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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 13, 2008
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Wealth redistribution is an inherent facet of Credit and Asset Bubbles. And I would argue that this inequitable wealth-transfer gains momentum progressively throughout the life of an inflationary boom. As such, various degrees of angst, contempt, unrest and "blowback" are inevitable. I've had particular disdain for Alan Greenspan warning us of the risks of trade frictions and "protectionism." These are, after all, the predictable consequences of a bursting U.S. Credit Bubble. It would now appear that spiking prices, hording, and supply shocks (emerging most acutely in the Asian inflationary "tinderbox") throughout the agricultural, energy, and commodities markets have the potential for initiating a period of problematic trade tensions, dislocations and acute geopolitical uncertainty.

And it is not only government policymakers grappling with today's new reality: the extreme uncertainty with regard to pricing and availability of critical resources. Industries throughout the U.S. and global economies now confront a fundamentally altered environment, where the future prices and supply of scores of key inputs can no longer be taken for granted. For many, the whole idea of "just in time" inventory management has become a luxury no longer affordable. Moreover, recent media accounts have illuminated the problems suffered by farmers and grain elevator operators due to recent dislocations in commodities derivative trading. Financial derivatives markets, having functioned well in the commodities arena for the most part for years now, will now play a destabilizing role in a new era of acute supply/demand imbalances and disruptions.

In particular, one can expect today's unfolding dislocations in energy trading to inflict bloody havoc on scores of businesses, industries and derivative players alike. Many (i.e. the airlines) that have previously been somewhat hedged against future energy price gains were more recently left largely unprotected because of the perceived exorbitant cost of hedging programs. And those derivative players on the wrong side of runaway price gains are today scrambling to hedge exposures and mitigate mounting losses. Importantly, whether it is in derivatives or in contracts for the future delivery of actual resources, those in a position to provide supply are today much less willing to lock themselves into future commitments. Psychology has changed and changed profoundly. The entire market landscape has been radically altered for key commodities and resource markets, and the ramifications for general inflationary trends are significant.

I am compelled to again contrast today's inflationary forces to other recent bouts of acute pricing pressures. When emerging Credit Bubble forces fueled the NASDAQ and technology Bubbles, inflationary effects were largely isolated in technology stocks, high-yielding telecom/tech-related junk bonds and leveraged loans, and a booming tech industry. This Bubble incited huge increases in demand for technology products, yet this demand was met by a massive increase in technology production capacity. The incredible growth in semiconductor and technology output was known as a "productivity miracle." It was, however, industry idiosyncratic. The buyers of these relatively inexpensive new products benefited, while fortunes were made (and many then lost) in the Internet and technology stock Bubble.

The next Fed-instigated round of Credit and Asset Bubble Dynamics then invaded mortgage and housing markets. Wall Street simply created Trillions of new higher-yielding securities, while the homebuilding industry constructed millions of new homes. Most American relished the wealth effects from inflating home and stock prices. The economy enjoyed a Credit-induced boom. Corporate cash-flows boomed, while government receipts swelled. Similar to the technology Bubble, few felt or thought they were suffering from the ill-effects of inflation.

I am this evening referring to A New Inflationary Epoch because today's unfolding inflationary dynamics are Different in Kind. For one, prevailing inflationary pressures are global in nature. Wall Street finance is not the source fueling the boom, and it's running outside the Fed's control. American asset inflation and resulting wealth effects are minimal, while price effects for food, energy, and commodities are extreme. In contrast to previous inflationary booms, while some selected groups benefit, the vast majority of people today recognize they are being hurt by rising prices. This pain comes concurrently with atypical housing price declines. Today's price effects pummel already weakened consumer sentiment, as opposed to previous effects that tended (through asset inflation) to bolster confidence. Furthermore, current inflationary forces are destabilizing and even destructive to many businesses, while playing havoc with the fiscal standing of federal, state and municipal governments.

Revolving around booming Wall Street finance, previous inflationary booms naturally fueled surges in securities issuance and speculation. These Bubble Effects worked as powerful magnets in attracting foreign financial institutions, foreign-sourced speculators, and cheap foreign-sourced borrowings (i.e. yen borrowings financing higher-yielding U.S. securities) that all worked in concert to "recycle" our Current Account Deficits ("Bubble dollars") directly back to our securities markets.

In contrast, inflationary forces these days largely bypass U.S. securities to play global energy, commodities, and hard assets. Foreign financial institutions are fleeing the U.S. risk intermediation business, while "Bubble dollars" are chiefly recycled back into Treasury and agency securities (where they now have minimal effect on U.S. home and asset prices). Meanwhile, the massive Global Pool of Speculative Finance is today focused on energy, commodities and the "emerging" economies.

Unlike tech stocks/junk bonds, and U.S. mortgages/houses, it is today extremely difficult to meaningfully increase the supply of energy, agricultural commodities, and many natural resources. Moreover, the longer this boom is sustained the greater the demand for energy and commodities from the likes of China, India, greater Asia and the Middle East. And the higher prices rise, the greater the tendency for hoarding and problematic supply disruptions - only aggravating supply/demand imbalances and emboldening aggressive speculation. Wall Street can't fix this demand imbalance.

Importantly, surging prices for vital necessities such as energy and food by their nature elicit expanded Credit creation - albeit our consumers using Credit cards at the gas pump; our Congress deficit financing economic stimulus packages; our state and federal deficits expanding to pay for generally rising costs; corporate America borrowing to finance surging energy and other expenses; aggressive borrowing by U.S. and global energy/commodities-related industries expanding operations; by the alternative energy Bubble; by speculation-related leveraging; by governments around the globe that will expand deficit spending programs implemented in an effort to placate outraged citizenry; and by OPEC, Brazil, Russia, Australia, Norway and other economies directly prospering from the boom. Or, stated differently, through various mechanisms, processes, dynamics, and rationalizations there will be overriding tendencies to "monetize" today's inflationary effects. And unlike previous inflation manifestations that tended to remain largely contained within asset markets, today's virulent energy and commodities inflation will spawn broad-based secondary price effects. As recent trends corroborate, inflation begets only greater inflation.

The reality that powerful inflationary psychology has taken hold - and that the world's leading central banks show no inclination to confront this worsening problem - motivates tonight's title, "A New Inflationary Epoch."

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