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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
June 9, 2010
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June 9, 2010

Gauging overall U.S. financial conditions is no easy endeavor.  From the bearish perspective, corporate debt markets have tightened meaningfully.  Financial flows have reversed away from risk assets.  I would expect these developments to stop any fledgling jobs recovery in its tracks.  Traditionally, a crisis-induce collapse in Treasury and MBS yields would at least spur refinancings and home buying.  Yet such benefits will surely underwhelm in this post-housing mania environment. 

At the same time, we must recognize that corporate and mortgage Credit have been playing a significantly lesser role compared to previous recoveries/expansions.  While conditions have tightened in corporate Credit, they have loosened further for the U.S. Treasury.  For now, however, I don’t expect lower Treasury yields to engender much benefit to the U.S. economy.  Federal spending levels are already incredibly inflated and additional stimulus measures are not yet in the offing.  So the flight to Treasuries should not greatly benefit general financial conditions.  So far, the abrupt collapse in Treasury yields and the dollar's rally have hurt the leveraged players (carry trades and such) and fostered general market instability.

Bank lending has been stagnant for two years.  The economic recovery was instead fueled by a dramatic government-induced loosening of conditions throughout the financial markets.  The massive financial bailout, zero interest rates, and a Trillion-plus Federal Reserve monetization were all instrumental in the reflating of U.S. and global securities markets.  I have argued that this reflation was an especially risky proposition. 

Central to the bearish thesis has been the dynamic where global risk markets were inflated with unsustainable market-based financial flows.  The nature of such flows creates inherent fragility, and we’ll work to gauge ramifications from faltering markets and another round of painful losses.  Going forward, I expect rising investor/speculator angst to have a major deleterious impact on general financial conditions in this age of securitized finance.

Admittedly, it is not easy to explain how the dots from Greece are connected rather directly to the U.S. economy.  They are affixed through global financial conditions – our New Age financial infrastructure of market-based Credit; gigantic risk markets where asset prices play prominently in confidence and spending; the massive pool of performance-chasing speculative finance; and market perceptions that are too often dictated by government policy actions.  In this extraordinary age of marketable finance and activist central bank inflationism, the securities markets and market perceptions have become (too) critically important.

When confidence is running high, financial conditions run loose.  The marginal borrower – Greece, a highly-leveraged U.S. corporation, or perhaps a private-equity fund – enjoys easy Credit Availability.  The tendency of things is for finance to expand, asset prices to inflate and economic “output” to increase.  And they all feed merrily on themselves.  But – in this unstable financial world - the Credit noose begins a rapid tightening the moment confidence is shaken.  And the inevitable reversal of financial flows and attendant speculator deleveraging ensures vicious contagion effects, acute fragility, and destabilizing crises of confidence. 

One can say that reflations fueled by marketable-based finance are prone to be dynamic and powerful.  Unfortunately, once unleashed, these forces are just as powerful on the downside as during expansionary periods.  Payback time comes when greed turns to fear and bull falls victim to bear.  Finance proves fickle and unreliable.  I fear U.S. financial and economic recoveries were built upon inflated expectations and unjustified confidence.  Fleeting confidence now creates myriad risks associated with unmet expectations, disappointment and disillusionment.