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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, 2011
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Sentiment within the U.S. stock market has moved to bullish extremes.  With the Fed still early in its QE2 program, participants perceive that the favorable market liquidity backdrop is safe for at least the near-term.  As for the economy, the combination of some “animal spirit” green shoots and the massive $1.5 TN federal deficit seems to ensure that there is minimal downside risk to growth this year.  Aggressive fiscal and monetary policies have bolstered the perception of systemic stability.

In reality, the world is an extraordinarily unstable place:  unwieldy finance, extreme economic imbalances and related wealth disparities – along with acute inflation - have created a geopolitical tinderbox.
The unprecedented – and ongoing - global expansion of debt has created myriad risks and vulnerabilities.  The ballooning of central bank balance sheets has over-liquefied markets and distorted risk perceptions worldwide.  This liquidity backstop has also rejuvenated and emboldened the leveraged speculating community.  Ignoring risk has been a fruitful tactic throughout the global market landscape.

The combination of massive debt growth and central bank monetization has nurtured an enormous pool of speculative finance that fuels boom and bust dynamics across virtually all risk markets and economies.  This backdrop has created what I have often referred to as “Monetary Disorder.”  One current facet of this monetary phenomenon is acute price pressures globally for food and energy.  This inflation exacerbates unrest and social instability.  Today’s developments in Egypt demonstrate how social instability has engendered political instability in a most volatile region of the world.
Today, crude oil surged $3.70 and gold jumped $23.  Emerging equities, in particular, were under pressure.  While unimpressive, the dollar did enjoy somewhat of a safe haven bid.  For the week, sugar and cotton gained about 5%, adding to already spectacular gains.  U.S. equities were under selling pressure, although most will question how street protests in Egypt could have much impact on our economic recovery.

Well, heightened unrest in Egypt and beyond adds additional uncertainty for susceptible global markets.  Unstable currency markets now have another development to contend with.  The possibility for safe haven bids for the dollar, Treasurys, and bunds has increased, which causes additional uncertainty all along the daisy chain of leveraged bond spread trades and currency “carry trades.”  Moreover, spreading regional unrest increases the probability for spikes and instability for oil and energy prices.  Recent developments also have the potential to exacerbate the trend toward price inflation and hoarding throughout the commodities complex, especially in the metals, energy and agriculture commodities arenas.
No one knows what the weekend and next week holds for Cairo.   What is clearer, however, is that this crisis is now unfolding at a juncture already demonstrating heightened market vulnerability.  As I attempted to highlight last week, 2011 has begun with a number of markets moving abruptly against the “crowd” (i.e. euro, European CDS, precious metals, etc.).  Additional uncertainty and related marketplace volatility has the potential to accelerate the process of de-risking and de-leveraging.
I would add that global Bubble Dynamics have been an unappreciated factor fueling U.S. equity prices.  In an environment already demonstrating rising bond yields and incipient liquidity issues, the emerging markets may prove especially susceptible to the unfolding geopolitical backdrop.  And a pullback in emerging bonds and equities would surely put significant additional pressure on the leveraged players.   As such, I don’t believe it would take all that much for a bout of “risk off” trading to provide the catalyst for a long-overdue correction in inflated U.S. stock prices.  Associated fragilities are an inescapable downside to Monetary Disorder and attendant speculative excess.