The following is part of Pivotal Events that was published for our subscribers May 5, 2010.
SIGNS OF THE TIMES:
"The Fed has unlimited abilities to buy treasuries."
- RBC, BNN, April 24, 2009
One of the great comforts to the financial establishment as the 1873 bubble was peaking was that the US did not have the hindrance of a gold-standard central bank. Moreover, the boast was that the treasury secretary had immense powers with a fiat currency to buy bonds out of the market. Enough to prevent a bubble from going bad. That post-bubble contraction ran from 1873 to 1895.
"The 'ideal' [real] interest rate for the US economy would be minus 5%, according to internal analysis prepared for the Fed's last policy meeting."
- Financial Times, April 27, 2009
The problem with this is that real long interest rates in the senior economy always decline - significantly - during a financial mania. And then in the consequent contraction they increase - significantly. In the latest example, real long rates fell to minus 1% and increased to plus 5% with the crash. They always increase during post-bubble turmoil and decrease with the rebounds - as of lately.
Changes in real interest rates are set by market forces, not by policymakers. This week's break in most markets will prompt an update on "Real Long Interest Rates". Our February 23 study on "Sovereign Debt Follies" is posted on our website.
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The last part of April provided a rich harvest of very bullish comments - from "Sub-prime Alive" to "Short Sellers Throw in the Towel" to "Goldilocks", which we reported. Much of the glow had to do with rising prices and boasts by interventionist economists that the problems were all in the past. Within the good times, Greece provided a number of trading opportunities as its fate swung from "Fixed" to "Ooops". The latter seems in play this week and like the Sub-Prime Mortgage problem in 2007 it can't be "isolated".
The sudden arrival of disaster quotations this week are more of discovery than of an ending character.
As the success of the recent great intervention, an observation by President Hoover in 1933 on that intervention may be instructive:
"The 'battle' against the depression was likened to a military campaign 'conducted on many fronts'. The strength of the nation had to be 'mobilized' and it was implied that citizens had a patriotic duty to respond to calls by the commander-in-chief for action."
In 1931 Richard Whitney, the president of the NYSE observed:
"There has been too many suave statements that reassure nobody, too many empty platitudes, too great a lack of frankness and realism, too much of an attitude of trying to whistle in a graveyard at midnight."
Actually, there was nothing new in the observations from the 1930's problems. The post-1873 contraction prompted similar complaints, comparable to today's.
"It is thus apparent that the Treasury operations have thus far chiefly benefited...Wall and Broad Streets more than the commercial community."
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Our theme last week was "Sudden Deceleration Syndrome" that implied that the New York stock market had run into a brick wall.
The brick wall has not moved and the markets are suffering a change of attitude that could be significant.
As we have been outlining, the rebound in the "good stuff" was likely to run into spring and reach excess. This was recorded in the growing number of individual stocks registering Upside Exhaustions and as Ross notes this only happens at important tops. The Nasdaq accomplished the best overbought since the blow off in 2000.
On the bigger picture, Brazil and China led the way up from the bottom of the crash. As Ross observed on April 4 this provided a "positive" divergence for the NYSE rebound that started in March a year ago. The key to the April 4 study was that the opposite had developed over the few months.
The two big leading exchanges have been in a critical negative divergence that has been indicating the culmination of the rebound party.
Our "helpers" on the rally have been base metal and crude oil prices that were expected to rally to a seasonal overbought in the spring. Base metals and crude oil accomplished this in mid April.
The "indicators" such as the silver/gold ratio also set its maximum momentum in mid April.
There has been rather convincing evidence that a major top has been building and the market will signal the reversal by setting a lower low, or a lower high than set the week before. The lower low has been recorded by the S&P, Nasdaq and DJIA.
It will be interesting to see if this week accomplishes the lower high, but the lower low is enough to mark the end the party.
Over the past few weeks the advice to investors was to lighten up and last week's advice to traders was to begin playing the short side.
"Greece is one giant Ponzi scheme"
"Greek politicians do not see the debt as debt. They see it as income"
This is from the National Post of April 28, 2010. The short article is worth reading at this link: http://network.nationalpost.com/NP/blogs/fullcomment/archive/2010/04/28/greece-is-one-giant-ponzi-scheme.aspx
The conclusion to our study "Sovereign Debt Follies" was in the last line:
"The process is devastating and continues until both lenders and borrowers vow to never be reckless again"
Using the guidance of history there is little point in trying to bail out Greece, or any other spendthrift country. The means is immoral in taking money from individuals who work and save and giving it to others who are not productive and do not save. The end is the hope of financial stability, which is impossible until the chronic abuse ends with a massive bond revulsion. This will include responsible taxpayers forcing all levels of government to also be responsible.
The struggle will be between the individual and central planners. A recent example was symbolized by the fall of the Berlin Wall, when the public looked at the promises of the governing classes and realizing it was nonsense moved to reduce privilege and power. Taking on a police state with the prerogative of political murder was one of the boldest moves in history.
In the past such political reversals have followed a high for commodities. That key one was in 1988 and the Wall came down in 1989. On the developing equivalent move in so-called "Western Democracies" there was a huge peak in commodities in 2008 and our governing classes have never resorted to political murder. All they have is Political Correctness, which is mainly propaganda and bluff.
Eastern Europeans took on an evil police state - our authoritarians are only ambitious busybodies. Their determination to impose the latest superstitions about political control has always been costly. They have squandered this generation's savings, as well as the next's, and as Margaret Thatcher observed socialists will spend other people's money until it is all gone.
We are there and the struggle to return to the condition whereby government exists at the pleasure of the people, rather than the other way around, will be interesting.
In the meantime, continue to avoid sovereign debt, get out of most classes of long-dated corporate issues and give the finger to greedy bureaucrats.
There are two good things going on in gold. One is the increase in dollar terms as the dollar has been firming relative other important currencies. Despite what crazed interventionists have been insisting - the public is finally resuming its right to determine what money is. It is gold.
In 1974 Jack F. Bennett, who was deputy undersecretary of the US treasury, was concerned about allowing Americans to again hold or trade gold:
"Gold legislation will cause a major catastrophe, of the same magnitude as a nuclear attack."
The legislation was passed and Americans have been permitted to trade and own gold since January 1975.
Well, it has taken 35 years and Bennett's fears may have been about losing "control" of the financial markets, and the worst nightmare of such policymakers may be arriving. And that would be the discovery of their own irrelevance as the market begins to seriously overwhelm their practices and theories. Recently, the nominal price seems to be indicating this.
Link to May 7, 2010 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1640