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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
May 19, 2010
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We’re now two years into the greatest expansion of global government debt in the history of mankind.  Manic-depressive debt markets have now pulled the rug out from under Greece and periphery Europe, but in the process have further accommodated profligate government borrowings here at home.  It is frightening to think of how distorted the Treasury market has become - and how things might play out down the road.

My bearish thesis on our markets and economy is based upon the view that the financial fuel for our recovery has been unsound, unstable and unsustainable.  This “Monetary Process” is now in jeopardy.  The Global Government Finance Bubble, which lunged into its terminal phase of excess with the collapse of the Wall Street/mortgage finance Bubble, has been pierced.  Greece’s debt crisis marks a momentous inflection point.  And, yes, some government markets – certainly including Treasuries – are benefiting from Greek and periphery European debt woes. Yet key Bubble dynamics percolate under the surface.

I have argued that the Global Government Finance Bubble has been the biggest and most precarious Bubble yet.  The incredible scope of global sovereign debt expansion over the past couple years has been rather obvious.  Less apparent are related distortions - to the pricing and allocation of finance throughout international markets - based specifically upon the market's perception that politicians and central bankers would act aggressively and successfully to forestall future crises.  This policy-induced market distortion fostered an incredible bout of risk-taking – especially considering the fundamental backdrop – and a resulting massive flood of finance out to the risk markets.  This perception has been blown to smithereens in Europe and has quickly become vulnerable everywhere.

Global markets in sovereign Credit default swap (CDS) protection have flourished on the assumption that policymakers would thwart any debt crisis.  In the post-Greek debacle era, writing insurance against a government default is no longer free money.  New realities have profoundly changed the risk and reward profiles of operating in this key market - and I’ll assume some profoundly less attractive marketplace liquidity dynamics going forward.  And a faltering market for sovereign debt insurance significantly changes the risk profile of owning the underlying sovereign debt.  To be sure, changing perceptions in the market for government debt work to corrode market confidence in the capacity of policymakers to stem financial and economic crises generally.  This implies a major adjustment in the markets’ perception of risk in various markets, including corporate, municipal and mortgage instruments.

But I’m getting somewhat ahead of myself.  Thus far, dislocation in Greek debt has fed powerful contagion effects throughout European debt and CDS.  This has forced a major market reassessment of the relative stability of the euro currency, which has unleashed bloody havoc throughout the currency and “carry trade” arena.  Currency and “carry trade” tumult has forced market reassessment as to near-term prospects for both the dollar (upward) and global growth (downward).  This has caused trading liquidation and de-leveraging havoc in the enormous global “reflation trade” and in risk markets more generally.  And there’s nothing like liquidation and forced de-leveraging to really bring out the animal spirits for those seeking to make nice speculative profits from others’ misfortune.

The dollar and Treasuries have benefited.  This has supported the bullish view that the unfolding crisis is largely a European issue.  It has also helped dampen the impact to our markets from changing global perceptions with respect to the capacity of policymakers to stem crises.  Here in the U.S., Credit spreads and risk premiums (corporates, MBS, municipals, etc.) have widened some.  Yet faith still runs deep that Washington won’t allow a crisis.  This confidence must hold for sufficiently loose U.S. finance to continue to support our fragile recovery.

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