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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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Best of Doug Noland
April 13, 2011
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It is simply not credible analysis to disregard the role Fed policy had on inciting excesses including a powerful speculative rally encompassing global risk markets.  In particular, a liquidity onslaught coupled with a weak dollar fomented a highly speculative and destabilizing market surge.  The eventual 2008 bursting of this speculative bubble – with atypically tight loss correlations across asset classes – coincided with the collapse of confidence in structured finance, ensuring the worst financial crisis in decades.  In a lesson regrettably left unlearned, policymaking that spurs a cycle of speculative leveraging lays the foundation for eventual de-risking, de-leveraging and liquidity crisis.

So, here we are again.  Fed policy has once again proved instrumental in inciting a commanding speculative Bubble throughout global risk markets.  One heck of a party has broken out in leveraged finance and global M&A.  And, again, there’s nothing like bountiful price gains to encourage participants to disregard underlying structural issues and fragile underpinnings.  Worse yet, the sophisticated speculators take great comfort that deep structural maladjustment ensures ongoing monetary accommodation.  Sure, the ECB lifted rates a little.  Yet, everyone knows that European periphery structural debt issues will hold meaningful tightening at bay.  Here at home, the unfolding fiscal train wreck guarantees that the Fed perpetually extends the “extended period.”

This is a dangerous period.  Global liquidity is way too plentiful, while speculation has become too all-embracing and rewarding.  Indications of monetary excess are everywhere.  Indeed, we’re in the midst of the biggest financial Bubble in history (the “Global Government Finance Bubble”) – yet everyone seems comfortably oblivious.  The Fed will persevere with its doctrine of ignoring asset prices, government borrowing excesses, market distortions and rampant speculation.  These don’t, after all, even enter into their policy framework.  The Fed is also determined to disregard increasingly entrenched inflation dynamics, convinced that its interest rate policy, quantitative easing programs and dollar neglect aren’t behind the upsurge in commodities prices.  Amazingly, the Fed likes what it sees and, much to the markets’ liking, clearly prefers to stay the course.

Throughout the marketplace, few discern inflated asset prices – certainly nothing indicative of some “great” Bubble.  Bond prices appear reasonable, at least in the context of perceived benign “core” consumer price inflation and rock-bottom short rates.  The collapse in junk and corporate risk premiums is thought justified by the robust corporate sector balance sheet and healthy cash-flows.  To many, stock valuations look cheap in relation to buoyant corporate earnings.  And, in line with the Fed’s viewpoint, rising energy and commodity prices are reflective of the health and ongoing expansions in the “emerging” economies.  Others obviously see things differently, but I see trouble all around in the rather covert effects the current Credit Bubble is exerting upon global risk markets and economies.

Where would U.S. incomes, earnings and corporate cash-flows be today if it weren’t for the $4.5 TN increase in federal debt over the past 10 quarters?  Ponder for a moment the liquidity backdrop in the Treasury market had the Fed not intervened in the marketplace with quantitative easing (#1) and “QE2” - in the process convincing the marketplace that the Fed had committed to operating as a reliable market “backstop bid?”  What would be the state of the household balance sheet today if not for the unprecedented fiscal and monetary policy response?  Is it sound analysis to trumpet the pristine state of the corporate balance sheet and celebrate the improving household balance sheet - when the Fed is doing unconscionable things to its balance sheet and the federal government is in the process of destroying theirs?  How would global markets and economies be functioning these days had it not been for the almost $1.6 TN increase in international central bank reserve holdings over the past 12 months – or the $2.75 TN, 40%,  growth in two years, to $9.45 TN?

Today, ECB President Trichet stated that “it is important that the dollar is a strong currency.”  He also said that “fixing imbalances must focus on deficit countries.”  To this day, Greenspan argues that foreign central bank Treasury purchases were instrumental for the rate environment that inflated our nation’s housing Bubble.  And the argument that our trading partners – and their undervalued currencies and steady accumulation of American I.O.Us – are most responsible for global imbalances will not be resolved anytime soon.
 
Let the world adjust; just ensure that the Fed keeps doing what it's doing.  And I just scratch my head in disbelief at how little we’ve allowed ourselves to learn over a turbulent 20 year period of interplay between “activist” policymaking and serial market Bubbles.  After doubling mortgage Credit in seven years, our system is now on track to double federal debt in 4 years.  And the markets couldn’t be more pleased with it all.  It leaves one pondering what type of circumstance will be necessary to finally force us to start getting our house in order – to return to some semblance of disciplined central banking and fiscal responsibility.