Great Depression

With everyone's attention pegged on the Grexit, what everyone appears to be forgetting is a nuanced clause buried deep in the term sheet of the second Greek bailout: a bailout whose terms will be ultimately reneged upon if and when Greece defaults on its debt to the Troika (either in or out of the Eurozone). Recall that as per our report from February 2012, in addition to losing its sovereignty years ago, Greece also lost something far more important. It's gold: To wit: "Ms. Katseli, an economist who was labor minister in the government of George Papandreou until she left in a cabinet reshuffle last June, was also upset that Greece’s lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal."

The picture of this very old telephone reminds of our “esteemed” Federal Reserve. They really seem incapable of any modern thought. Their parallels to, and fears of, the Great Depression [Former Chair Bernanke], seem to drive 2009-2015 monetary policy. It reminds me of incredibly stale thinking... sort of like their incredibly stale personalities. I suppose it’s a good match for them but not for the citizens of the world subjected to their currently ineffective and intellectually lazy policies... rooted in very ancient [just like most of them] history.

American banks have largely gained from low interest rates, British banks have suffered losses as a result and in the Eurozone they have been hugely detrimental to banks’ profitability. The ones who have undoubtedly lost out were those quintessential Keynesian villains: the savers. The medicine prescribed by the central banks to correct their “bad” ways has cost them billions. And given that yields have continued to go down since McKinsey's report was published, their misery has only increased. More high fives from Keynes! And yet, even within those groups the impact has been uneven. Who in the household segment is suffering the most because of ultra-low interest rates? The retirees, of course.

To put the 28 months of declining retail sales in context, during the Great Financial Crisis, CAT suffered "only" 19 months of consecutive declines. As of March 2015, this number is now 28! Or as a more truthful Tim Geithner would say, "Welcome to the second Great Depression, Caterpillar!"

Of course no two financial crashes ever look exactly the same. The crisis that we are moving toward is not going to be precisely like the crisis of 2008. But there are similarities and patterns that we can look for. Sadly, most people are not willing to learn from history. Even though it is glaringly apparent that we are in a historic financial bubble, most investors on Wall Street cannot see it because they do not want to see it. This next financial crisis will be strike number three. After this next crisis, there will never be a return to “normal” for the United States.

In 2014, all but a few argued that the path of interest rates was certainly higher. Despite a steady decline beginning on January 1st of 2014 and continuing today, everyone still insists strenuously that interest rates simply have to go up. What if all the arguments about growth in the US economy and much anticipated rate hikes by the Federal Reserve hinged upon a decision-making premise that is flawed? What if instead of the standard and variety of factors informing the consensus perspective about the direction of interest rates it is actually interest rates themselves that are sending signals that should inform our perspective about all other things?

"An alternate, more sophisticated approach to explaining why QE may not work to stimulate aggregate consumption is, perhaps, because the demographic mix of the U.S. (and most parts of the developed world) has shifted toward older people. Unlike 30 or 40 years ago, the enormous baby boomer generation, and even retirees, are much wealthier (including human capital) than in the past, and they are wealthier than current generations earlier in their life cycle.  So the wealth effect does not lead to an increase in consumption and, potentially, has the opposite outcome."

- Robert Merton

The science of economics has taken a decidedly wrong turn sometime in the 1930s. In the field of monetary science specifically, sober analysis has given way to broad-based support of central economic planning, with both policy makers and their advisors seemingly trying to trump each other with ever more lunatic proposals.

"About 300 paratroopers, from the 173rd Airborne Brigade, arrived at the International Peacekeeping and Security Center, April 14 - 15, to begin a six-month training rotation with Ukrainian national guard forces."

Over the past several weeks we have heard repeated comments that you should ignore the recent retail sales weakness for a variety of reasons such as cold winter weather, consumers don't believe the drop in gas prices, etc. Putting aside the fact that cold weather almost always occurs during winter (which is why the data is seasonally adjusted to begin with), or that more than 70% of Americans are living paycheck-to-paycheck, should we dismiss the data entirely?

Three former Freddie Mac executives who understated the amount of subprime exposure on the GSE's book by a factor of 28 came to terms with the SEC today on a settlement which imposes fees no one has to pay and "limitations on future behavior" that "will not limit [anyone] in any practical way."

Can you arbitrage time?  Can you buy and sell time? We think that you can from the perspective of time horizons. In our view, financial markets are operating on the wrong time horizon – one that is too long (thanks to central banks ZIRP/NIRP and credit creation) - although there are signs that this is beginning to change.

In spite of the landmark decision 80 years ago against the imposition of economic fascism in America, the U.S. government has continued to grow in power over the American people. But it should be remembered that men of courage, integrity, and principle can stand up to Big Brother and resist the headlong march into economic tyranny. That unanimous Supreme Court decision in 1935 was one bright example of it.

 The US stock market is trading at 1929-bubblesque valuations, with a CAPE of 27.34 (the 1929 CAPE was only slightly higher at 30. And when that bubble burst, stocks lost over 90% of their value in the span of 24 months.