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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
April 17, 2012
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Spanish and Italian bonds, the euro and global risk markets were right back on their heels Friday.  Hopes that the ECB might be ready to backstop Spain’s sovereign bonds were somewhat dashed by comments from ECB Governing Council member, and President of the Netherlands central bank, Klaas Knot.  He stated that the ECB was not ready to revive its bond support program:  “I think that we are very far from that situation.  The instrument hasn’t been used for some time, but it’s still there. I hope we never have to use it again.”

As I’ve tried to underscore, Spain is in dire straits.  Its debts are spiraling out of control and its badly maladjusted economic structure is today incapable of producing sufficient real wealth to support itself, let alone to service its obligations.  It’s not Greece, but Spain’s much more significant economy has begun to demonstrate similar post-Bubble “financial black hole” tendencies.  LTRO euphoria has subsided, and I don’t expect it to reemerge anytime soon.  The troubled Spanish banks significantly increased their holdings of sovereign debt over the past few months, likely only increasing systemic vulnerabilities.  The markets are increasingly of the view that the backdrop ensures a major banking system recapitalization and only greater fiscal strain at the local and national level.  Basically, it’s difficult to see Spanish debt appealing to the marketplace in the near-term.

So the backdrop points to ongoing European debt stress and financial/economic crisis.  There will be enormous pressure on the ECB to bolster faltering debt markets.  There will be more finger pointing at the Bundesbank and German politicians.  There will be only louder calls for a larger “firewall,” along with joint Eurobonds, special purpose vehicles and other sophisticated structures that would amount to risk-sharing by all member states.  Basically, it still boils down to the marketplace expecting Germany to back the debt of weak euro zone member countries.  And my thesis has been that the farther the world proceeds down the path of faltering Credit Bubbles the more determined the Germans will be to protect their own.  If one looks at the world through the prism of a historic global Credit Bubble, with the epicenter in an increasingly fragile U.S., why should anyone fault the Germans for safeguarding the interests of their citizens and institutions?

No discussion of current Credit Bubble Dynamics would be complete without touching upon China.  China’s March bank lending data was out this week and such data continues to amaze.  New lending surpassed 1.01 Trillion yuan, or $160bn, the strongest loan growth since January 2011 (1.04 TN).  Lending was up 40% from February and was fully 25% above the consensus estimate (according to Bloomberg).  Analysts were quick to point to the impact of policy loosening.  As an analyst of Credit, I’m contemplating how a Credit system in the midst of a significant housing slowdown can nonetheless extend $160bn of loans in a single month. 

From Bloomberg:  “Aggregate financing, a measure of funding that includes bank lending, bond and stock sales, was 3.88 trillion yuan in the first quarter, down 8% from the same period last year.”  On an annualized basis, that’s almost $2.5 TN of system Credit.  I have posited the thesis that China succumbed to the “terminal phase” of Credit Bubble excess.  System Credit has exploded since policymakers imposed the massive post-2008 crisis stimulus package.  I am familiar with the bullish “soft landing” view, yet such a scenario is basically impossible from the perspective of a historic Credit Bubble.  I continue to expect Chinese policymakers to tinker and loosen, yet I also anticipate that they will have an increasingly difficult time managing an unwieldy Credit system and maladjusted economic structure.  My instincts tell me that we need to follow developments in China with even greater diligence. 

The world is convinced that the Fed will do everything to ensure ongoing liquidity abundance and decent U.S. economic activity.  This guarantees unrelenting massive trade deficits and resulting global liquidity abundance.  The world is similarly convinced that China will do everything to ensure ongoing strong domestic growth, providing steadfast global demand for everything real and financial.  Much of the world believes that Europe’s (debtor/creditor) mess can be largely ignored so long as the world’s key symbiotic debtor (US) and creditor (China) relationship is maintained.  And it is rather obvious why folks are complacent and embracing risk. 

Yet when one takes a step back and contemplates the backdrop, there is overwhelming support for the analysis of troubling parallels between Greece and U.S. subprime:  the first cracks in respective historic Bubbles.  And once the unavoidable downside of the Credit cycle takes hold, there’s little policymakers can do but to postpone (and exacerbate) the inevitable.   Federal Reserve rate cuts in ’07 and early-2008 only made things worse.  ZIRP, QE1, QE2, SMP, EFSF, ESM, LTRO – worse.  From my framework, Greece was the catalyst for the bursting of the global government finance Bubble – global not just European.  It wasn’t going to stop with Greece, Portugal or Ireland.  It won’t end in Spain or Italy.  And while it was all fun and games while it lasted, the LTRO spike to the punchbowl has the world again vulnerable to the hangover blues.