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Jim Cook

 

RUNAWAY SOCIAL SYMPATHY

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
April 7, 2010
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The downfall of Greece – and, perhaps, European – debt profligacy has, in a way, restored the reign of King Dollar.  There might be consternation as to the size of current and prospective U.S. deficits (as well as governmental market and economic intervention), but for the most part the marketplace just loves U.S. debt these days.  In contrast to the hamstrung Greeks, the view holds that our policymakers certainly will not let anything stymie economic and financial recovery.  If additional stimulus is needed, loads will be immediately forthcoming.  Massive deficits are fine, as they ensure sustainable recovery.  If zero interest rates are required for years, Drs. Bernanke, Yellen and others will faithfully deliver.  The Federal Reserve may be winding down its various emergency programs and Trillion dollar monetization, but the Fed surely wouldn’t hesitate using these incredibly successful tools as needed.  No Japan here.  In short, dollar securities are underpinned by the markets’ perception of a potent and comprehensive federal backstop.

As I noted above, markets have a dangerous proclivity for accommodating Bubbles.  And I see ample evidence of such dynamics throughout currency, debt, and equities markets - at home and abroad.  And I would argue that the reinstatement of King Dollar is not, as some had expected, impinging global reflation.  Indeed, rather than restraining reflationary forces, dollar strength may today be reinforcing them.  I would argue that the dollar’s newfound muscle has not yet impinged Credit systems overseas, especially overheated Credit in the “periphery.”  Meanwhile, it has helped underpin “core” U.S. debt markets generally, which has played a prominent role in the ongoing reflation of the world’s largest economy and stock market. 

This week, California sold $3.4bn of new debt, including $2.5bn of 30-year Build America Bonds.  Heightened demand, especially from international investors, compelled the state to significantly increase the size of this offering.  I would argue that without Washington’s massive fiscal and monetary stimulus there would be little demand today for long-term California debt obligations – especially from foreigners.  And while many have compared California’s structural debt problems to those of Greece, the markets are doing anything but imposing discipline and restructuring upon our golden state.  And in many ways California is a microcosm for our nation’s structural debt and economic issues:  reflation is simply postponing the day of reckoning.  An increasingly speculative marketplace is happy to focus on the here and now.

The markets are not oblivious to our structural debt problems.  Yet a view has taken hold that it’s more of a longer-term issue; nothing imminent to fret too much about.  After all, the distressing scope of our federal, state and local, and household debt problems virtually ensures the Fed will maintain extraordinarily loose financial conditions for some years to come.  And this view supports asset market reflation, underpins debt market confidence and, most certainly, stokes speculative fervor.  It’s textbook Bubble Dynamics, and such a backdrop has been supporting the dollar while also underpinning risk markets globally.  Moreover, European debt fragilities are perceived in the markets as one more reason to be confident that the Fed, ECB, People’s Bank of China and the Bank of Japan will cling to extraordinarily loose monetary policies.   

Ten-year Treasury yields jumped 16 bps this week to 3.85%.   It is my view that a significant jump in Treasury and agency yields would prove problematic for U.S. recovery.  But at this point I would tend to view this week backup in yields as more a “normalization” of yields.  Bond yields had diverged too much from the reflationary realities evidenced by inflating equities prices.  The bond market must look at stocks – and central bank dovishness - with rising apprehension.  But at least thus far, rising Treasury yields have not incited a widening of Credit spreads. 

I believe U.S. reflation will be in jeopardy when a jump in yields occurs simultaneously with increasing risk premiums and waning Credit availability.  And I wouldn’t be surprised if such a scenario unfolds in response to renewed dollar weakness.  Considering the backdrop, call me a King Dollar skeptic.  I wouldn’t be at all surprised if the prevailing sanguine view regarding U.S. policymaking and structural debt issues proves rather ephemeral.  At the end of the day, the soundness of our currency will be determined by the health and sustainability of our economic structure and the size of our debt load.  A restoration, albeit temporary, of King Dollar doesn’t appear constructive for either.

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