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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 25, 2009
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Reflation Issues Heat Up:

The Bernanke Fed held tightly to its “extended period” language in their November 4th communication.  Global markets took this as a signal that the Fed would not be shifting away from its ultra-loose stance until sometime later in 2010 - at the earliest.  Then there were captivating comments this week from St. Louis Federal Reserve Bank President James Bullard:  “Policy rates are near zero in the U.S. and the rest of G-7 countries, something not seen in postwar economic history.  The FOMC did not begin policy rate increases until 2-1/2-3 years after the end of each of the past two recessions.”  Markets were quick to ponder the possibility that rates might be on hold all the way into 2012.  The Fed should discourage such thinking.

In fairness to Mr. Bullard, he did note that the Fed will be mindful of criticism that it has in the past maintained low interest rates for too long.  Interestingly, the world seems to have suddenly woken up to some of the risks posed by prolonged near zero short-term U.S. rates.  Throughout Asia, attention has shifted from crisis management to the formidable challenge of dealing with unrelenting “hot money” inflows and associated Bubble risks.  Increasingly, there are fears of an extended period of Monetary Disorder.

“Asian policy makers are studying capital controls to limit ‘hot money’ inflows that may stoke asset bubbles and force their currencies to appreciate,’ according to a Bloomberg story (Shamim Adam) that ran this morning.  The article noted that policymakers from South Korea, India, and Indonesia are expressing concerns regarding international flows fueling asset inflation.  Central bankers in Indonesia are studying placing limits on foreign investment in short-term debt instruments.  This follows last week’s move by the Taiwanese to restrict international investments in bank term deposits.  The Bloomberg article also included an apt comment from the Chief Executive of the Hong Kong Monetary Authority:  “These economies could of course raise interest rates to contain inflation and increases in asset prices. But the fear is that once interest rates are raised the carry trade will become even more active, attracting even more fund inflows. Asian economies are therefore facing a dilemma.”

Here at home, there is the consensus view that the weak dollar, “hot money” flows, and the reemergence of Asian and global asset Bubbles are predominantly the problem of Asia and the rest of the non-U.S. world.  From Bill Gross’s latest:  “Raise interest rates with 15 million jobless and 25 million part-time working Americans? All because gold is above $1,100? You must be joking or smoking – something.”

With a clear head I can argue seriously that U.S. rates were cut much too low and that leaving them at near zero for a prolonged period is another major policy blunder.  It is a case of the costs of such a policy greatly outweighing potential benefits. 

As my designated “analytical nemeses” for approaching a decade now, I take special interest in the commentaries coming out of Pimco.  In my parlance, Messrs. Gross and McCulley are “inflationists.”  I would have expected inflationism dogma to have been discredited by now.  Silly me, as the inflationists remain firmly in control of the Federal Reserve and Treasury - and continue to enjoy renown and riches as our era’s “captains of industry.”  And they stick unbowed with their policy ideologies – government-directed monetary and fiscal stimulus – but in increasingly massive quantities and for longer durations.   

The inflationists argued passionately for extraordinary “Keynesian” stimulus after the bursting of the technology Bubble.  The “market” demanded and the Fed delivered.  Of course, the Fed collapsed rates after the 2000 tech wreck.  Rates remained at 1.0% until June 2004 and didn’t make it above 3% until mid-2005.  At the time, the inflationists argued that some real estate excesses were a small price to pay to protect the system from the scourge of deflation.  Their analysis of risk was flawed.

Household mortgage debt expanded 10.6% in 2001, 13.4% in 2002, 14.3% in 2002, 13.6% in 2004 and 13.2% in 2005.  Evidence of a Bubble was right there in Fed data.  From my perspective, rates were inarguably set inappropriately low for much too long, and higher borrowing costs would have been constructive for a more sound and stable financial and economic system.  Would we be better off today had the Fed raised rates earlier and more aggressively?

The inflationists are always keen to downplay (ignore) Bubble risks, while disparaging any analysis suggesting that government market intervention can go too far.  I could only chuckle recently when CNBC’s Rick Santelli and Steve Liesman were going another round at each other.  After criticizing Federal Reserve, Mr. Liesman needled Mr. Santelli’s for how he’d set policy if he were leading the Fed.  Santelli responded, “I’d start by raising rates to 1.0%.”  Liesman immediately snapped back, “You’re a liquidationist!”

In Mr. Gross’s latest, he refers to “mini bubbles.”  The problem is that the concept of anything “mini” hasn’t applied to Bubble analysis for years - and it doesn’t apply to the current backdrop either.  It is the nature of Credit Bubbles that they tend toward expansion.  If accommodated, they will not remain “mini” for long.  Considering the unprecedented scope of synchronized global monetary and fiscal stimulus, it should be no surprise that Bubble dynamics have emerged so quickly.

To be sure, the Fed has been accommodating Bubbles for many years now.  And with each bursting Bubble came policy reflation and only larger Bubbles.  The bursting of bigger Bubbles provoked only more aggressive reflations and Bubbles of historic dimensions.  The inflationists fatefully disregarded Bubble dynamics earlier this decade when their aggressive post-tech Bubble policy course fomented a much more dangerous Wall Street/mortgage finance Bubble.  They are content these days to make a similar mistake. 

Importantly, the unfolding global government finance Bubble is the largest and most precarious Bubble yet.  Such a statement may today seem ridiculous to U.S.-centric analysts - but its becoming less so to those following developments in and around China.  The unfolding backdrop is particularly dangerous because the Fed is poised to aggressively accommodate global Bubble dynamics for an extended period.  Ultra-aggressive U.S. policy stimulus ensures ongoing dollar debasement, which feeds already massive financial flows to “undollar” assets and markets.  Only aggressive policy tightening would contain Bubble excesses in China, Asia and the emerging markets.  There appears no stomach for such an approach anywhere - and this is no mini predicament.

From Mr. Gross’s perspective, the Fed will not back away from its aggressive stimulus until “your cash has recapitalized and revitalized corporate America and homeowners…”  And this seems an accurate enough assessment of the Fed’s point of view.  But Gross then follows with a key sentence:  “To date that transition is incomplete, mainly because mortgage refinancing and the purchase of new homes is being thwarted by significant changes in down payment requirements.”  If I had to speculate, I’d say Mr. Gross struggled with that sentence – and may even wish he could have it back.

It is fundamental to Credit Bubble analysis to appreciate that the unfolding reflation is going to be altogether different than previous reflations.  As I’ve repeatedly tried to explain, the epicenter of reflationary forces have shifted from the Core (U.S.) to the Periphery (China, Asia, and the “emerging” markets).  The dollar and sophisticated Wall Street Credit instruments have been supplanted by non-dollar assets and markets as the inflationary asset class of choice.  The underlying U.S. economic structure evolved during - and for – a Credit cycle era comprised of massive ongoing U.S. mortgage Credit expansion, resulting asset inflation, over-consumption and mal-investment.  Accordingly, the U.S. economy is today especially poorly positioned for the new global reflationary backdrop. 


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