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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
May 11, 2010
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Through the teachings of Keynes, Friedman, Bernanke and others we have been taught flawed analysis and educated in the wrong lessons from the terrible experience of the Great Depression.  The doctrine of inflating Credit, while disregarding speculation and Bubble dynamics, is fraught with myriad dangers.  And, well, we’re now 20 months into Dr. Bernanke’s - and global central bankers’ – experimental “helicopter money” and “government printing press” assault on the Credit crisis.   Not for a moment have I expected such overzealous inflationism to do anything other than exacerbate financial and economic fragility.

The financial world would be a safer place today had Trillions of additional dollars (and euros, yen, etc.) of liquidity not been unleashed upon the markets.  After all, ultra-loose financial conditions accommodated 20 months of historic deficit spending in Greece, periphery Europe, here at home and all about.  Massive government borrowing likely fomented heightened trading activity and speculation in sovereign Credit default swap markets around the world.  Clearly, synchronized fiscal and monetary stimulus incited speculative excess throughout global securities markets.

The “inflationists” would argue that fiscal and monetary stimulus was essential for fostering U.S. economic recovery.  A “liquidationist” (“anti-inflationist”) would counter with the argument that the cost of Trillions of additional government debt and related marketplace distortions far outweigh what will prove ephemeral benefits.  Attempts to avert system adjustment and restructuring – efforts to sustain the previous Bubble economy structure – will prove unsuccessful.  This will in large part be because of the enormous amounts of ongoing Credit expansion and monetary profligacy required for such an endeavor.  There are a host of issues related to the government throwing Trillions (of new “money”) at a maladjusted economy.  I have over the years broadly referred to these types of consequences as “Monetary Disorder.”  Some of these effects have made themselves conspicuous of late.

Reflating the stock market has been a key facet of government reflationary measures.  Rising stock prices were instrumental in boosting household and business confidence.  The revival of “animal spirits” in debt and equities markets was integral to much improved sentiment - and the advancement of a bullish consensus view that economic fundamentals were sound and the recovery on sound footing.  And there’s nothing like the cocktail of inflating markets, escalating confidence, and ultra-loose financial conditions to ensure the rapid emergence of speculative excess.

The financial world would be a safer place today had electronic “frequent trading” not proliferated throughout the government policy-induced stock market reflation.  And financial stability was similarly not bolstered by near-zero rates having enticed over $1 TN of money market assets out to inflate global risk markets.  The revival of bullish expectations, the revitalization of speculative excess and the unprecedented flow of finance into riskier assets – in the face of latent financial and economic fragility – has set the stage for another round of financial tumult – along with further investor disappointment and disillusionment.

Perhaps “purge the rottenness out of the system” is too strong.  But the financial world would be a safer place today had zealous government market intervention not bailed out the crisis-imperiled “leveraged speculating community”.  At one point yesterday, the Japanese yen was almost 6% higher against the dollar – and up a stunning 8% against the euro, Swedish krona and some other currencies.  Those that had speculated on “carry trades” – say, borrowing in yen to finance leveraged long positions in euro-denominated Portuguese bonds – were crushed yesterday in what was likely a significant unwind of money-loosing trades. 

The reemergence of “contagion” definitely makes the financial world an unstable and uncertain place in which to operate.  A crisis of confidence in Greek debt led to dislocation in the market for Greece’s Credit default swap (CDS) protection - that jumped to Portugal and then quickly engulfed European CDS and beyond.  Dislocation in European bonds and CDS placed significant downward pressure on the euro and upward pressure on the dollar – in the process fostering general currency market instability.  Most commodities (not gold!) sank, while the emerging markets came under heavy selling pressure.  Global tumult incited a flight into bunds and Treasuries, causing additional havoc for myriad other “carry trades”.  Here at home, spreads between Treasury yields and higher-yielding debt instruments (i.e. MBS and corporate bonds) began to “blow out.”  In short order yesterday, the yen melted up, Treasuries melted up, risk spreads widened dramatically and 2008-style deleveraging returned in full force. 

Throwing Trillions at a highly-speculative and dysfunctional global financial “system” has begun to present itself somewhat as a more conspicuous failure.  The Greeks and Europeans are furious.  And I doubt the ECB is too impressed right now with the “inflationist” prescription of monetizing euro debt issues.  Here at home, confidence is shaken but not yet broken.  The dollar is well-bid and yields are low, so things could definitely be worse.  There should be, however, little doubt that the sequence of Goldman Sachs testimony, violent Greek riots, the eruption of contagion risk, and a quick 1,000 point market downdraft has reversed momentum away from Greed and firmly in the direction of Fear. 

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