Pivotal Events

By: Bob Hoye | Tue, Mar 30, 2010
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The following is part of Pivotal Events that was published for our subscribers Thursday March 25, 2010.

Bonfire Of The Inanities

The following quotations were used in our October 23, 2008 edition that was looking for that phase of the crash to complete in November. It is a record of a remarkable difference between actual markets and theories about markets. The reason such a difference exists is because those who have confected interventionist theories have had little knowledge of market history. Indeed, in the 1970s Hayek stated that he was astounded by Keynes' "ignorance of economic theory and market history".

Our own view has been that anyone who thinks that the economy can be managed through always wise manipulations of interest rates has to be ignorant of market history and market forces.

Well the financial and business rebound out of the first post-bubble crash has run for some six months longer that we expected, but the important item is to understand that the "good times" are just a rebound. It is also worth understanding that the "good times" are fully discounted by the markets, which for centuries have been implacable to interventionist ambition.

The following quotes and notes outline one of the greatest intellectual failures in history. The interventionist community is again celebrating Keynes's genius in "preventing Depression 2.0", as Krugman phrased it.

"No One Wants to Burst Greenspan's Bubble"

"Those close to Mr. Bernanke believe he can handle any worrisome economic conditions given his academic pedigree. He scored 1590 out of a maximum of 1600 on his SATs, has an economic degree from Harvard, and a doctorate from MIT. He has taught at Princeton for 17 years."

- That was from the February 1, 2006 edition of the Financial Post, which included a comment from Robert Frank who wrote a textbook with Dr. Bernanke:

"I'll bet on Ben's ability to see what is coming around the next corner over just about anybody else."

Some perspective on power and monetary madness is provided in an observation made by Mayer Rothschild in 1836:

"Give me control of a nation's money, and I care not who makes the laws."

In 2002 there was an event to honor Milton Friedman, and Bernanke's address included:

"I would like to say to Milton and Rose: Regarding the Great Depression you're right, we [the Fed] did it [caused the depression]. We're very sorry. But thanks to you [Friedman] we won't do it again."

In so many words, Bernanke claimed that the Fed had learned its lessons. The problem is that those (including Friedman) who have claimed that the post-1929 contraction was caused by a policy blunder have been wrong.

With adequate research anyone would conclude that great contractions are caused by great financial manias.

In the summer of 2006 there was a droll review of corporate ambition. It might have been titled "Bonfire of the Inanities":

"Corporate executives are increasingly turning to debt for the cash they need to feed stock investors with share repurchases, dividends and empire building."

- Wall Street Journal, July 11, 2006

Even as late as last December 2007 academic boasting continued:

"How to Avoid Recession? Let the Fed Work"

"The truth is that Fed governors, together with their crack staff of Ph.D economists and market analysts, are as close to an economic dream team as we are ever likely to see."

- Gregory Mankiw, Harvard economist and textbook author,
New York Times, December 23, 2007

* * * * *

Signs Of The Times

This Year:

"The fact that the world hasn't slid into another Great Depression is because governments bailed out financial institutions and allowed their budget deficits to grow."

- Bloomberg, March 24, 2010

The quote was by Robert Skidelsky, who has written a three-volume biography on Keynes.

Obviously, Neo-Keynesians have been jumping to delusions again. One can't help but wonder if their assumptions now will be as reliable as they were in the last eruption of establishment confidence.

Ignorance or understanding of money is nothing new. In 1526, Copernicus, in his Monetae cudendae ratio (On the Minting of Coin) observed "An excessive quantity of money should be avoided."


"ObamaCare will eventually 'control the people'."

- Representative John Dingell (D. Michigan),
Breitbart, March 23, 2010

As the bill works its way through the Senate, one of the Republican amendments will include the requirement that all federal politicians will have to suffer the same health care as all Americans.

The nationalization of health care will dislocate much of the economy and is another excuse for runaway deficits. So much so that US Treasury debt will be downgraded.

* * * * *.


Last week we asked the question "Are we there yet?", and answered "Almost".

Part of that conclusion was in how we got to here, which was in our February 4th edition: "It is worth looking for some positives". These included a rebound in crude oil and base metal prices that could run through March.

This has worked out on timing as well as in enthusiasm for stocks, corporate bonds and commodities. And last week, this was matched by pessimism in the US dollar and the drop in the gold/silver ratio. Some of the items with the rally, such as the latter, accomplished enough momentum to end the move. As noted, the declining gold/silver ratio was "so essential to the stock market rally".

Yesterday was an important day in all markets. The financial world is discovering the hazards of unlimited government as administered by the White House and Congress, with very little of the traditional checks and balances. The mainstream media have applauded the ambition of Obama and did not criticize the budgetary nonsense that was fabricated to get ObamaCare through. It was a politically brutal weekend and the spinmeisters claimed it was a "win" for the Democrats and a "loss" for the Republicans.

Eventually, this loss of free markets and political freedom will be seen as an immense loss for global prosperity. The loss of prosperity would accompany the long post-bubble contraction anyway. The radical administration will accelerate the usual pace.

Keep in mind that radicals don't want to have a better economy. They want to wipe out middle class prosperity and the independence of the bourgeoisie that has always been resistant to the ferocious beliefs of radicals.

It is going to be interesting and the next big push will be the nonsense of man-caused global warming. Not because the climate can be altered, intentionally or unintentionally. But because "climate change" is a rallying cry for an inordinate increase in taxation and regulation.

Consider that even with majorities in the two legislative houses, the health bill could not be passed without brutal measures. It is also extraordinary that Democrats would go against opinion polls for so long. It is no longer government by consent but by corrupt Chicago power politics.

Popular resistance to this is growing and will become even more motivated. But as welcome as less government will be, the struggle will be a political battleground that won't be friendly to the financial markets. This on top of an administration that is hostile to business and the constitution makes notions about traditional investing rather hazardous.


In today's world, the "flight to quality" can take some interesting twists. Traditionally, a real flight to quality is to the most liquid items, which have been short-dated bills in the senior currency. Traditionally, the senior currency was convertible into gold. In the continuing world of experimental policymaking the main currency is no longer convertible so the "flight" has been to US bills and gold. This is less efficient as it offers two possible transactions. Tradition was more efficient as safety and liquidity required only one transaction.

The reckless experiment by financial adventurers in policy may be coming to a justifiable end. In the meantime we might just as well enjoy some of the absurdities.

The last wrong-way "flight" occurred in late 2008 as that part of the crash culminated. The street bought the long bond and drove the price from 112 to 142 in only five weeks. Fundamentally and technically the ChartWorks identified the significance of the top as well as the opportunity.

The bond plunged to 112, which must have been disappointing to "flighters".

This week the bond market stepped into the twilight zone.

First of all is the discovery that the drive to unlimited government will prompt unlimited demand for funds. The health-care bill has ended complacency in long treasuries and two-points down yesterday with follow through today could be marking the return of the Bond Vigilante.

Wednesday's jump in yield for the thirty-year from 4.60% to 4.72% is noteworthy, particularly with the drop in yield for junk from 11.80% to 11.75%. Now, junk can decline in yield as the stock market goes up and treasury yields increase. But, with the stock market down yesterday's action suggests that junk could be the new "flight to quality".

This may not last long as Washington's mania for unlimited government will not only be accompanied by unlimited demands upon the treasury market, there will be unlimited demands upon corporate and individual taxpayers. The economic recovery could be rolling over now; unlimited government demands will accelerate the decline in business.

Obama's implementation of the New Deal, or Fascism, or whatever you want to call it should be compared to President Roosevelt's efforts in the last post-bubble contraction. Roosevelt also found that the constitution seriously hampered his personal ambition and packed the Supreme Court with statist judges. It took a few years but Obama's ambition is not accompanied by such patience, as from day one he had packed the White House with radical advisors and political operators.

Fortunately, residual American regard for the constitution and the freedom it represents has inspired the independent Tea Party movement that has been gaining influence. By the November elections this will be a formidable force.

Then, if this really is the justifiable charge by the Bond Vigilantes the bond market could deny the Democratic Machine the life-blood of other people's money. Then the Tea Party will deny them electoral advantage in November.

We have been considering that when this rally in stocks, commodities and corporate bonds tops out around late spring it could lead to another great post-bubble bond revulsion.

So far, junk has declined in yield from 13.23% in early February to 11.75% for a very good return. The low yield was set at 11.85% in January and we have been considering the action as a big test. That junk has become the "flight" target may not last too long and on any price decline the "carry" will have to be unwound.

With Portugal's downgrade sovereign debt took another deserved hit, which emphasizes the overall risk. In 2007 the sub-prime mortgage bond market failed, but was considered as "isolated", or could be "contained" by government policy. The next step was the massive failure in the corporate bond market from 2008 until March 2009. Now it is the failure in sovereign markets.

It should be emphasized that the action since March a year ago has been a huge rebound and the momentum reached is now cautionary.

This also applies to most commodities and as they roll over it will indicate a decline in pricing power of most business and commensurate decline in earnings. Bond rating agencies will follow with downgrades.

Unlimited demands by an unlimited federal government are even more of a threat.

Link to March 26, 2010 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1596

Maxine on the health care bill:


Let me get this straight. We're going to be gifted with a health care plan written by a committee whose chairman says he doesn't understand it, passed by a Congress that hasn't read it but exempts themselves from it, to be signed by a president who also hasn't read it and who smokes, with funding administered by a treasury chief who didn't pay his taxes, to be overseen by a surgeon general who is obese, and financed by a country that's broke.

What the hell could possibly go wrong?

The following points are outrageous:



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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