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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 25, 2010
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China’s bank loans expanded $202bn – in January.  This must be the greatest month of loan growth for a national banking system in the history of mankind.  On the back of about $1.3 TN of loan expansion, Chinese home prices were up 9.5% y-o-y.  January crude imports were up 33% y-o-y, while copper imports were up 25% y-o-y.  January power consumption was up 40% from a year earlier (against a weak comparison).  With GDP and real estate prices expanding at around double-digit rates, one would typically expect policymakers to be preparing to slam on the brakes.  These are atypical times.

The People’s Bank of China raised bank reserve requirements 50bps today, the second such hike in the past month.  This heightened market fears that Chinese authorities are determined to implement real monetary tightening.  For an economy experiencing unprecedented “hot money” inflows, bank lending, and “animal spirits”, count me skeptical that marginal changes in reserve requirements will be all that effective in reining in systemic excesses. 

Two-year bank deposit rates remain at about 2%, while lending rates are significantly below the rate of real estate inflation.  Indeed, I suspect that the Chinese are at this point intent on tightening reserve requirements in lieu of the large rate increases justified by the degree of current overheating.  With the world these days awash in cheap liquidity, higher Chinese interest rates would likely only exacerbate both inbound financial flows and general Monetary Disorder.  Raising capital requirements must be about the easiest decision for Chinese monetary authorities.

Yesterday from Bloomberg:  “The People’s Bank of China will ‘gradually guide monetary conditions back to normal levels from the counter-crisis mode,’ it said in a quarterly monetary policy report… The central bank repeated a call for global coordination of stimulus exits. ‘Before major developed economies fully exit their abnormal policies, global liquidity may remain ample and keep pushing up asset prices… But once major developed economies start to exit, global capital flows may reverse and global asset prices, especially asset prices in emerging markets, may see volatilities.’”

If Chinese policymakers are waiting for the “developed economies” to exit their extremely loose monetary stance, it could prove a rather expanded wait.  The Bernanke Fed appears determined to exit over a period of years.  And in light of the Greek debt crisis and other fiscally troubled EU countries (Spain, Portugal, Ireland…), it is unlikely that the ECB will move to meaningfully tighten financial conditions for some time to come.  In short, global policymakers have no stomach whatsoever for crisis. 

The basic premise of my Global Government Finance Bubble thesis is that policymakers everywhere will err on the side of extreme fiscal and monetary stimulus – that global monetary conditions will remain extraordinarily loose.  Policymakers see enormous risks in global Credit systems and economies - and little in the way of inflation risk.  The structurally maladjusted U.S. economy ensures ongoing massive federal deficits, loose monetary policy, huge current account deficits – and a structurally unsound dollar.  Serious financial and economic issues at the “Core” (U.S.) have unleashed Credit systems at the “Periphery” (i.e. China, Brazil, India, Asia, and the “emerging markets”).  There is no global monetary anchor, and it’s inflationism as far as the eye can see.

Ultra-loose monetary policies notwithstanding, are Chinese “tightening” and European debt problems in the process of derailing global reflation?  Does the dollar rally and unwind of the so-called “dollar carry trade” point to reemerging deleveraging and global deflationary forces?  Global Credit systems and economies remain extraordinarily vulnerable, no doubt about that.  And highly speculative global risk markets were overdue for some painful retrenchment.  But are we witnessing a fundamental shift in the preference for global finance to flow back to the “Core” and away from the “Periphery?” Such a dynamic would imply acute vulnerability to “Periphery” Credit systems and economies - and put global reflation in jeopardy. 

I struggle with the issue of the “dollar carry trade.”  Clearly, there were huge leveraged bets – short dollars and long myriad “undollars” – going into 2008.  The global financial crisis incited a dramatic dollar short squeeze, along with associated massive deleveraging both throughout global markets and within the “leveraged speculator community.”  Granted, global policymakers somewhat bailed out the leveraged players with their aggressive systemic stabilization measures (the EU must these days be wondering if saving the hedge funds was such a good idea).  Did the speculators rush right back out and implement aggressive leveraged strategies? 

It’s fair to say that dollar sentiment turned quite negative toward the end of 2009 – and that animal spirits were running quite high in the “undollar” markets – i.e. emerging debt and equities, gold, energy, commodities, and foreign currencies.  There were, no doubt, huge second-half flows into “undollar” markets.  Yet it is unclear as to what extent borrowing/leverage was behind these flows.  It is thus not clear to me to how susceptible the global system is today to a 2008-style, self-reinforcing dollar rally and deleveraging. 

Sure, greed can abruptly turn to fear throughout the global currency and risk markets.  It is not necessarily an extraordinary development when speculative flows reverse and mete out pain to market participants.  But it would be a major issue if this reversal fomented the unwind of market borrowings and reduced marketplace liquidity.  After all, deleveraging and illiquidity are at the heart of market contagion effects and systemic crisis.  The analysis of deleveraging and marketplace liquidity is today as challenging as it is critical

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