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July 07, 2009

Pivotal Events
by Bob Hoye

The following is part of Pivotal Events that was published for our subscribers July 2, 2009.

The ambition of the White House and Congress to change America's culture from the traditional bastion of freedom is remarkable. And as Bastiat observed in the 1840s: "The welfare state is the great fiction whereby everyone tries to live at the expense of everyone else."

Perhaps "Independence Day" should be changed to "Dependent's Day".

Signs Of The Times:

Last Year:

"These institutions are fundamentally sound and strong. There is no reason for the kind of [stock market] reaction we're getting."

- Christopher Dodd, Chairman, Senate Banking Committee
Financial Post, July 12, 2008

He was referring to Fannie and Freddie--creatures from the intellectual swamps of the 1930s.

"Cops to IndyMac Customers: Remain Calm or Face Arrest"

- Breitbart, July 14, 2008

That was a run by small depositors.

* * * * *

This Year:

"Two US Democratic lawmakers want Freddie and Fannie to relax lending standards."

- Reuters, June 22, 2008

"Not content to tempt political fate by imposing huge carbon taxes on the American middle class, Democrats have added a provision which imposes stiff tariffs on our trading partners if they don't adopt aggressive carbon restrictions of their own. You heard it correctly: progressives have authored a bill that earns the mortal enmity of domestic energy consumers and our most crucial trading partners at the same time. Economy - killing climate policies and a trade war - together at last."

- National Review, June 24, 2009

The article did not include that in its heyday, the notorious Enron was an important trader of modern "indulgences", otherwise known as "carbon credits".

"Financial products should be treated like medicines and sold to consumers only when they are certified safe."

- Yahoo Finance, June 29, 2009

Two thoughts on this one:

Policymakers in the 1930s were convinced that complete prospectuses delivered to the newly-formed SEC would prevent radical financial innovation that has been the hallmark of every great bubble since the first one in 1720. It is tempting to conclude that each post-bubble scramble to create legislation that would prevent such innovation is, in itself, radical regulatory innovation.

The other question asks: Has this generation of "progressive" politicians tested their legislative innovations for danger to the health of the investing community?

The answer: Financial history is a "due diligence" on every radical scheme promoted during a mania, as well as upon the subsequent fit of regulatory recrimination.

* * * * *

STOCK MARKETS

Back in February it was somewhat daunting to consider that the markets could technically become very overbought by around May, and that pundits would become very enthused.

Examples used to guide included the huge rebound into the spring of 1930. As a "target" we used The Trader column from Barron's concluding that it would "be difficult to quench the fires of enthusiasm." And then the Harvard Economic Society noted the strong stock market was "auguring" a business recovery by later in the year (1930).

On May 5 this year, Mr. Bernanke read the tea leaves and observed that the "broad rally in equity prices" is indicating that "economic activity will pick up later in the year."

The culmination of the move included a number of Upside Exhaustions registered on key sectors from commodities to stock groups. This was reviewed in Tuesday's memo.

As with most important tops, it is a process, and new highs are accompanied by diminishing internal dynamics. That has been the case as the high was set three weeks ago. Internal weakness has continued, accompanied by weakening commodities.

However, on the plus side, the mania to buy junk has resumed, which seems to be delaying the seasonal reversal.

Link to (DATE) 'Bob and Phil Show' on Howestreet.com: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1277

Bob Hoye
Institutional Advisors

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