ Doesn’t Happen Here”) did not create a major moral hazard issue. 

The markets have no fear that the Fed will tighten in response to financial speculation.  I believe the Fed examines today’s real estate markets and fears “deflation.”  I would imagine they see a stock market still 25% below all-time highs and worry of “disinflation.”  They see stagnant (at best) household debt growth, declining bank Credit, and still impaired securitization markets and see no credible inflation threat.  Looking in the rear-view mirror, they just don’t see problematic financial leveraging and lending excesses.  They would surely view the reemergence of asset inflation as confirmation of their adept policymaking.

The Fed’s overriding focus is stimulating sustainable recovery.  They will err on the side of caution when it comes to removing crisis-period liquidity measures.  I will assume that they will not be raising rates meaningfully until they are confident that the markets and economy have first adjusted well to ending quantitative easing operations.  Meaningful financial tightening is nowhere in sight.  The Bernanke Fed still believes that monetary policy is a “blunt tool” and, as such, is inappropriate for dealing with Bubbles.  They prefer stronger “regulation.” So, who is responsible for regulating Washington Credit excesses? 

The Fed’s analytical framework and rear-view approach will not serve them well.  Today’s domestic Credit excesses are concentrated in the Treasury and agency markets.  In a replay of Mortgage Finance Bubble dynamics, Federal Reserve policies today accommodate the Government Finance Bubble.  Dr. Bernanke’s talk of helicopter money and the government printing press was fundamental to creating an environment where the markets operated confidently knowing the Fed was there to provide a market liquidity backstop.  The Fed’s fingerprints were all over the historic mispricing and over-extension of mortgage Credit.  Today, “quantitative ease” and the perception of potentially unlimited Federal Reserve monetization (balance sheet growth) have greatly distorted the pricing mechanisms for government borrowings and debt instruments generally.   

Because of the Fed’s words and deeds, the marketplace is dysfunctional when it comes to pricing risk.  These days the price of government Credit has no relationship to the interaction of its supply and demand.  If Washington seeks to borrow a couple hundred billion - or a few Trillion - it really has little impact on yields.  In an ominous replay of the Mortgage Finance Bubble, government intervention has severely distorted the capacity of the marketplace to properly price risk, allocate resources, and discipline market participants (borrowers and speculators). 



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