 PIVOTAL
EVENTS - OCT 5, 2011
Signs Of The Times
Bob Hoye
Institutional Advisors
Posted Oct 7, 2011
The following is part of Pivotal Events
that was published for our subscribers September 30, 2011.
Signs Of The Times:
"Global Meltdown: Investors Are
Dumping Nearly Everything"
-CNBC, September 22
"The lack of direction from European
leaders is troublesome for investors looking for some profound
announcement coming from European leaders as to what they're
going to do to rectify the crisis."
-CNN Money Report, September 23
We have often noted that policymaking
has been a scam that only appears to work when the business and
stock market cycles are trending up. And as was heard on the
old and dreadful Vancouver Stock Exchange "So long as
the stock is going up the public will believe the most absurd
stories."
One of the most absurd promotions has
been that a committee of wise economists can manage the economy,
and so long as they could keep credit expanding they had the
public's confidence.
Since April, they have been unable to
keep things from going down and are losing credibility.
Another quote shows growing frustration:
"Investors just want to know,
even if it is just a Band-Aid, that there's some cure that's
going to be announced."
-Chief Investment Strategist, September 23
"Divided We Fail – The
World Needs Quick & Collective Action" -Economy Watch, September 27
a) The main belief has been that policymakers
have the ability to prevent bad things from happening.
b) Another one is that when "bad"
happens it can be rectified.
If "a" was valid, "b"
would not be necessary.
These have been the two main theories
that have been around since Bagehot floated them in 1873 –
as that bubble was concluding. That post-bubble contraction prevailed
from 1873 to 1895.
In 1929 Bagehot was in the minds of central
bankers and the Fed discounted liberally during that impossible
crash. They have followed the same policy on this contraction,
which is now being seen as ineffective.
In the early 1930s the establishment
understood that the crash was caused by the bubble. The SEC and
Glass-Steagall acts were intended to prevent another bubble and
they did not work.
Essentially since the 1960s, interventionist
economists have assumed that the Fed is a perfect instrument
and revised history in blaming Fed leadership for erroneously
tightening credit. Newspapers of the day report that the Fed
was trying to inflate credit.
As any trader would know – liquidity
disappeared – as it does following any great financial
mania.
The other part of the above quote about
"Divided..." included "We need a strong
political will around the world."
Policymakers and their toadies sense
that their great interventions are not working. Rather than criticizing
central banking as a perfect instrument, the establishment is
laying the blame upon individuals. The old ad hominem
argument in 21st century guise.
The problem continues with the establishment
being overweight theories and underweight common sense. A painful
rebalancing continues.
***
Perspective
Lady Bountiful has been in retreat as
the tag team of Mother Nature and Mister Margin wrest control
from policymakers. Actually, the Fed never really has had control
over the treasury curve and credit spreads.
The brain-dead "Operation Twist"
did not work when earnestly imposed in the 1960s, and now is
quickly being seen as doubtful policy. Independent of this folly,
long-dated treasuries have had an outstanding run.
The action is working on a major top,
which the "Twist" is helping create.
Chubby Checker and his important hit
of 1960 – "The Twist" is in the financial media.
Many of today's central bankers were not of age then, and may
not know one of the variations "Let's Twist Again."
The establishment will be discussing
damage control, but it is too early for us to do a full post
mortem.
This hit is confirming that seasonally
September can be bad.
So can October, but it is also known
as the month that ends panics.
On the bounce out of August we wondered
if that hit was enough to clear the air. We concluded that the
relentless widening of corporate spreads would overwhelm the
possibility of either an engineered or natural end to the pressures.
The question now is the same. Is it over?
The Dow is making the third test of the
August low.
Corporate bonds from the Baa out to Junk
continue to decline in price as spreads widen.
Baa yields have increased by 20 bps as
the spread widened by 20 bps. At the other end, Junk yields increased
by 92 bps with 100 beeps of widening.
As spreads reversed to widening in May
we thought it would trend towards possible dislocation in the
fall. That's what usually happens at the end of a cyclical party
in spreads. The change so far is significant, but not in a panic.
In so many words, this sector was in
the "Get me in!" mode ("GMI!") into April.
It is not yet "GMO!"
Policymaking
"No warning can save people determined
to grow suddenly rich."
The observation was made by Lord Overstone,
a prominent banker, in the mid-1800s. History shows that during
an era of financial speculation virtually all facets of a society
participate – one way or another. The observation means
that there is nothing that can be done to prevent or curb speculation
– when it is time.
Given the cyclical nature of market history,
the opposite condition holds. And that is when a financial mania
completes there is nothing anyone or any agency can do to prevent
a speculative collapse – when it is time.
That occurred with the 2008 Crash. The
first business cycle out of that crash started in June 2009 and
likely ended in May of this year. That would be with the speculative
highs for stocks, corporate bonds and commodities.
Today's financial problems have often
occurred and are due to exceptional speculation by individuals,
corporations and government.
Remedies that were exciting and revolutionary
in the early 1930s have become the established way of doing things.
The problem is that Keynes and his disciples were so ignorant
of financial history that they thought that personal revelations
were new science. Worse, some of the ideas were so old that they
dated back to Ancient Rome.
It can be said that the distortions induced
by Rome's version of the New Deal contributed to its ultimate
failure.
However, when it was on it was celebrated
as the "Genius of the Emperor," but it was used
by the bureaucracy to change the country from a republic to a
police state.
More recently, the notion that throwing
credit at a credit contraction will make it go away dates back
Edward Missleden who had a personal revelation inspired the hardship
initiated by the banking crash of 1618 to 1623.
Understandably, such wisdom seems mainly
to be "revealed" in desperate financial conditions.
The next important example was made by John Law (the first truly
reckless modern central banker) following the end of a long and
dynamic expansion in 1716.
The next such discovery about using credit
to prevent a credit contraction was made by Walter Bagehot who
was editor of The Economist as the 1873 bubble was topping.
Keynes seemed unaware that bubbles were
dangerous and suffered a significant loss during the 1929 Crash.
He "took a bath" and thoroughly perplexed invented
the "liquidity preference."
Markets have a way of creating genius.
The old saying is that the higher a bull market goes the more
geniuses there are. A variation is that the moment someone with
a PhD in currency and interest-rate manipulation gets appointed
as Fed Chairman he becomes a genius.
Even greater accolades are visited upon
the government official who, by fate, presides over a "new
financial era." Andrew Mellon was Treasury Secretary during
the "Roaring Twenties" and was celebrated as the greatest
since Alexander Hamilton. Then Robert Rubin had the watch when
another new financial era began, and was granted the accolade.
Volatility during Ben Bernanke's reign
will deny the accolade.
Nevertheless, Bernanke has been appointed
to genius status, whose latest exercise in tautology is noted
on the attached chart.
A recent FT article on the latest in
rescue plans observes that it "requires psychiatric rather
than financial assessment."
The reason for this is that the "new"
concept "would have the features of a CDO of a CDO, a
highly leveraged security which proved toxic in 2007-2008."
With the contraction it seems that financial wizards in the
brokerage business found refuge in government.
Clearly, policymakers have become fanatical
and the latest experiment will not work. The literature provides
no evidence of the senior central bank ever preventing a full-blown
financial mania, which supports Overstone's observation. There
is no evidence of the senior central bank ever preventing a severe
and lengthy post-bubble contraction.
STOCK MARKETS
Commodities and corporate bonds are making
new lows for the move that started in April. Volatility prevails
in the stock market such that it continues to test the August
low.
The latter seems to be the most responsive
to the "rescues" engineered by increasingly desperate
fanatics. Quite likely, commodity and bond traders are more skeptical
than stock investors are.
Our work in April suggested a cyclical
bear for stocks, commodities and corporate bonds that could last
for more than a year.
We will stay with that, but we are uncertain
about the action in October.
***
"If inflation falls too low or
inflation expectations fall too low, that would be something
we have to respond to because we do not want deflation." -Ben Bernanke, September 29, 2011
- The Fed opened its doors for "business"
in January, 1914.
- President Nixon stopped payments of
gold in 1971.
- The only reason why Keynesianism and
central banking are still in play is that it transfers wealth
to the State.
- Bernanke's recent observation is absurd.
###
-Bob Hoye
Institutional Advisors
email: bobhoye@institutionaladvisors.com
website: www.institutionaladvisors.com
Hoye Archives
The opinions
in this report are solely those of the author. The information
herein was obtained from various sources; however we do not guarantee
its accuracy or completeness. This research report is prepared
for general circulation and is circulated for general information
only. It does not have regard to the specific investment objectives,
financial situation and the particular needs of any specific person
who may receive this report. Investors should seek financial advice
regarding the appropriateness of investing in any securities or
investment strategies discussed or recommended in this report
and should understand that statements regarding future prospects
may not be realized.
Investors should note that income from such
securities, if any, may fluctuate and that each security's price
or value may rise or fall. Accordingly, investors may receive
back less than originally invested. Past performance is not necessarily
a guide to future performance. Neither the information nor any opinion expressed constitutes
an offer to buy or sell any securities or options or futures contracts.
Foreign currency rates of exchange may adversely affect the value,
price or income of any security or related investment mentioned
in this report. In addition, investors in securities such as ADRs,
whose values are influenced by the currency of the underlying
security, effectively assume currency risk. Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.
321gold Ltd
|
