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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 19 , 2010
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For the past couple of months, the world has been enamored with QE2 and prospects for concerted global central bank monetization/liquidity creation.  European peripheral debt problems were viewed as ensuring ECB market intervention/support.  Deflation had the Bank of Japan poised for aggressive action.  In the U.S., structural problems were sure to support multiple QE’s and a feeble dollar.  A faltering greenback equated to ongoing Asian central bank dollar purchases and the “recycling” of these balances back to the U.S. Treasury market.  Ultra-low Treasury yields would then remain a steadfast anchor on market yields for the vast spectrum of global borrowers. 

Global markets – stocks, bonds, commodities, and currencies – have been luxuriating in visions of endless liquidity over-abundance - for all.  It’s been a backdrop where fundamental factors and issues were relegated to the backburner.

This week, it seemed like the focus may have shifted toward fundamentals.  Risk is returning to the equation.  For starters, the markets’ disregard for global inflation risks has begun to wane.  And despite all the focus on global liquidity abundance, systemic risks remain quite elevated.  Moreover, the world is increasingly keen to structural debt problems.  As the week wore on, the liquidity backdrop suddenly looked a lot less certain.  Perhaps the future does not guarantee ultra-loose “money” for all – but rather an increasingly discriminating market environment of “the haves” and “have nots”.

Global yields were on the rise.  German bund yields gained 9 bps to 2.51% and Japan’s JGB yields rose 7 bps to 0.99%.  Notably, UK 10-year yields jumped 24 bps (3.21%), Spain 17 bps (4.53%), and Italy 18 bps (4.15%).  Our 30-year Treasury yields rose 17 bps to 4.29%, the high since mid-May.  Benchmark U.S. municipal yields jumped 24 bps to 3.70% (from Bloomberg).
If the markets are indeed beginning to reevaluate the global inflation backdrop and the prospects for China/Asian monetary tightening, the marketplace would also be expected to become more discriminating based on respective borrower fundamentals.  After all, the potential for rising global yields and a less accommodating liquidity backdrop would more severely impact the most heavily indebted.  As such, I take particular interest in this week’s jump in yields for the UK, Spain, Italy, U.S. Treasurys and American municipal bonds. 
If the market has in fact begun to shift from “endless liquidity for all” to a more fundamentally-driven focus, don’t expect such a transition to go smoothly.  After all, ultra-loose financial conditions tend to most benefit the weakest borrowers.  That has certainly been the case in the U.S. Credit market, with junk bonds, leveraged loans, and municipal debt having enjoyed such stellar performance.  In our stock market, many of the most fundamentally-challenged stocks and sectors have posted tremendous gains.  An extraordinary liquidity backdrop has nurtured speculative excess – in the process creating acute vulnerability to changing market perceptions. 

On a global macro basis, few governments have benefited more from global liquidity excess than the U.S. Treasury.  It is worth noting that in the face of today’s global risk markets drubbing – Treasury yields rose and the dollar index barely tread water.

Has quantitative easing – on this, the initial trading day of QE2 – turned counterproductive?  Have markets reached an inflection point, with concern shifting away from perceived liquidity benefits to the heightened risks associated with additional Federal Reserve liquidity creation (i.e. inflation, Chinese/Asian tightening, unwieldy global liquidity flows, heightened market instability, worsening structural problems, etc.)?  Did global policymaking and the markets’ euphoric perception of endless liquidity set the stage for disappointment and liquidity issues?  This week felt different; highly speculative global markets are overdue for a bout of “soul searching.”