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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 26, 2011
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2010 witnessed the “flash crash.”  This is potentially a huge Issue for 2011.  Throughout the markets, there has been a proliferation of instruments – especially exchanged-traded funds – that seemingly offer liquid ways of speculating on a vast array of risk assets and market outcomes.  Many players have been drawn to these products because they offer a much more attractive liquidity profile than what is available for the underlying stocks, debt instruments, or commodities.  Others have taken a more aggressive stance when playing a particular sector or theme specifically because of the capability of rapidly hedging various risks in the liquid ETF and derivatives marketplaces.  And I would expect that many of the more sophisticated players have one eye on the exit – and both eyes on what instruments they might use to protect themselves – when they see the Bubble beginning to burst.
The explosion of trading in these instruments has significantly altered risk perceptions and risk taking.  Especially because of today’s Bubble backdrop, I believe risk to any number of market liquidity issues has created major systemic vulnerabilities.  The concept of “portfolio insurance” has evolved mightily since 1987.

2011 is extraordinary for the degree and variety of risks that confront market participants when compared to the extent speculation and bullishness has become ingrained throughout the marketplace.  The ongoing evolution of the European debt crisis creates great uncertainty.  There are big unknowns when it comes to issues surrounding the mounting inflationary pressures throughout China and “developing” Asia.   The year begins with “developing” economy Credit systems in overdrive, fueled by loose Credit, robust inflationary forces and unrelenting “hot money” inflows.  Such Monetary Instability foments myriad market, economic and policy risks. 

In particular, China faces very challenging Bubble dynamics.  The Credit and inflation backdrop beckons for “slamming on the brakes” – or at least tapping them.  There will be none of that.  Following in the footsteps of others, Chinese authorities failed to act with sufficient force to quash Bubble and inflationary forces early enough in the cycle.  Bubble risks have grown exponentially, and I would expect policymakers to continue to tread softly.  The Chinese juggernaut Credit system and economy has become a force to be reckoned with. 

If, as I have to presume at this point, the Chinese Credit Bubble is sustained through 2011, Asian economies will become an even greater glutton of global resources and commodities.  Policymakers are grappling these days with how to contain the inflationary effects of massive “hot money” inflows and an increasingly complex Credit backdrop that goes way beyond monitoring bank lending and setting loan quotas.  And while focus on consumer and real estate inflation garners the most media attention, the Chinese plan to continue stimulating consumption and lower-end housing construction. 

China's policy endeavors – is poised to walk the highwire - to manage inflation, while boosting incomes for the hundreds of millions of lower-end and rural workers that have lost major headway against the urban and rising middle and upper classes.   To say the Chinese face an extremely challenging task in controlling a runaway Credit Bubble and historic economic transformation is an understatement.
Here at home, policymaking has turned simple:  run massive deficits, keep rates at zero, and have the Fed monetize debt until the private sector can be trusted to do the heavy lifting.  Well, don’t hold your breath.  So, for Issues 2011, we can assume the Fed stands pat on rates.  And while they have little credibility, both Congress and the Fed are talking tough against bailing out troubled states.  Whether they can stick to this rhetoric is an Issue 2011.  The dollar continues to benefit from the capacity of our policymakers to inflate Credit, a dynamic that will compound our dilemma when the markets turn their sights on disciplining Washington.

I’ll posit that each year of massive government marketable debt issuance reduces the likelihood that central bankers will be able to exit their market liquidity backstop operations.  History has shown how systems become precariously addicted to inflationary measures and market interventions.  The Fed’s balance sheet will only move in one direction.  And when push comes to shove, they may be forced to buy municipal debt or monetize more Treasurys to help finance bailouts.  For now, the most important Issue 2011 is that serious structural deficiencies ensure that the Federal Reserve errs on the side of liquidity creation.  This would seem to ensure a year of even greater Monetary Disorder, with the risk of heightened instability throughout global fixed-income, currency, commodities and equities markets.