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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
August 20, 2008
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A lot has been written about all the crazy mortgage and derivative products that were peddled during the Bubble. The incredible mania that engulfed the hedge fund community has not yet received it due. It’s simply hard to believe the days of new fund managers raising billions with extended lockups isn’t coming to an abrupt end. And this is an industry that has for the past few years luxuriated in enormous investment inflows.

While I still read articles noting increased hedge fund investments (see "Muni Watch" above), I can’t believe the more sophisticated money is not running or at least considering heading for the exits. At the minimum, the industry appears to have passed a major inflection point, and one should contemplate that acute Ponzi dynamics could easily materialize. As long as the industry was posting strong returns, inflows remained predictably huge. And robust flows ensured that favored positions could be increased and additional leverage employed – self-reinforcing bull market dynamics. These inflows worked to mark up the value of previous investments, as global securities and commodities markets soared. Investors were completely enamored, while "genius" fund managers raked in billions.

This Bubble will not function well in reverse. And I know the argument that most hedge funds are still outperforming the major equities indices. This just doesn’t matter much. I expect the entire dynamic of this industry to change now that the majority of funds face "high water marks" (losses that have to be recovered before incentive fees can again be collected). After suffering losses, many managers will be tempted to role the dice with investors’ money: "Heads I win and get my head above the high water mark; tails investors lose and I close the fund and enjoy time at the beach." More responsible managers will operate under intense pressure for performance, forced to place bets but with little room for error. This is a particularly grueling endeavor, and you can rest assured that markets won’t cooperate.

Such significantly altered trading dynamics – not to mention all the burst global speculative Bubbles – create a backdrop where it becomes extremely difficult for speculators to perform. And resulting wild market volatility significantly compounds the pressure and angst. At the same time, many managers had expected to implement various strategies to play the markets’ downside – including shorting, buying put options, writing calls, and certainly playing CDS (Credit default swaps) and various other derivatives. Yet because the Global Leveraged Speculating Community ballooned to unimaginable dimensions, these various systemic "hedges" and bearish speculations all became One Big Crowded Trade. Things are just not going work as expected, a huge problem for investors with grossly inflated expectations.

Wall Street and global speculator community travails are today at the heart of Acute Monetary Disorder. Global pricing mechanisms have turned dysfunctional. Crude oil, the most important commodity in the world, now sees its price fluctuate 30% over a few short weeks – to the upside and then to the downside. Currency values have become similarly unhinged. At the same time, liquidity conditions throughout the global debt markets have turned quite spotty at best. All these factors are working corrosively on the global economy.

The consensus view holds that the Fed should maintain today’s (grossly inequitable) negative real interest rates indefinitely. This, as the thinking goes, is how the financial sector will repair itself. Everything will then return to normal - eventually. Besides, inflation’s won’t be much of an issue. I contend that global financial and economic systems will not begin to "normalize" until this massive global pool of speculative finance deflates. Speculators have for some time been the marginal price setters for global securities, energy, commodities and many other asset markets. This is a precarious dynamic, especially considering that large numbers of speculators are impaired and will now be fighting to save their businesses. Things both financial and economic have become hopelessly unstable. And this Dysfunctional Pricing Backdrop has become the major impediment to unavoidable U.S. and global economic adjustment.

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