Ode to Warren Harding: Q4 2013 Earnings & the End of Normalcy

rcwhalen's picture

Team by team, reporters baffled, trumped, tethered, cropped

Look at that low plane, fine, then

Uh-oh, overflow, population, common group

But it'll do, save yourself, serve yourself

World serves its own needs, listen to your heart bleed

Tell me with the Rapture and the reverent in the right, right

You vitriolic, patriotic, slam fight, bright light

Feeling pretty psyched


It's the end of the world as we know it

It's the end of the world as we know it

It's the end of the world as we know it, and I feel fine


"It's The End Of The World As We Know It (And I Feel Fine)"


Peter Buck, Bill Berry, Michael Stipe, Michael Mills


The US equity markets had a pretty bad time last week, causing a number of people to ask why.  The Sell Side analysts community wants you to think that the reason for the selloff is merely crappy Q4 earnings, which is at least partly true.  Selling hope, after all, is the stock and trade of the Sell Side.  But we all need to take a step back and ask ourselves just where we stand on the proverbial economic timeline – in this case stretching over the past century and more.  As we ponder the answer, let's keep in mind the words of President Warren Harding from May 14, 1920:

There isn't anything the matter with world civilization, except that humanity is viewing it through a vision impaired in a cataclysmal war. Poise has been disturbed, and nerves have been racked, and fever has rendered men irrational; sometimes there have been draughts upon the dangerous cup of barbarity, and men have wandered far from safe paths, but the human procession still marches in the right direction.  America's present need is not heroics, but healing; not nostrums, but normalcy; not revolution, but restoration; not agitation, but adjustment; not surgery, but serenity; not the dramatic, but the dispassionate; not experiment, but equipoise; not submergence in internationality, but sustainment in triumphant nationality.  

When President Harding said those words, the US was again foundering in the economic doldrums after a short-lived lift from the first Great War.  By 1918, following the end of the temporary economic boom associated with WWI, the deflation and difficult economic circumstances that had prevailed in the first two decades of the 1900s returned and with a vengeance.  The impact of the Spanish Flu pandemic of 1918-20, which claimed over 20 million lives, wiped out just about all the growth in the US stimulated by European demand for goods during WWI.  The creation of the Federal Reserve System in 1913, an example of the enlargement of the corporate state during the First World War, had little effect on the slack employment market and terrible commodity price deflation seen in the US agricultural sector.  

With real economic possibilities limited, Americans embarked upon a period of financial speculation referred to as the Roaring Twenties, not because the US economy and corporate earnings were particularly good, but due instead to growth in “off balance sheet” finance.  Sound familiar?  Just as the creation of National Banks added a new layer of financial leverage to the US economy in the period of the Civil War, the rise of the culture of popular investment on Wall Street, fueled by the use of “non-consolidated” pyramids of subsidiaries and trusts, added yet another dimension to the US economy just as real economic growth was failing.  And yes, the folks at Goldman Sachs & Co were in the middle of the action.

After the Great Crash nine years later, the US was plunged into decades of deflation and private capital flight that extended through the end of WWII.  Only with the enormous expansion of government finance following 1945 did the private sector, slowly, painfully return to health.  Corporate monopolies, many of which were a function of government credit and guarantees during WWII, thrived.  Up through the 1980s, American industry and the culture of the consumer blossomed, driving employment both domestically and around the world. Americans like to tell ourselves that the prosperity of the post-WWII era was a result of the free enterprise system, but in fact much of that growth came about because of the implicit or explicit support of the US government and its agencies following the Great Depression and WWII.   

Since the 1980s, however, the growth of the US economy has slowed and with it job opportunities and consumer income, especially measured in real, inflation adjusted terms.  I wrote a comment in Breitbart over the weekend about the latest hand wringing about “income inequality” and why public debt and related inflation is the real problem when it comes to income disparity:

Since 1980, the real, inflation adjusted value of the dollar has fallen by nearly 75%. Over this same period, the wages of working people have been relatively flat, meaning that American families have lost enormous ground in terms of what their dollar will buy for housing, food, and other necessities. Over those three decades, Congress under both parties has happily voted for ever increasing federal budget deficits, based largely on the belief that deficit spending is good for Americans. These same luminaries now fret that “income inequality” is a public policy concern.


Since the 1980s, Washington has become obsessed with using ever lower interest rates and deficit spending to prop up the US economy.  We don’t talk about this reality, in part because almost nobody in our political life or the US media knows enough about American history to talk confidently about such things.  But the reality is that the from the 2000s on through to today, the biggest driver of what we call “growth” in the US economy has been credit expansion by the Fed and the use of off balance sheet fraud on Wall Street.  We talked about the role of Paul Volcker and others in encouraging this reckless use of leverage by the largest banks this past December.


Credit expansion by the Federal Reserve System, which is effectively the bank of issue for much of the world economy, provided the leverage to support private extensions of credit by banks and corporations.  All of the credit expansion between 2001 and the 2008 subprime collapse were a function of Wall Street’s love affair with off-balance sheet fraud. The pyramid schemes of the 1920s find their precise analog in the mortgage frauds perpetrated by the big banks between 2000 and 2008.  But now that the off balance sheet game is over, thanks to Dodd-Frank, the end of the FDIC’s safe harbor for true sales, and other regulatory changes, the US economy is going cold turkey a la the 1930s.  This is why jobs and consumer spending has been barely growing since 2008, even with the massive infusions of credit by the Fed.

So with that short history of 20th Century American finance, why did the US financial markets get slaughtered last week?

The first reason for the selloff is the impending end of the Fed's program of quantitative easing (QE) and zero interest rate policy or "ZIRP."  The prospect of a change in FOMC policy of financial repression, and the end of artificial environment that has subsidized debtors, is perhaps the single biggest factor and one nobody wants to acknowledge.   It is not just that we have been on life support since 2008 – we have --  but an end to Fed easing marks a reversal of policy that goes back three decades.


As we've note afore in ZH, we are living in The Matrix.  Or as Morpheus said to Neo, “You still think that is air you’re breathing?”  Without QE driving liquidity out of bonds and subsidizing Uncle Sam's debt addiction, federal deficits and yields soar, and stocks will be flat to down once the Fed stops punishing savers to subsidize debtors.  Since the 1920s, the stock market has been one of the most important sectors providing marginal growth to the US economy.  In the post subprime world, the end of creative finance also spells a sharp curtailment of nominal growth as measured by such yardsticks as consumer spending and the velocity of money. 

The second reason for the selloff is the slack economy, particularly a weak jobs market and slumping housing.  A LOT of the lift in both financial and corporate earnings is due to ZIRP and cost cutting. Corporates have refinanced their debt at absurdly low interest rates even as the Fed has stolen $100 billion plus per quarter from savers who are foolish enough to keep their money deposited in banks.   There is no revenue visibility for financials or corporates.  Again, the Sell Side analysts pretend it isn’t so, but the forward guidance from the S&P 500 says otherwise.  

Remember, the peak in the housing recovery was end of Q2 2013, in part because the cost of American homes is rising much faster than consumer income.  Real estate remains a good measure of inflation despite official efforts to hide the wasting effect of price increases.  The Fed and various government agencies tell us that inflation is low, < 2% annually, but in fact the real rate of inflation is much higher.  Again, nobody wants to acknowledge this.   As my friend Marc Faber told Bloomberg News:

But one thing I wanted to show you and talk about because you said that lower interest rates help people. Well, if money trending helps everybody, then why does not everybody in the whole world always have zero interest rates? And everybody would be rich. You keep on printing money and you don't need to work here, you don't need to put on makeup. I could stay in bed the whole day and go drinking in the evenings. So, let's just print money and be all happy. It doesn't add up. One thing about the figures you showed: first of all, you live in New York. Do you really think that your cost-of-living increase is a 1.2% per annum? You really believe that? It doesn't feel like more, it feels like five times more, or even ten times more.

And the third factor giving Wall Street a dose of reality is the deceleration in many emerging markets and especially China, which has been trying to keep itself from imploding since 2008 and is now running out of options.  The Chinese have been hoping, praying that the US economy would revive and demand for exports would return to pre-crisis levels.  Not happening. China has been using massive amounts of debt to prop up economy, but as my pal Lee Miller at China Beige Book wrote, ‘credit transmission is broken.”  

Q: Could it be that the Chinese are even more addicted to debt than the Americans? A:  yes

The train wreck in China is just part of a more generalized collapse in the emerging markets. The situation in Argentina, for example, is going from bad to worse, leading to a 20% currency devaluation last week.  The mounting political chaos in Argentina (and related capital flight from Uruguay and Brazil) is good for Florida real estate, where 60% of home purchases were for cash in December.  But it also illustrates that the end of the long term economic cycle in terms of the US serving as the “engine of growth” in the post WWII era implies significant economic and political instability and change around the world.  

And then there is my favorite emerging nation, Italy, where like China the heavily subsidized economy has been dependent upon export markets that no longer exist.  The capital flight from Italy into US real estate markets is more focused on New York than Florida, but suffice to say that a lot of Italians are looking to get out while they can.  They figure that the world’s largest developing economy, namely the US, is the place to hide.  These same Italians might have gone to Argentina once upon a time, but now somewhere in the East Coast of the US is the desired destination.  

What all of this means is that 2014 is shaping up to be a major inflection point not only for the US economy but for the world as well.  If the US cannot use steadily falling interest rates and other expedients to goose nominal growth, then the many parts of the global economy that have grown and prospered as a result of US consumption must suffer as well.  The same slack demand that is hurting earnings visibility for the S&P 500 is also undermining stability in China and other global markets.  

If the 20th Century was the era of free trade, paid for by the US consumer and taxpayer, then the 21st Century is shaping up to be a very different model, one based more on self-interest and limited trade and global financial flows which, let us recall, were a function of American largesse in the post-WWII era.   Let us repeat the words of President Harding:

America's present need is not heroics, but healing; not nostrums, but normalcy; not revolution, but restoration; not agitation, but adjustment; not surgery, but serenity; not the dramatic, but the dispassionate; not experiment, but equipoise; not submergence in internationality, but sustainment in triumphant nationality.  

That last phrase, “sustainment in triumphant nationality,” is likely to be the theme of the 21st Century.  With the US unable or unwilling to continue expanding credit and debt, the major nations of the world face lower economic growth, less dependence upon global trade and financial flows, and a resurgence of nationalism that is likely to end as it has before, in war.  

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LMAOLORI's picture



Some interesting info about Warren Harding he was actually quite interesting but he did have his own scandal but really all of them have...

America's Greatest Depression Fighter (No, it wasn't Franklin Delano Roosevelt)



One of Harding's campaign slogans was "less government in business," and it served him well. Harding embraced the advice of Treasury Secretary Andrew Mellon and called for tax cuts in his first message to Congress, April 12, 1921. The highest taxes, on corporate revenues and "excess" profits, were to be cut. Personal income taxes were to be left as is, with a top rate of 8% of incomes above $4,000. Harding recognized the crucial importance of encouraging investment essential for growth and jobs, something that FDR never did.

Powerful senators, however, favored giving bonuses to veterans, as 38 states had done. But such spending increases would have put upward pressure on taxes. On July 12, Harding went to the Senate and urged tax and spending cuts. He noted that a half-billion dollars in compensation and insurance claims were already being paid to 813,442 veterans, and 107,824 veterans were enrolled in government-sponsored vocational training programs, the total cost of which was estimated to involve another half-billion dollars.

The senators were determined to push through this spending bill, and Senator Pat Harrison of Mississippi accused Harding of having "attacked the soldiers of America who fought and won the recent war." Meanwhile, a tax cut bill emerged from the Senate Finance Committee and was passed, while debate on the veterans' bonus bill continued.

Harding's Budget and Accounting Act of 1921 provided a unified federal budget for the first time in American history. The act established (1) the Bureau of the Budget with a budget director responsible to the president, and (2) the General Accounting Office to help cut wasteful spending.

in full



Fuh Querada's picture

"my friend Marc Faber"
frigging name dropper,
Meet my Albanian friend, Ushud Shovit.

geno-econ's picture

How many bankers tell it the way it is ? RC understands the corrupt financial system and does speak out when most are silent. Would agree though latest piece not one of his best because it strayed from explaining faults of financial sector which he understands much better than Faber. Must admit they are both on the same page which is a form of friendship not to be taken seriously.

11b40's picture

RC does have a lot of info to share, and he really was nailing the whole RE/Mort fiasco early on when most were still trying to figure it out.  He gets it, but...

When it comes to banking overall, he starts pulling his punches and protecting his own.  I get the feeling he would prefer some "tweaks" to the system and a little less corruption, but nothing too radical.

Stud Duck's picture

Wn he reference Brietbart, he lost most of his credibility!  Rambled on with a "all knowng" line on history, as if no one else has any knowledge of the subject. Thanks for a waste of time with this one! Will try to skip any moe RC Whalen stuff!

LawsofPhysics's picture

What garbage.  This shill want all to be forgiven for the greatest theft of and transfer of wealth humanity has ever known.  Must be another useless paper-pushing fuck.  One simple question, are we to be a nation of laws or a nation of men.  John Corzine's freedom (as well as that of many others) would suggest that we are no longer a nation of laws, so fuck it, it's every man for himself, time to find out the real value of everyone's labor.  Bring it motherfucker.

pondview28's picture

So according to RC Whalen the government credit and spending was the savior and now it is the devil? This rambling "analysis" is aimed at what? The author is also telling us he knows why the market declined last week. Why not the week before when the same circumstances were existant? What will happen next week?
Time to run when someone says with certainty why the market did this or that over a short time frame.

Random_Robert's picture

"So according to RC Whalen the government credit and spending was the savior and now it is the devil? "

-I think the point he is making is that any perciveed "benefit"  of of such credit expansion (and associated gov't spending)  is a short-term phenomenon, when viewed over longer periodic timeframes; as it will be this time as well..


ebworthen's picture

Yes War, to keep the youth from hauling the banksters to the guillotines and hanging trees as they deserve.

Stud Duck's picture

TPTB has got to get the 500,000 men and women they sold the Iraq war too fight in passified with Oxy scripts from the VA for PTSD. THEN, they might have to guts to start another! It is not goig to take much to put this bunch of pissed Vets over the line!

TPTB_r_TBTF's picture

only pussies suffer PTSD


only thing gonna push those Vets over the line

is when their meds run out...

11b40's picture

Tell us what you know about PTSD, why don't you, Rambo.  

Tell us about the dead mother on the floor of the hooch and the baby crying alone on the straw mat.  Tell us about your buddy's head exploding all over you.  Or, maybe about the time your unit got pinned down in a bad place and a couple of snipers were killing your squad one by one.  It's good to know you have lot's of cool war stories to share, but never dream about them.  Never wake up at 4:00 in the morning in a cold sweat.  Never see those faces, smell those smells, hear those sounds.  Joe cool.

If they have trouble filling the ranks for the next war, maybe they could try implementing a draft.  Then we will see just how strong the politco's stomachs are.


TPTB_r_TBTF's picture

you'll be ok

just keep takin' your meds

and you'll be ok...


Everything will be fine,

if you pick up your refills on time.

11b40's picture

No meds for me, you smarmy little dip-shit.  

You are not worthy of licking the sweat off a warriors balls, but every man is capable of being broken.

Come back around when you gain a little maturity.

11b40's picture

If the politicians keep inserting us in more wars, they may get strung up first....or, for them a fate equally as bad - getting voted out of office.

The rumblings of America First are getting louder, and soon all these free trade fucks just might be branded for the traitors they are.  There is a strong undercurrent right now trying to de-rail the latest fast track legistaion designed to further throw open our borders for one more giant ass-rape of what's left of our manufacturing sector.



Seattle Times letters to the editor

January 23, 2014 at 7:03 AM Trans Pacific Partnership: Stand up to fast track authority Posted by 

If you breathe air, drink water or are concerned about the environment and climate change, watch out because a tsunami of corporate power is about to overtake many of our existing protections [“Trans Pacific Partnership: Fast-track authority at odds with self-governance,” Northwest Voices, Dec. 30].

A few details of the ultrasecret, 12-nation Trans Pacific Partnership are, thanks to WikiLeaks, just now being revealed, and every citizen should be aware of its far-reaching threats.

Because language in the investment chapter allows foreign corporations to sue a government directly for almost any domestic law that might hurt its profitability, it poses a direct threat to many of our current laws, including those related to the environment, labor, agriculture and access to medicines.

As a resident of the 8th District, I thank U.S. Rep. Jim McDermott, D-Seattle, for his strong opposition to this “NAFTA on steroids.” I urge others in Congress to stand up to the fast track, which would strip Congress of its own ability to ensure that the TPP would actually protect our citizens, communities and the environment.


orez65's picture

It would save us a lot of time if these "War and Peace" length articles had a summary up front.

11b40's picture


I keep hearing that, but who exactly are we going to war against?  The public has no taste for it, as recently shown in the attempt to start one up in Syria.  The situation in Irag is turning around, too, much to the chagrin of certain elements, both natioanlly and internationally.  Russia? Pu-leeze.  If there is one thing that has been proven to bad actors the world over, it's that countries with nuclear bombs don't get attacked.  This leaves a limited range of weak and relatively minor countries to bully - hardly world war stuff that make weapons makers have an orgasm.  In fact, little more than the current status quo.  Last time I checked, we were involved in military conflicts in several places on the globe....and the average American is getting tired of it.  I guess we will just have to wait and see what 2014 has in store for us.

geno-econ's picture

All recent wars including WWI and II were started overseas with the U S being dragged in for some jingoistic reason such as " save democracy" or the " free world against communism" or "domino effect" . It will start with a bank run, assassination, or regime change that will force the US to respond in order to save capitalism or the interests of multinational corporations. Chances are we are entering a period of popular isolationism while at the same time our military commitments are stretched out. Considering all the confrontations in Asia, Middle East, Ukraine , China/ Japan means 2014 will be an interesting year indeed.

hot sauce technician's picture

11b40's right. Who we gonna fight? Who's the commander in chief? Who's the geo-political strategist? Obamba and Mr Theresa Heinz? The only thing they know about is vacations in Hawaii and fine dining. And I'm not even sure about the latter. (Ever see how the Kenyan scarfed down that fight club corndog?) In any case, unless Mexico or Canada were fully mobilized on their way to storming Texas or Minneapolis, or throwing scuds on wall st and DC, the US military hasn't the ability nor will to fight foreigners. And TPTB know this all too well. The only way they can retain the status quo would be via socialization of the economy, which is already underway. And btw, the WWs were a lot easier to mobilize for - Americans were naive enough to ''fight for the flag''. Today? It's more like ''gimme that tax refund''.

RaceToTheBottom's picture

Money will go where powers want it to, to increase their wealth.  That is always the case.

geno-econ's picture

Conclusion as far as investment advice is buy,buy, buy War. However, since War requires raw materials, lots of energy and commodities you now know how to position your portfolio. Thanks rc for the historical perspective, but should I hold on to any banks whether they be the TBTF type, or the regional and smaller financial institutions you seem to favor ?

christofay's picture

Always be careful when finance guys start quoting the rock lyrics.

lasvegaspersona's picture

Goethe would have been in a band if Chuck Berry had been born first.

11b40's picture

...especially on Breitbart.


Too bad we couldn't apply a little Nationalism (and common sense) along the way to develop FAIR and sustainable trade policies.  Instead, our leadership has consistently sold us out to banker/multi-national corporate fast-buck greed as America is strip-mined by FREE trade.  

Free Trade, my ass.  The average American business has been forced to compete with foreign governments and consortuims who subsidize their various industries and drive our factories out of business.  Legalized bribery has now gotten us to the place where corporations are given equal footing with citizens and money is the equivilent of speech.  What total and foolish nonsense.  If we have free speech, and money is equal to speech, where is my free money?

new game's picture

thanks for great summation! oh, how important history can be!

my summation: oh how fuked it has become(for reasons few want acknowlegde), we are heading to a place few want to go(war)...

hopefuly the golden rule works out for the few that are planning...