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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
February 7, 2008
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There’s no free lunch in finance nor from inflation. For now, though, Wall Street celebrates the Bernanke Fed’s rapid-fire slashing to a 3% funds rate. The Bank index has now rallied 28% off of recent lows, the Homebuilders 59%, Retailers 25%, Transports 19%, and the Broker/Dealers 25%. There is an overwhelming consensus view that aggressive rate cuts are precisely the policy prescription to stem housing prices declines, to hold recessionary forces at bay, and to reliquefy the Credit market. Underlying fundamentals are sound; we just need a helping hand to get through this Credit ‘rough patch’, they say. The Fed finally "gets it," Wall Street pundits assure us.

Over the short run, there are some obvious benefits to inflationary negative real interest rates. Mortgage borrowing costs have fallen sharply, creating a more conducive environment for home sales while inciting yet another refi boom. Stocks benefit from the paltry yields of competing assets, including bonds, deposits, and money market funds. Many top-tier companies will see their cost of funds decline. Markets in general receive a boost of confidence from the belief that the Fed is now attentive and aggressively on the path of supporting higher asset prices.

Only time will tell how this latest "Reflation" eventually plays out. It’s my view that Wall Street is taking a typically rather short-sided and shallow analytical approach to the issue. The consensus believes that further significant house price declines would be catastrophic for a highly leveraged household sector and acutely fragile Credit system. Others note the equally obvious fact that this is a particularly inopportune time for the economy to slip into recession. Apparently, the risks of failing to aggressively ease monetary policy greatly outweigh the limited inflationary risks. If it were only that straightforward. There is never a good time to collapse a Bubble….

These days, there is great relief in the markets that our troubled financial institutions enjoy a virtual bottomless pit of "capital" to garner from overseas investors. This dynamic is, however, only an inflationary expedient that forestalls the necessary reallocation of resources away from finance, consumption, and "services" to the goods producing sector. The current fixation on the housing market misses the more important issue that our economy will soon be forced to restrain its Credit creation and significantly bolster the production of tradable goods and services. Policies to promote mortgage Credit and consumption are not only destined to fail, they are inhibiting the necessary adjustment and reallocation process. And low Treasury yields and today’s manageable deficits instill false confidence that fiscal policy enjoys great latitude in fostering counter-cyclical stimulation. I fully expect impending massive deficits, inflation concerns and a dollar crisis to eventually hamstring efforts to buoy the economy when such measures are desperately needed.

Many economies have been forced into "tough macroeconomic policies" during the fateful 15-year global experiment in Unfettered Contemporary Finance. In many cases, it was a quite tumultuous and wrenching experience. But these episodes also provided examples of the capacity to bounce back after relatively short but deep financial and economic adjustment periods. Perhaps global markets will not impose a severe adjustment upon our system as it did to others that had similarly allowed borrowing and spending imbalances to severely distort the underlying economic structure. Yet that would only ensure years of stagnation, inflation and unrest. The goal of avoiding recession at all cost carries with it enormous costs.

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