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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
November 11, 2009
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The Bernanke Fed has now locked itself into a policy course that will ignore global reflation dynamics and instead fixate on specific U.S. economic indicators.  Instead of adopting a more hawkish posture and laying the market groundwork for withdrawing extraordinary monetary stimulus, the Fed flew even farther into uncharted dovishness.  This adds to a long series of (compounding) errors from our central bank.  Most importantly, the Federal Reserve signaled “resource utilization” (markets read “unemployment rate”) as a key factor that will determine the course of policy normalization.  If I had to choose one economic indicator guaranteed to notably lag global reflationary dynamics, well, I’d bet on U.S. payrolls.

So, from a macro perspective, a clearer view is coming into focus – a new Paradigm is emerging.  New global reflationary dynamics have gained important momentum.  Credit systems in China, India, Asia, Brazil and the developing world – the “Periphery” - are today significantly more robust than they are here at home (the “Core”).  Powerful global financial flows to the inflating Periphery (“Monetary Processes”) also work to ensure market and economic outperformance.  The rising Periphery – with its billions of consumers and rising demand for commodities – has realized a robust and self-reinforcing inflationary bias.  Moreover, secular dollar weakness has increased the investment and speculative merits of commodities and other hard assets when contrasted to dollar securities.  Dollar weakness begets global reflation that begets dollar underperformance that begets a new Paradigm..

The balance of financial and economic power has shifted decisively away from the U.S.  The Periphery has supplanted the Core as the epicenter of global economic reflation, recovery, and expansion.  Yet the more the world changes the more the Fed remains the same.  Disregarding both the impaired dollar and global reflationary dynamics, the Fed has locked itself into pegging rates based singularly on dismal U.S. economic fundamentals.  And these ultra-low Core rates are providing a very hefty global interest-rate anchor.

I will humbly suggest that a momentous global economic transformation is at this point About Half a Paradigm.  Powerful global economic and inflationary forces have decisively shifted to the Periphery.  Meanwhile, the Federal Reserve (Core) still retains remarkable dominance over global market yields.  I believe we are in a transition period, with the Fed’s power over global yields waning over time (or perhaps abruptly in a future crisis backdrop).  In the meantime, however, global yields are mismatched to the reflationary backdrop.  This predicament implies ongoing market distortions, a rather extraordinary global mispricing of the cost of finance, along with all the myriad financial and economic costs associated with unrelenting “Monetary Disorder” (i.e. assets Bubbles, imbalances, mal- and over-investment, financial and economic fragilities, etc.)
Of late, there’s some loud clamoring with respect to the dollar carry trade and global asset Bubbles.  Little doubt the “carry trade” (borrowing at low rates in the U.S. to play higher-yielding assets globally) is a meaningful source of global liquidity, although it should not be overstated in the context of rapid synchronized Periphery Credit growth. And, clearly, speculative excess has found its way to “developing markets” (some years ago I would write “liquidity loves inflation” to describe how financial flows inherently gravitate toward the inflating asset classes).  But I would stress that a reasonable portion of this year’s spectacular market gains are associated with a fundamentally-based revaluation of Periphery and commodity-based assets.  There’s more to this year’s global market moves than mindless buying of risk assets and Bubble excess.  Furthermore, I believe the Core-to-Periphery Dynamic is a secular trend that will prove less vulnerable to bursting Bubbles than others would contend.

The sources of acute systemic fragility are generally not easily or commonly recognized during periods of excess.  The risks wrought from Fed-induced market distortions and mis-pricings during the Mortgage Finance Bubble were not apparent to most until it was much too late.  The perception today is that our post-Bubble systemic backdrop is not vulnerable to either excesses or inflationary pressures.  The bulls scoff at the notion that there are domestic risks associated with sticking with ultra-easy monetary policy (any one catch Paul McCulley’s CNBC interview late this afternoon?).  The risks are there but not so visible.

A major yet unappreciated domestic risk associated with Fed policy is that ultra-low interest-rates are being only further embedded into Credit and economic structures.  The Fed has manipulated short-rates and market yields in the most extreme degree.  This intervention has amounted to massive distortion throughout the markets, while this process has further spurred the Paradigm shift of power from the Core to the Periphery. 

Each month, the U.S. Credit system and economy become only more vulnerable to a rise in yields (mortgage and Treasury borrowing costs, in particular).  Imagine the U.S. housing market in an environment of much higher mortgage rates and then ponder the scope of the Fannie/Freddie/FHLB/FHA bailouts in the event of a spike in yields.  Picture the dilemma faced by Treasury if its borrowing costs jump significantly.  How about the fiscal position of state and local governments?  Could our frail banking system handle a surprise rise in rates?  And imagine the corner policymakers would find themselves boxed into when the Fed loses control over market yields.

It is not clear to me whether it will unfold over months or years.  But I do expect a more complete Paradigm shift to foster waning influence of the Fed over global market yields commensurate with fading U.S. economic dominance.  Unless global reflationary forces dissipate, this implies a future adjustment period for U.S. interest-rate and risk asset markets.  And when the Fed eventually loses command over market yields, the risks associated with today’s policy course will likely manifest into a very problematic financial and economic crisis.  The Fed should neither peg interest rates nor telegraph the future course of interest rate manipulations – especially at near zero rates.  And the Fed can today ignore global reflationary dynamics at our – and our currency’s - future peril.  It’s amazing the lessons somehow not learned. 


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