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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
March 7, 2011
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The Federal Reserve’s balance sheet has expanded almost $225bn over the past 16 weeks.  International (global central bank) “reserve assets” have jumped $1.5 TN in 12 months.  In just two years, “reserve assets” have ballooned an incredible $2.6 TN, or about 40%, to $9.3 TN (reserves were about $3.0 TN to begin 2004).  There’s been nothing comparable to this in the history of central banking – in the history of “money.”  The resulting liquidity onslaught has inflated global securities and commodity prices, distorted market perceptions of risk and liquidity, depressed global yields and fomented speculative excess in any market that trades.  I have referred to this backdrop as one of “Monetary Disorder.”

Monetary Disorder can certainly fester for some time under the façade of a seemingly healthy environment.  As we have witnessed, global equities prices have been a prime beneficiary of global reflationary dynamics.  And there is nothing like the tonic of inflating stock prices to bolster confidence and embolden the risk-takers.  Ebullient markets, then, lead economic expansion and provide seeming confirmation of the bullish point of view.  Yet there is no escaping the instability lurking just beneath the fragile surface.

It is said that hedge fund assets (and leverage!) have returned to pre-crisis levels.  Surely, global sovereign wealth funds have grown only more gigantic.  And it is worth noting that China’s “reserve assets” have jumped 46% in only two years to an incredible $2.847 TN.  The world is awash in liquidity/”purchasing power” like never before.  This is all worth keeping in mind as we contemplate the likelihood of ongoing unrest in the Middle East and potential supply and price shocks.  The Goldman Sachs Commodities Index ended the day at the highest level since August 2008.

The global liquidity and speculation backdrop ensures that any important commodity facing potential supply constraint enjoys a propensity for spectacular price inflation – a dynamic now appreciated by companies, speculators and policymakers alike.  This inflationary manifestation was really taking hold back in 2008 before the onset of the global Credit crisis.  Of late, it has returned with a vengeance throughout the agriculture commodities and food complex.  Yet, with stock markets booming and confidence running high, most have been content to disregard this troubling inflation dynamic.  The markets this week abruptly turned somewhat less complacent (at least for a few sessions).
The Middle East crisis took a decided turn for the worst this week with the eruption of violence and chaos throughout Libya.  The markets now confront great uncertainty as to how developments will unfold throughout the region.  Recent events certainly increase the probability for potentially problematic energy supply disruptions and resulting price shocks.  A fragile global recovery and inflated markets create a susceptible backdrop, especially with optimism and speculative zeal having become so prominent throughout global markets. 

With crude (West Texas Intermediate) surpassing $100 this week – and with prospects high that Middle East instability won’t be dissipating anytime soon – analysts are scurrying to fashion views as to the impact surging energy prices will have on corporate profits, consumer spending, inflation and global growth.  To say that unfolding circumstances create extreme uncertainty is no overstatement.

This week, Saudi Arabia’s King Abdullah announced plans to increase social spending by $36bn, including a 15% pay increase for government employees and $10bn for low-income housing.  At the top of the list of oil exporters (and with $440bn of international reserves), Saudi Arabia enjoys unusual capacity to ameliorate its underclass.  The markets are watching Saudi Arabia with keen interest, at this point confident that the kingdom has the capacity both to hold social unrest at bay and to pump additional barrels.

To be a fly on the wall in Beijing…  Chinese policymakers must be intensively analyzing developments throughout the Middle East.  I’ll assume they are taking great interest in the House of Saud’s approach to placating the masses.  And while China is definitely no Saudi Arabia or Egypt, there is simmering social tension that provides authorities constant worry.  China may not have a huge unemployed youth problem, yet inflation and Bubble Economy Dynamics have engendered huge wealth disparities and attendant social instability.

To this point, policymaking has been straddling a fence.  There has been a certain determination to dampen home price appreciation and other Bubble effects in urban locations, while at the same time moving to significantly increase minimum wages and boost construction of low-income housing.  There has been a focus on addressing real estate excesses, with the expectation that adept economic management will allow this “tightening” to be accomplished without sacrificing ongoing strong growth.  This is the type of complex economic management that nurtures a high risk of monetary mismanagement.

Today from Bloomberg News:  “China may slow the pace of tightening ‘significantly’ in coming months as policy makers are likely to need time to access the impact of the ‘intensive and aggressive tightening’ measures introduced the past five months, Daiwa Securities Capital Markets Co. said… The political turmoil in some African countries and increased uncertainty about the global economy should make China ‘more cautious’ about implementing further tightening measures, according to the report by Mingchun Sun, analyst at Daiwa.”

First of all, the notion of what amounts to “intensive and aggressive tightening” has evolved considerably since Paul Volcker manned the helm of the Federal Reserve.  With borrowing rates about 6% and January bank loan growth of $180bn, China remains some distance away from tight “money.”  At the same time, the view that recent events might provide the impetus for Chinese authorities to take a more cautious approach to further “tightening” does resonate.
From the perspective of my analytical framework, China is in the midst of its “terminal phase” of Credit Bubble excess.  I have posited that China, with the extraordinary dimensions of its population, its underdeveloped north, and the nation’s $2.8 TN hoard of reserves, has perhaps a unique capacity to prolong its historic boom.  I have also noted that it is generally typical for policymakers to turn increasingly timid as the risks of bursting Bubbles compound.  China has reached the point where it must move forcefully in order to rein in excess or risk things running completely out of control.  I have feared that policymakers would along the way find reason to lose their nerve.

The recent surge in food and energy prices comes at a critical juncture for global policymakers.  The inflationary backdrop beckons for meaningful synchronized monetary tightening.  The seriousness of unfolding inflationary risks is becoming difficult to downplay.  Yet the Federal Reserve, the guardian of the world’s reserve currency, won’t even slow its pace of quantitative easing, let alone reverse course and tighten.  Incredibly, global inflationary dynamics do not factor into the Fed’s policy framework.  The Europeans have begun to prepare the markets for an increase in rates, although when this does occur it will hardly qualify as monetary restraint.  The Bank of Japan won’t be raising rates anytime soon, and I wouldn’t be surprised if other Asian central banks actually step back a bit from their baby-step approach to rate hikes.
The People’s Bank of China - “guardian” of the world’s largest population, most robust economy, most imposing Credit Bubble and most gluttonous appetite for all things food, energy and commodities - was poised to play a pivotal role in global finance; it appeared on the brink of providing a source of monetary restraint.  Recent developments could change everything.  Instead of potential restraint, China might adjust course and become an even greater source of global demand.
First, if China turns cautious on its tightening program, this will most likely lead to another year of stronger-than-expected economic growth (how long until China reaches 25 million annual vehicle sales?).  Second, surging food and energy prices may induce the Chinese (along with others) to move more aggressively toward building “strategic stockpiles” of everything necessary to sustain strong growth and buoy social spirits.  Third, the authorities may view the popularity of global protests and the Facebook phenomenon as cause to approach their objective of bolstering incomes and consumption for its enormous poor underclass even more aggressively.  The potential to unleash additional purchasing power is enormous.

In a world with some semblance of normality, one would look at surging energy prices as portending restraints on growth.  Global bond markets would fret at breathtaking surges in commodities prices – along with the specter of hoarding and inflation psychology becoming firmly entrenched.  But these are the most abnormal of times.  It is not beyond the realm of possibility that a booming Asia might actually relax and further monetize higher food and energy prices.  Global bond markets - that in the past could be counted on to help dampen incipient inflation through the imposition of higher yields – remain these days fixated on the likelihood that the Fed and global central bankers will for an extended period ignore inflation and stick with ultra-loose money.
The current backdrop creates extraordinary uncertainty.  From an analytical perspective, things can go in many different directions from here.  There is no alternative than to follow developments diligently, keeping an open mind and re-evaluating often.  But the makings for a serious inflation problem seem to become more cohesive by the week.  Global central bankers are determined to bring new meaning to the term “behind the curve,” which connotes eventual “hard landings.”  To be sure, US “CPI” these days provides an especially poor gauge of monetary conditions and the appropriateness of policy.  And when writing of an “inflation problem,” I am thinking more in terms of the global market, economic, social and political havoc fomented from an extended period of (increasingly unwieldy) Monetary Disorder.