Bubble – Page 4 – The Burning Platform

FACTS ARE SO INCONVENIENT FOR LIARS

The beat goes on. The lying pricks trying to convince you that we are in the midst of an economic recovery keep having the rug pulled out from beneath their feet. So let me get this straight. The reason, housing, retail, and manufacturing have been in the toilet for the last six months was supposedly cold and snowy weather during the WINTER.

We were assured by highly educated Ivy League Wall Street economists and millionaire CNBC talking heads that there would be a dramatic rebound in the Spring. Well, Summer is only three days away. Home sales always surge in the Spring. Everyone knows that. Here is today’s announcement from the Mortgage Bankers Association:

The Market Composite Index, a measure of mortgage loan application volume, decreased 9.2 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 10 percent compared with the previous week. The Refinance Index decreased 13 percent from the previous week. The seasonally adjusted Purchase Index decreased 5 percent from one week earlier. The unadjusted Purchase Index decreased 6 percent compared with the previous week and was 15 percent lower than the same week one year ago.

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So let me get this straight. We have 30 year mortgages available at near record low interest rates of 4.35%, we supposedly have a record number of Americans employed as the Obama recovery blossoms, and people are rolling in dough because household net worth is also at an all-time high, but the number of people applying for mortgages is 15% BELOW last year, 30% below levels of 2010, 60% below levels of 2004/2005, and at the same levels of 1997. How can you have a real housing recovery when mortgage applications are at 17 year lows?

The schmuck who generates the chart below continues to blather about a phantom housing recovery because it is clear he was bought off by the industry. Housing starts are in the toilet. New homes sales are at recession levels. The Wall Street Rent to REO scam has run its course. Housing is headed back into the toilet, along with home prices. Housing bust 2.0 is underway and all the propaganda in the world won’t change the facts.

FED GOVERNOR REVEALS THE TRUTH ABOUT QE

“I was not for this program, popularly known as QE3, to begin with. I doubted its efficacy and was convinced that the financial system already had sufficient liquidity to finance recovery without providing tinder for future inflation. But I lost that argument in the fall of 2012, and I am just happy that we will be rid of the program soon enough. “I am often asked why I do not support a more rapid deceleration of our purchases, given my agnosticism about their effectiveness and my concern that they might well be leading to froth in certain segments of the financial markets. The answer is an admission of reality: We juiced the trading and risk markets so extensively that they became somewhat addicted to our accommodation of their needs… you can’t go from Wild Turkey to cold turkey overnight.

So despite having argued against spiking the punchbowl to the degree we did, I have accepted that the prudent course of action and the best way to prevent the onset of market seizures and delirium tremens is to gradually reduce and eventually eliminate the flow of excess liquidity we have been supplying… one would be hard pressed to say that ending our asset purchases, which the depository institutions from which we buy them deposit back with us as excess reserves, would deny the economy needed liquidity. The focus of our discussions now is when and how to ‘normalize’ monetary policy.” – Fed Governor Richard Fisher

Talk about speaking the truth!!!

He admits that QE was designed to benefit Wall Street banks, hedge funds, HFT and the rest of the parasites on the ass of America. It was designed by the few for the few. It benefited Wall Street, not Main Street. The .01% saw their riches expand exponentially. The 1% benefited modestly as their 401k’s rebounded. The 99% got higher food and energy prices, along with declining real wages.

I know that John Hussman’s weekly letter is too deep in the weeds for many people, but I learn stuff every week that helps me understand the truth about our financial system and our manipulated, bubble markets. The Federal Reserve is primarily responsible for the two bubbles that have already burst since 2000. They are single-handedly responsible for the bubble that will burst in the near future. The Fed will have withdrawn the $85 billion per month punchbowl by October of this year. Hussman explains what happens next:

That sucking sound you hear is the Federal Reserve exiting from the most reckless policy experiment in its history. Unfortunately, that policy experiment has been the primary driver of speculation in recent years. One can’t rule out some stall in the tapering timeline, but even QEternity appears to have an expiration date. Despite present complacency, this transition is likely to be painful for the market, as one does not normalize valuations that are 100% above historical norms without pain – typically concentrated in a handful of steep but short-lived free-falls. That said, there was no evidence years ago that boosting the market to speculative highs would do much good for the economy (consumers spend from their view of “permanent income,” not from temporary fluctuations in volatile assets).

Make no mistake about it, valuations today are more extreme than they were in March 2000. Think about that for a few moments. Are you mentally and financially prepared for a third 50% plunge in the stock market in the last fourteen years? Well, are you punk?

With advisory sentiment running at 56% bulls and fewer than 20% bears, with most historically reliable valuation metrics about twice their pre-bubble norms (and presently associated with negative expected S&P 500 nominal total returns on every horizon of 7 years and less), with capitalization-weighted indices near record highs but smaller stocks and speculative momentum stocks diverging badly, and with a Federal Reserve clearly intent on winding down the policy of quantitative easing that has brought these distortions about, we continue to view the present market environment as among the most dangerous instances in history.

Major market peaks, even those like 2000 and 2007 that were followed by 50% losses, have never felt dangerous at the time. That’s why they were associated with exuberant price extremes. Sure, investors had a sense that prices had advanced a great deal, but endless reasons could be found to justify the advance. Avoiding major losses required an intimate familiarity with market history, and enough discipline and patience to maintain what Galbraith called a “durable sense of doom” about observable conditions. The general rule is that you don’t observe the “catalyst” in advance, only the stack of dynamite.

Make no mistake, reliable valuation measures for the median stock are actually more extreme today than in 2000. On a capitalization-weighted basis, valuations are beyond every pre-bubble point in history except for a few months in 1929. In the bubble that ended in 2000, final valuations were higher owing to the extremes in large-capitalization technology stocks at that peak. Many observers seem to believe that valuations are of no concern unless they match that singular extreme. Good luck on that. The novelty, imagination, and extrapolation born of the late-1990’s internet and technology revolution is unlikely to be matched by an economy that can’t post growth beyond the threshold between expansion and recession despite the largest monetary intervention in history. The Fed is already retreating from that intervention, and for good reason, because while the Fed’s extraordinary actions are not actually linked to real economic outcomes, they encourage very risky speculative side-effects.

Meanwhile, an average, run-of-the-mill bear market would wipe out the entire advance in the S&P 500 Index since April 2010. Even on a total return basis, I doubt that any of the market’s gains from that point will actually be retained by investors by the completion of the present cycle. We currently estimate S&P 500 nominal total returns averaging about 2.4% annually over the coming decade.

Understand that nominal means before inflation. Therefore, you will be getting a big fat ZERO real return from the stock market over the next ten years. Considering the Fourth Turning has approximately fifteen years to go, this makes sense as we enter the war zone. I’m sure all seven of these valuation methods are wrong this time. Just ask a CNBC bimbo or Wall Street economist shyster.

Read John Hussman’s Weekly Letter

Jeremy Grantham: The Fed is killing the recovery

Guest Post by Fortune

By Stephen Gandel, senior editorMarch 24, 2014: 5:00 AM ET

The money manager argues that the Fed’s interventions have ruined the very recovery it was supposed to stimulate and that the market is poised to disappoint investors.

Jeremy Grantham

FORTUNE — If you hate the Federal Reserve, you have a new hero.

A few weeks ago, Jeremy Grantham, the co-founder of money management firm GMO, called newly appointed Federal Reserve chairman Janet Yellen “ignorant” in the New York Times. He also said the reason for the slow recovery was not the severe financial crisis, continued high unemployment, or the many standoffs in Washington. Instead, he blamed the Fed for ruining the recovery it was supposed to stimulate. To someone who believes in the laws of economics, it’s hard to overstate how odd that claim is. It’s positively bonkers.

Low interest rates stimulate the economy. The Fed has done everything in its power to keep interest rates down, lower and longer than anyone can remember. That should have helped the economy. And yet the recovery has been just meh. So, either Grantham is bonkers, or he is onto something. Fortune recently caught up with him to find out.

Fortune: You believe the Fed’s policies, particularly quantitative easing, have slowed the recovery. What’s your proof?

Grantham: It’s quite likely that the recovery has been slowed down because of the Fed’s actions. Of course, we’re dealing with anecdotal evidence here because there is no control. But go back to the 1980s and the U.S. had an aggregate debt level of about 1.3 times GDP. Then we had a massive spike over the next two decades to about 3.3 times debt. And GDP over that time period has been slowed. There isn’t any room in that data for the belief that more debt creates growth.

In the economic crisis after World War I, there was no attempt at intervention or bailouts, and the economy came roaring back. In the S&L crisis, we liquidated the bad banks and their bad real estate bets. Property prices fell, capitalist juices started to flow, and the economy came roaring back. This time around, we did not liquidate the guys who made the bad bets.

Can you really blame the Fed for the bailouts? That was an act of Congress.

I don’t like to get into the details. The Bernanke put — the market belief that if anything goes bad the Fed will come to the rescue — has had a profound impact on people and how they act.

Okay, but that’s still not proof that quantitative easing slowed the recovery.

There’s no proof on the other side, that the economy is any stronger from quantitative easing. There’s some indication that the crash would have been worse and the downturn would have been sharper had the Fed not stepped in, but by now the depths of that recession would have been forgotten, the system would have been healthier, and we would have regained our growth.

It’s economic doctrine that lower interest rates boost the economy. Are you saying that’s wrong?

Economic doctrine says the market is efficient. My view of the economy is not really principle-based. Higher interest rates would have increased the wealth of savers. Instead, they became collateral damage of Bernanke’s policies. The theory is that lower interest rates are supposed to spur capital spending, right? Then why is capital spending so weak at this stage of the cycle. There is no evidence at all that quantitative easing has boosted capital spending. We have always come roaring back from recessions, even after the mismanaged Great Depression. This time we are not. It’s anecdotal evidence, but we have never had such a limited recovery.

But the Fed does seem to have boosted stocks. Even if it did nothing else, doesn’t a better market help the economy?

Yes, I agree that the Fed can manipulate stock prices. That’s perhaps the only thing they can do. But why would you want to get an advantage from the wealth effect when you know you are going to have to give it all back when the Fed reverses course. At the same time, the Fed encourages steady increasing leverage and more asset bubbles. It’s clear to most investing professionals that they can benefit from an asymmetric bet here. The Fed gives them very cheap leverage on the upside, and then bails them out on the downside. And you should have more confidence of that now. The only ones who have really benefited from QE are hedge fund managers.

Okay, but then I guess that means you think stocks are going higher? I thought I had read your prediction that the market would disappoint investors.

We do think the market is going to go higher because the Fed hasn’t ended its game, and it won’t stop playing until we are in old-fashioned bubble territory and it bursts, which usually happens at two standard deviations from the market’s mean. That would take us to 2,350 on the S&P 500, or roughly 25% from where we are now.

So are you putting your client’s money into the market?

No. You asked me where the market is headed from here. But to invest our clients’ money on the basis of speculation being driven by the Fed’s misguided policies doesn’t seem like the best thing to do with our clients’ money.

We invest our clients’ money based on our seven-year prediction. And over the next seven years, we think the market will have negative returns. The next bust will be unlike any other, because the Fed and other centrals banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before. Assets are overpriced generally. They will be cheap again. That’s how we will pay for this. It’s going to be very painful for investors.

Beer Goggles, Monetary Camels, the Eye of the Needle and the First Law of Holes

As close as you are ever going to get to complete honesty from a Federal Reserve Governor.

Via Dallas Fed President Richard Fisher

Beer Goggles, Monetary Camels, the Eye of the Needle and the First Law of Holes

During the holiday break, I spent a good deal of time trying to organize my thoughts on how I will approach monetary policy going forward. Today, I am going to share some of those thoughts that might be of interest to you as corporate directors.

At the last meeting of the Federal Open Market Committee (FOMC), it was decided that the amount of Treasuries and mortgage-backed securities (MBS) we have been purchasing should each be pared back by $5 billion, so that we would be purchasing a total of $75 billion a month (in addition to reinvesting the proceeds of maturing issues we hold) rather than $85 billion per month. In addition, it was noted that “if incoming information broadly supports the Committee’s expectation(s) … the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings.” And it was made clear that the FOMC expects it will hold the base rate that anchors the yield curve—the federal funds rate, or the rate on overnight money—to its present near-zero rate well past the time when unemployment is reduced to 6½ percent.

I was pleased with the decision to finally begin tapering our bond purchases, though I would have preferred to pull back our purchases by double the announced amount. But the important thing for me is that the committee began the process of slowing down the ballooning of our balance sheet, which at year-end exceeded $4 trillion. And we began—and I use that word deliberately, for we have more to do on this front—to clarify our intentions for managing the overnight money rate.

As an economist would say, “on net” I was rather pleased with the decision taken at the December FOMC meeting.

Under the chairmanship of Ben Bernanke, all 12 Federal Reserve Bank presidents, together with the sitting governors of the Federal Reserve Board, have input into the decision-making process. There is a formal vote—regardless of who is the Fed chair—that includes only five of the 12 regional Bank presidents plus the governors, but all of the principals seated at the table participate fully in the discussion of what to do. And yet, either because we will effect a change in the chairmanship starting in February or because at the last meeting we took the step of tapering back by a small amount our massive purchase of Treasuries and MBS, great attention is being placed on the voters for 2014, of which I am one.

Two comments I recently read have been buzzing around my mind as I think about the many issues that will condition my actions as a voter.

Beer Goggles …

The first was by Peter Boockvar, who is among the plethora of analysts offering different viewpoints that I regularly read to get a sense of how we are being viewed in the marketplace. Here is a rather pungent quote from a note he sent out on Jan. 2:

“…QE [quantitative easing] puts beer goggles on investors by creating a line of sight where everything looks good…”

For those of you unfamiliar with the term “beer goggles,” the Urban Dictionary defines it as “the effect that alcohol … has in rendering a person who one would ordinarily regard as unattractive as … alluring.” This audience might substitute “wine” or “martini” or “margarita” for “beer” to make it more age-appropriate, but the effect is the same: Things often look better when one is under the influence of free-flowing liquidity. This is one reason why William McChesney Martin, the longest-serving Fed chairman in our institution’s 100-year history, famously said that the Fed’s job is to take away the punchbowl just as the party gets going.[2]

… and the Eye of the Needle

The other eye catcher for me was a cartoon in the Jan. 6 issue of The New Yorker. Sitting in a room are two businessmen who are apparently conversant with the New Testament’s book of Matthew. One says to the other, “We need either bigger needles or smaller camels.”

Today, I want to muse aloud about whether QE has indeed put beer goggles on investors and whether we, the Fed, can pass the camel of massive quantitative easing through the eye of the needle of normalizing monetary policy without creating havoc.

Free and Abundant Money Changes Perspective

Boockvar is right. When money available to investors is close to free and is widely available, and there is a presumption that the central bank will keep it that way indefinitely, discount rates applied to assessing the value of future cash flows shift downward, making for lower hurdle rates for valuations. A bull market for stocks and other claims on tradable companies ensues; the financial world looks rather comely.

Market operators donning beer goggles and even some sober economists consider analysts like Boockvar party poopers. But I have found myself making arguments similar to his and to those of other skeptics at recent FOMC meetings, pointing to some developments that signal we have made for an intoxicating brew as we have continued pouring liquidity down the economy’s throat.

Among them:

Share buybacks financed by debt issuance that after tax treatment and inflation incur minimal, and in some cases negative, cost; this has a most pleasant effect on earnings per share apart from top-line revenue growth.
Dividend payouts financed by cheap debt that bolster share prices.
The “bull/bear spread” for equities now being higher than in October 2007.
Stock market metrics such as price-to-sales ratios and market capitalization as a percentage of gross domestic product at eye-popping levels not seen since the dot-com boom of the late 1990s.
Margin debt that is pushing up against all-time records.
In the bond market, investment-grade yield spreads over “risk free” government bonds becoming abnormally tight.
“Covenant lite” lending becoming robust and the spread between CCC credit and investment-grade credit or the risk-free rate historically narrow. I will note here that I am all for helping businesses get back on their feet so that they can expand employment and America’s prosperity: This is the root desire of the FOMC. But I worry when “junk” companies that should borrow at a premium reflecting their risk of failure are able to borrow (or have their shares priced) at rates that defy the odds of that risk. I may be too close to this given my background. From 1989 through 1997, I was managing partner of a fund that bought distressed debt, used our positions to bring about changes in the companies we invested in, and made a handsome profit from the dividends, interest payments and stock price appreciation that flowed from the restructured companies. Today, I would have to hire Sherlock Holmes to find a single distressed company priced attractively enough to buy.

And then there are the knock-on effects of all of the above. Market operators are once again spending money freely outside of their day jobs. An example: For almost 40 years, I have spent a not insignificant portion of my savings collecting rare, first-edition books. Like any patient investor in any market, I have learned through several market cycles that you buy when nobody wants something and sell when everyone clamors for more. During the financial debacle of 2007–09, I was able to buy for a song volumes I have long coveted (including a mint-condition first printing from 1841 of Mackay’s Memoirs of Extraordinary Popular Delusions, which every one of you should read and re-read, certainly if you are contemplating seeing the movie The Wolf of Wall Street). Today, I could not afford them. First editions, like paintings, sculptures, fine wines, Bugattis and homes in Highland Park or River Oaks, have become the by-product of what I am sure Bill Martin would consider a party well underway.

I want to make clear that I am not among those who think we are presently in a “bubble” mode for stocks or bonds or most other assets. But this much I know: Just as Martin knew by virtue of his background as a noneconomist who had hands-on Wall Street experience, markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations.

This need not threaten the real economy. The “slow correction” of 1962 comes to mind as an example: A stock market correction took place, and yet the economy continued to fare well.

Here is the point as to the market’s beer goggles. Were a stock market correction to ensue while I have the vote, I would not flinch from supporting continued reductions in the size of our asset purchases as long as the real economy is growing, cyclical unemployment is declining and demand-driven deflation remains a small tail risk; I would vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date.

How Large Is the Camel?

Let’s turn to the camel, by which I mean the size of the Fed’s balance sheet.

A little history provides some perspective. We began to grow our balance sheet as we approached year-end 2008. On Sept. 10, 2008, the amount of Reserve Bank credit outstanding was $867 billion. On Nov. 25, 2008, we announced a program to purchase $100 billion of securities issued by the housing-related government-sponsored enterprises, together with our intent to purchase up to $500 billion in MBS in order to goose the housing market. I supported these initiatives, recognizing that the economy was in the throes of a financial panic.

Following our December 2008 meeting, the FOMC announced that it had cut the target range for the fed funds rate to 0-to-1/4 of 1 percent, and being thus “zero bound,” we floated the idea of purchasing longer-term Treasuries in order to provide further monetary accommodation (when we buy Treasuries or MBS and agency debt, we put money into the financial system, substituting for further interest rate cuts). On March 18, 2009, we announced additional purchases of up to $750 billion of agency MBS and up to $100 billion of agency debt, plus purchases of up to $300 billion of longer-term Treasury securities over six months. That day, our balance sheet was marked at $2 trillion.

There are some details that impacted our balance sheet, which I have omitted so as not to bore you or entangle you in the entrails of central bank operations: For example, liquidity swaps with other central banks declined from a peak occasioned by the financial crisis of $583 billion the week ended Dec. 10, 2008, to $330 billion the following March, thus somewhat mitigating the growth of our balance sheet over that period.[3]

From my perch, I considered a balance sheet of $2-plus trillion and a base lending rate of 0-to-1/4 of 1 percent more than sufficient to stimulate not just the housing market but the stock market, too, thus placing us on the path of what economists refer to as “the wealth effect”—the working assumption that rising prices for homes, stocks and bonds floats the income boat of all Americans.

I basically said so publicly on March 26, 2009, in a speech to the RISE Forum, an annual student investment conference. At the time, the S&P 500 was priced at 814, the Nasdaq at 1,529 and the Dow at 7,750. The mindset of investors at that moment was summarized at an earlier FOMC meeting by one of my most esteemed colleagues at the Fed, who quipped that in looking at the balance sheets of most financial institutions, “nothing on the right is right and nothing on the left is left.” As I looked at the faces of the students gathered in that vast auditorium, I could see in their eyes a reflection of the gloom and doom of the time.

Here is what I told these young investors that dark morning: “… the current economic and financial predicament represents a potential gold mine rather than a minefield. Historically, great investors have made their money by climbing a wall of worry rather than letting a woeful consensus cow them. … Your job as investors is … to ferret out from the general-market malaise good financial and business operators whose franchises and prospects are overdiscounted at current prices. Were I you … I would be licking my chops at the opportunities that always abound in times of adversity. … There are a lot of dollar bills that can be found in the debris of the current markets that can be picked up for nickels and dimes.”

Of course, I would not mention this today had I been wrong! Currently, the right hand side of the balance sheet of most any well-managed market-traded business is chock-full of restructured, cheap debt and leaner common stock, while the left side is bulging with surplus cash. The S&P closed yesterday at 1,819, the Nasdaq at 4,113 and the Dow at 16,258—a plateau over two times above the valley into which they had descended in 2009.

And, again, there are the signs of conspicuous consumption I mentioned earlier that reflect a fully robust stock market. If there is indeed a wealth effect that spreads from clever market operators to the working people of America, a $2 trillion balance sheet might well have been sufficient to have performed the trick.

The FOMC is a committee, however, and the majority of my colleagues have disagreed with me on this point. We have since doubled our balance sheet to $4 trillion. This has resulted not only in saltatory[4] housing, bond and stock markets, but a real economy that is on the mend, with cyclical unemployment declining and inflation thus far held at bay.

Here is the rub. We have accomplished the last $2 trillion of balance-sheet expansion by purchasing unprecedented amounts of longer-maturity assets: As of Jan. 8, 2014, 75 percent of Federal Reserve-held loans and securities had remaining maturities in excess of five years.

A Narrow Needle Eye

The brow begins to furrow. To be sure, Treasury and MBS markets are liquid markets. But the old market operator in me is conscious that we hold nearly 40 percent of outstanding eligible MBS and of Treasuries with more than five years to maturity. Selling that concentrated an amount of even the most presumably liquid assets would be a heck of lot more complicated than accumulating it.

Currently, this is not an issue. But as the economy grows, the massive amount of money sitting on the sidelines will be activated; the “velocity” of money will accelerate. If it does so too quickly, we might create inflation or financial market instability or both.

The 12 Federal Reserve Banks house the excess reserves of the depository institutions of America: If loan demand fails to grow at the same rate as banks accumulate reserves due to our hyperaccommodative monetary policy, the resultant excess reserves are deposited with us at a rate of return of 25 basis points (1/4 of 1 percent per annum).

Here is some math confronting policymakers: Excess reserves are currently 65 percent of the monetary base and rising. The only other time excess reserves as a percentage of the base have come anywhere close to this level was at the close of the 1930s, when the ratio hit 41 percent. We are in uncharted territory.

To prevent excess reserves from fueling a too-rapid expansion of bank lending in an expanding economy, the Fed will need to either drain reserves on a large scale by selling longer-term assets at a loss or provide inducements to banks to keep reserves idle, by offering interest on excess reserves at a rate competitive with what banks might earn on loans to businesses and consumers. Or we might employ more widely new techniques we are currently testing, such as “reverse repos,” complex transactions in which we, in effect, borrow cash overnight from market operators while posting securities as collateral.

Such inducements to control the velocity of the monetary base might expose the Fed to intense scrutiny and criticism. The big banks that park the lion’s share of excess reserves with us are hardly the darlings of public sentiment. Raising interest payments to them while scaling back our remittances to the Treasury might raise a few congressional eyebrows. And as to our repo operations, we have never implemented them on anywhere near the scale envisioned.

Of greatest concern to me is that the risk of scrutiny and criticism might hinder policymakers from acting quickly enough to remove or dampen the dry inflationary tinder that is inherent in the massive, but currently fallow, monetary base.

In the parlance of central banking, the “exit” challenge we now face is somewhat daunting: How do we pass a camel fattened by trillions of dollars of longer-term, less-liquid purchases through the eye of the needle of getting back to a “normalized” balance sheet so as to keep inflation under wraps and yet provide the right amount of monetary impetus for the economy to keep growing and expanding?

The First Law of Holes

I have great faith in the integrity and brainpower of my fellow policymakers. I am confident that the 19 earnest women and men that make up the FOMC will do their level best under Chairwoman Janet Yellen’s leadership to accomplish a smooth exit that keeps prices stable and the economy in a job-creating mode. But my confidence will be bolstered if my colleagues adopt the First Law of Holes espoused in the late ’70s by then-British Chancellor of the Exchequer Denis Healey: “If you find yourself in a hole, stop digging.”

The housing market is well along in repair;[5] the economy is expanding; cyclical unemployment is declining. To be sure, there will be individual data points that appear to challenge confidence, like the just-released employment report for December. But I believe the odds favor continued economic progress. And I believe that continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy.

The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat. As soon as feasible, we should change tack. We should stop digging. I plan to cast my votes at FOMC meetings accordingly.

ACCORDING TO PLAN

On one of the Bitcoin threads last week I pondered whether TPTB were purposely driving the price of bitcoin to unsustainable levels in order to crash it in an attempt to discredit it as an alternative currency. Make no mistake about it, the bankers and politicians DO NOT like bitcoin. Anything that reduces their power and/or control of the monetary system is considered a threat. They may act unconcerned, but in the smokey backrooms where the real decisions in this country are made, the bankers are worried. This bubble and crash smells like a planned publicized event to scare people away from bitcoin. The MSM will now do their part by scorning and ridiculing bitcoin as a joke. TPTB are becoming a bit predictable.

Bitcoin Crashes, Loses Half Of Its Value In Two Days

Submitted by Tyler Durden on 12/07/2013 09:27 -0500nShare1

It was inevitable that a few short days after Wall Street lovingly embraced Bitcoin as their own, with analysts from Bank of America, Citigroup and others, not to mention the clueless momentum-chasing, peanut gallery vocally flip-flopping on the “currency” after hating it at $200 only to love it at $1200 that Bitcoin… would promptly crash. And crash it did: overnight, following previously reported news that China’s Baidu would follow the PBOC in halting acceptance of Bitcoin payment, Bitcoin tumbled from a recent high of $1155 to an almost electronically destined “half-off” touching $576 hours ago, exactly 50% lower, on very heave volume, before a dead cat bounce levitated the currency back to the $800 range, where it may or may not stay much longer, especially if all those who jumped on the bandwagon at over $1000 on “get rich quick” hopes and dreams, only to see massive losses in their P&Ls decide they have had enough.

Which incidentally, like gold, is to be expected when one treats what is explicitly as a currency on its own merits in a world of dying fiat – with the appropriate much required patience – instead of as an asset, with delusions of grandure that some greater fool will pay more for it tomorrow than it is worth today. Sadly, in a world of HFT trading, patience is perhaps the most valuable commodity.

As for Bitcoin, while the bubble may or may not have burst, and is for now kept together with the help of the Winklevoss bros bid, all it would take is for another very vocal institutiona rejection be it in China or domestically, where its “honeypot” features are no longer of use to the Fed or other authorities, for the euphoria to disappear as quickly as it came…

Two day chart, showing the epic move from $1155 to $576 in hours:

And longer term chart showing the overnight action in its full glory:

THIS IS WHY YOU OWN PHYSICAL GOLD

I love listening to the anti-gold nitwits who call it a barbaric relic. They put their faith in pieces of paper produced by central bankers and politicians. Do you need any more proof than what is happening to the people of India? Their politicians have been running large deficits over the last few years. They have been able to do this because Bennie and his fellow central banker buddies have been printing prodigious quantities of paper money. The hot money crowd was willing to fund India’s deficits, hoping for a better return than the .50% they could get in US Treasuries. It seems even the talk of tapering was enough to scare the hot money crowd out of the emerging markets. The Indian Rupee has fallen 30% against the USD in the last five months. India imports all of their oil and a large amount of their food – all priced in dollars. How do you think the average Indian is doing now?

The government is in disarray. They are scrambling around with price controls, laws against buying gold, etc. This is what politicians across the world do. They create problems and then create solutions that create worse problems. If you were an Indian with $100,000 worth of Rupees in March, 2013 and converted it into gold you would have gold worth $106,000 today. By holding onto your Rupees, you have Rupees valued at $70,000 today. Do you get it?

Gold is not an investment. It is an insurance policy against the idiocy of central bankers and politicians. Keep believing the USD will always be the world’s reserve currency. Just because Bennie is printing $120 million of new dollars per hour doesn’t mean the USD will be worth less in the coming years. Right? Have some faith. Don’t buy that barbaric relic with your fiat dollars just because every paper currency in history has reached its true intrinsic value of zero. Believe the propagandists for the state who tell you gold is nothing but a giant bubble. Everyone knows that when gold makes up 0.5% of all global assets, it surely is in an epic bubble.

Some ideas are so stupid that only an intellectual, academic, central banker, politician or Wall Street shill could believe it.

IT’S A MATTER OF TRUST – PART ONE

“All the world is made of faith, and trust, and pixie dust.” ― J.M. Barrie – Peter Pan

“The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.” – Lord Acton

Who do you trust? Do you trust the President? Do you trust Congress? Do you trust the Treasury Secretary? Do you trust the Federal Reserve? Do you trust the Supreme Court? Do you trust the Military Industrial Complex? Do you trust Wall Street bankers? Do you trust the SEC? Do you trust any government agency or regulator? Do you trust the corporate mainstream media? Do you trust Washington think tanks? Do you trust Madison Avenue PR maggots? Do you trust PACs? Do you trust lobbyists? Do you trust government unions? Do you trust the National Association of Realtors? Do you trust mega-corporation CEOs? Do you trust economists? Do you trust billionaires? Do you trust some anonymous blogger? You can’t even trust your parish priest or college football coach anymore. A civilized society cannot function without trust. The downward spiral of trust enveloping the world is destroying our global economy and will lead to collapse, chaos and bloodshed. The major blame for this crisis sits squarely on the shoulders of crony capitalists that rule our country, but the willful ignorance and lack of civic accountability from the general population has contributed to this impending calamity. Those in control won’t reveal the truth and the populace don’t want to know the truth – a match made in heaven – or hell.

“Most ignorance is vincible ignorance. We don’t know because we don’t want to know.” – Aldous Huxley

The fact that 86% of American adults have never heard of Jamie Dimon should suffice as proof regarding the all-encompassing level of ignorance in this country. As the world staggers under the unbearable weight of debt built up over decades, to fund a fantasyland dream of McMansions, luxury automobiles, iGadgets, 3D HDTVs, exotic vacations, bling, government provided pensions, free healthcare that makes us sicker, welfare for the needy and the greedy, free education that makes us dumber, and endless wars of choice, the realization that this debt financed Ponzi scheme was nothing but a handful of pixie dust sprinkled by corrupt politicians and criminal bankers across the globe is beginning to set in. A law abiding society that is supposed to be based on principles of free market capitalism must function in a lawful manner, with the participants being able to trust the parties they do business with. When trust in politicians, regulators, corporate leaders and bankers dissipates, anarchy, lawlessness, unscrupulous greed, looting, pillaging and eventually crisis and panic engulf the system.

Our myopic egocentric view of the world keeps most from seeing the truth. Our entire financial system has been corrupted and captured by a small cabal of rich, powerful, and prominent men. It is as it always has been. History is filled with previous episodes of debt fueled manias, initiated by bankers and politicians that led to booms, fraud, panic, and ultimately crashes. The vast swath of Americans has no interest in history, financial matters or anything that requires critical thinking skills. They are focused on the latest tweet from Kim Kardashian about her impending nuptials to Kanye West, the latest rumors about the next American Idol judge or the Twilight cheating scandal.

Bubble, Bubble, Toil & Trouble

Economist and historian Charles P. Kindleberger in his brilliant treatise Manias, Panics, and Crashes details the sordid history of unwitting delusional peasants being swindled by bankers and politicians throughout the ages. Human beings have proven time after time they do not act rationally, obliterating the economic teachings of our most prestigious business schools about rational expectations theory and efficient markets. The only thing efficient about our markets is the speed at which the sheep are butchered by the Wall Street slaughterhouse. If humanity was rational there would be no booms, no busts and no opportunity for the Corzines, Madoffs, and Dimons of the world to swindle the trusting multitudes. The collapse of a boom always reveals the frauds and swindlers. As the tide subsides, you find out who was swimming naked.

“The propensity to swindle grows parallel with the propensity to speculate during a boom… the implosion of an asset price bubble always leads to the discovery of frauds and swindles”— Charles P. Kindleberger, economic historian

The historically challenged hubristic people of America always think their present-day circumstances are novel and unique to their realm, when history is wrought with similar manias, panics, crashes and criminality. Kindleberger details 38 previous financial crises since 1618 in his book, including:

The Dutch tulip bulb mania
The South Sea bubble
John Law Mississippi Company bubble
Banking crisis of 1837
Panic of 1857
Panic of 1873
Panic of 1907 – used as excuse for creation of Federal Reserve
Great Crash of 1929
Oil Shock of 1974-75
Asian Crisis of 1998

Kindleberger wrote his book in 1978 and had to update it three more times to capture the latest and greatest booms and busts. His last edition was published in 2000. He died in 2003. Sadly, he missed being able to document two of the biggest manias in history – the Internet bubble that burst in 2001 and the housing/debt bubble that continues to plague the world today. Every generation egotistically considered their crisis to be the worst of all-time as seen from quotes at the time:

1837: “One of the most disastrous panics this nation ever experienced.”
1857: “Crisis of 1857 the most severe that England or any other nations has ever encountered.”
1873: “In 56 years, no such protracted crisis.”
1929: “The greatest of speculative boom and collapse in modern times – since, in fact, the South Sea Bubble.”

Human beings have not changed over the centuries. We are a flawed species, prone to emotional outbursts, irrational behavior, alternately driven by greed and fear, with a dose of delusional thinking and always hoping for the best. These flaws will always reveal themselves because even though times change, human nature doesn’t. The cyclical nature of history is a reflection of our human foibles and flaws. The love of money, power, and status has been the driving force behind every boom and bust in history, as noted by historian Niall Ferguson.

“If the financial system has a defect, it is that it reflects and magnifies what we human beings are like. Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong. Booms and busts are products, at root, of our emotional volatility.” – Niall Ferguson

Not only are our recent booms and busts not unique, but they have a common theme with all previous busts – greedy bankers, excessive debt, non-enforcement of regulations, corrupt public officials, rampant fraud, and unwitting dupes seeking easy riches. Those in the know use their connections and influence to capture the early profits during a boom, while working the masses into frenzy and providing the excessive leverage that ultimately leads to the inevitable collapse. As the bubble grows, rationality is thrown out the window and all manner of excuses and storylines are peddled to the gullible suckers to keep them buying. Nothing so emasculates your financial acumen as the sight of your next door neighbor or moronic brother-in-law getting rich. As long as all the participants believe the big lie, the bubble can inflate. As soon as doubt and mistrust enter the picture, someone calls a loan or refuses to be the greater fool, and panic ensues. This is when the curtain is pulled back on the malfeasance, frauds, deceptions and scams committed by those who engineered the boom to their advantage. As Kindleberger notes, every boom ends in the same way.

“What matters to us is the revelation of the swindle, fraud, or defalcation. This makes known to the world that things have not been as they should have been, that it is time to stop and see how they truly are. The making known of malfeasance, whether by the arrest or surrender of the miscreant, or by one of those other forms of confession, flight or suicide, is important as a signal that the euphoria has been overdone. The stage of overtrading may well come to an end. The curtain rises on revulsion, and perhaps discredit.” – Charles P. Kindleberger – Manias, Panics, and Crashes

When mainstream economists examine bubbles, manias and crashes they generally concentrate on short-term bubbles that last a few years. But some bubbles go on for decades and some busts have lasted for a century. The largest bubble in world history continues to inflate at a rate of $3.8 billion per day and has now expanded to epic bubble proportions of $15.92 trillion, up from $9.65 trillion in September 2008 when this current Wall Street manufactured crisis struck. A 65% increase in the National Debt in less than four years can certainly be classified as a bubble. We are currently in the mania blow off phase of this bubble, but it began to inflate forty years ago when Nixon closed the gold window. This unleashed the two headed monster of politicians buying votes with promises of unlimited entitlements for the many, tax breaks for the connected few and pork projects funneled to cronies, all funded through the issuance of an unlimited supply of fiat currency by a secretive cabal of central bankers running a private bank for the benefit of other bankers and their politician puppets. Crony capitalism began to hit its stride after 1971.

The apologists for the status quo, which include the corporate mainstream media, intellectually dishonest economist clowns like Krugman, Kudlow, Leisman, and Yun, ideologically dishonest think tanks funded by billionaires, and corrupt politicians of both stripes, peddle the storyline that a national debt of 102% of GDP, up from 57% in 2000, is not a threat to our future prosperity, unborn generations or the very continuance of our economic system. They use the current historically low interest rates as proof this Himalayan Mountain of debt is not a problem. Of course it is a matter of trust and faith in the ability of a few ultra-wealthy, sociopathic, Ivy League educated egomaniacs that their brilliance and deep understanding of economics that will see us through this little rough patch. The wisdom and brilliance of Ben Bernanke is unquestioned. Just because he missed a three standard deviation bubble in housing and didn’t even foresee a recession during 2008, doesn’t mean his zero interest rate/screw grandma policy won’t work this time. It’s done wonders for Wall Street bonus payouts.

The growth of this debt bubble is unsustainable, as it is on track to breach $20 trillion in 2015. The only thing keeping interest rates low is coordinated manipulation by Ben and his fellow sociopathic central bankers, the insolvent too big to fail banks using derivative weapons of mass destruction, and politicians desperately attempting to keep the worldwide debt Ponzi scheme from imploding on their watch. Their “solution” is to kick the can down the road. But there is a slight problem. The road eventually ends.

At some point a grain of sand will descend upon a finger of instability in the sand pile and cause a collapse. No one knows which grain of sand will trigger the crisis of confidence and loss of trust. But with a system run by thieves, miscreants, and scoundrels, one of these villains will do something dastardly and the collapse will ensue. Ponzi schemes can only be sustained as long as there are enough new victims to keep it going. As soon as uncertainty, suspicion, fear and rational thinking enter the equation, the gig is up. Kindleberger lays out the standard scenario, as it has happened numerous times throughout history.

“Causa remota of the crisis is speculation and extended credit; causa proxima is some incident that snaps the confidence of the system, makes people think of the dangers of failure, and leads them to move from commodities, stocks, real estate, bills of exchange, promissory notes, foreign exchange – whatever it may be – back into cash. In itself, causa proxima may be trivial: a bankruptcy, suicide, a flight, a revelation, a refusal of credit to some borrower, some change of view that leads a significant actor to unload. Prices fall. Expectations are reversed. The movement picks up speed. To the extent that speculators are leveraged with borrowed money, the decline in prices leads to further calls on them for margin or cash and to further liquidation. As prices fall further, bank loans turn sour, and one or more mercantile houses, banks, discount houses, or brokerages fail. The credit system itself appears shaky, and the race for liquidity is on.” – Charles P. Kindleberger – Manias, Panics, and Crashes

Despite centuries of proof that human nature will never change, there are always people (usually highly educated) who think they are smart enough to fix the markets when they breakdown and create institutions, regulations and mechanisms that will prevent manias, panics and crashes. These people inevitably end up in government, central banks and regulatory agencies. Their huge egos and desire to be seen as saviors lead to ideas that exacerbate the booms, create the panic and prolong the crashes. They refuse to believe the world is too complex, interconnected and unpredictable for their imagined ideas of controlling the levers of economic markets to have a chance of success. The reality is that an accident may precipitate a crisis, but so may action designed to prevent a crisis or action by these masters of the universe taken in pursuit of other objectives. Examining the historical record of booms and busts yields some basic truths. The boom and bust business cycle is the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.

Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money through the money creation process in our fractional reserve banking system. This leads to an unsustainable credit-sourced boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. The easy credit issued to non-credit worthy borrowers results in widespread mal-investments and fraud. A credit crunch leading to a bust occurs when exponential credit creation cannot be sustained. Then the money supply suddenly and sharply contracts as fear and loathing of debt replace greed and worship of debt. In theory, markets should clear through liquidation of bad debts, bankruptcy of over-indebted companies and the failure of banks that made bad loans. Sanity is restored to the marketplace through failure, allowing resources to be reallocated back towards more efficient uses. The housing boom and bust from 2000 through today perfectly illustrates this process. Of course, Bernanke declared housing to be on solid footing in 2007.

The housing market has not been allowed to clear, as Bernanke has artificially kept interest rates low, government programs have created false demand, and bankers have shifted their bad loans onto the backs of the American taxpayer while using fraudulent accounting to pretend they are solvent. Our owners are frantically attempting to re-inflate the bubble, just as they did in 2003. Our deepest thinkers, like Greenspan, Krugman, Bush, Dodd, and Frank knew we needed a new bubble after the Internet bubble blew up in their faces and did everything in their considerable power to create the first housing bubble. If at first you don’t succeed, try, try again.

Human nature hasn’t changed in centuries. We have faith that humanity has progressed, but the facts prove otherwise. We are a species susceptible to the passions of power, greed, delusion, and an inflated sense of our own intellectual superiority. And we still like to kill each other in the name of country and honor. There is nothing progressive about crashing the worldwide economic system and invading countries for “our” oil.

History has taught that there will forever be manias, bubbles and the subsequent busts, but how those in power deal with these episodes has been and will be the determining factor in the future of our economic system and country.

Humanity is deeply flawed; the average human life is around 80 years; men of stature, wealth, over-confidence in their superior intellect, and egotistical desire to leave their mark on history, always rise to power in government and the business world; this is why history follows a cyclical path and the myth of human progress is just a fallacy.

“That men do not learn very much from the lessons of history is the most important of all the lessons that History has to teach” – Aldous Huxley

In Part 2 of this three part series I will examine the one hundred year experiment of trusting a small cabal of non-elected bankers to manage and guide our economic system for the benefit of the American people.