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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 24, 2012
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The Fed’s aggressive monetary policy actions back in 2007 and early-’08 failed to improve underlying U.S. mortgage and financial sector debt.  I have argued that the Fed’s moves, and resulting added market distortions and excesses, likely only augmented systemic fragilities.  While the markets have been focused on extraordinary measures from the ECB, S&P’s downgrades provide a reminder that the deterioration in European debt fundamentals runs unabated.  Despite extraordinary ECB liquidity measures, the European debt crisis is not yet under control - let alone on course for resolution.

Everyone knows “Don’t fight the Fed.”  Yet fighting the ECB has been a notably gainful exercise in the marketplace.  The newfound 2012 bullish view holds that a now Fed-like Draghi ECB will be a much more formidable combatant.  And with another huge round of ECB LTRO coming next month, and the Fed with an itchy trigger finger for QE3, the bullish analytical regime to begin 2012 is very much premised on the ongoing command of central banks over market forces.

My view holds that the ECB is on thin ice; the euro is on thin ice; and the European Credit system remains on thin ice.  I doubt the ECB is capable of wresting control of the debt crisis from powerful market forces for any significant length of time.  I appreciate that the markets have gravitated to a much more optimistic view, much to the benefit of global risk markets and overall sentiment.  Yet this creates vulnerability to a return of risk aversion in the event that the marketplace begins to back away from bullish premises.  My presumption is that the more sophisticated financial operators recognize ongoing system fragilities, but at the same time likely believe the LTRO facilities have bought some time.  Speculators have grown comfortable with the game of using policymaker time purchases to pounce on those bearishly positioned.  This dynamic incites “rip your face off” rallies, heightened market instability and, importantly, susceptibility to destabilizing market reversals and problematic air pockets.

The year 2011 proved a major setback for the view that policymakers had global debt crisis dynamics under control.  Indeed, I would argue that the European sovereign debt crisis provided a historical inflection point with respect to the capacity for fiscal and monetary policy intervention to hold the downside of a Credit bust at bay.  I expect circumstances in 2012 to confirm this dynamic of waning policy efficacy, but on a more global basis.  Last year, markets witnessed how policy moves in Europe too often came with unintended consequences.  The ECB’s LTRO facility has shifted sentiment back in favor of central bank policy power and effectiveness.  But for how long?

I could envisage a scenario where euro weakness tightens the screws on the ECB.  If capital flight has become a serious issue, ECB liquidity operations could become increasingly destabilizing.  The markets are already anticipating the positive effects of LTRO part II scheduled for late-February.  A faltering euro might have the Germans (in particular) questioning the merits of another open-ended liquidity facility.  And there could be dissention as well in the ranks of the FOMC.  Another round of MBS purchases in the face of buoyant risk markets, improving economic, labor and housing markets, and record low mortgage borrowing costs risks a decisive blow to already-depleted Federal Reserve credibility.

Granted, it’s only been two weeks.  But markets are sure placing a great deal of faith in policymakers, in a year I expect such faith to be further undermined.  One could adopt a view that, despite strongly bullish market sentiment, system stability hangs in the balance.  The Year of the Central Bank?  Has that look to it thus far.