Today is Groundhog Day and Punxsutawney Bill sees six more weeks of winter. There is a little know correlation between the rodent's predictions and our bureaucratic Fed. It is like dog years to human years. Truth be told, I just started the theory. I see six more years of depression and recession with another climax bubble in the banking industry. I will show you how I came to that conclusion in a minute, but first, let's take a closer look at the little event.
Movie Classic
Hollywood mirrors society and made a comedy classic about the celebration in 1993, however the movie was set in 1992 exactly 20 years ago today. Gotta like Bill Murray and the beautiful, make that very beautiful, Andie MacDowell. Murray's character gets lost in a deja vu at the event and he cannot tell whether he is in reality or just dreaming. He keeps reliving the day over-and-over again. He does the same things over-and-over again, hoping for a different resolution. Isn't that the definition of insanity? Applying the same solutions to a problem over-and-over again hoping for a different outcome? This takes us to the Fed which is a bureaucracy which applies the same principles it sees in our economy over-and-over again hoping for a different outcome. I'll give the Fed one thing. They are
Consistent.
From their first year in 1913 until today, they have lost the value in our dollar to the tune of almost one percent per year. C'mon, boys! Get two percent this year and when you celebrate your one hundred anniversay next year you will have lost 100% value in our dollar. Along the way they have demonstrated their true colors many times:privatize the profits for the banking industry and socialize the losses to the taxpayers. For every economic problem they apply the same solution, more liquidity.
This is how I see the next crash. It will be from the
Bottom Up.
As opposed to a previous crash which was from the
Top Down.
Ever see a Savings&Loan? You know, the lending insitution that George Bailey operated? When our capital markets were freer back in the 1970s, there were over 4,000 of them throughout our nation. They would provide mortgages for the housing industry before our GSE took over the operation or should I say filled the vacuum left by the loss of our Savings&Loan industry. When Paul Volcker headed the Fed in 1979, he made a famous speech to fight inflation. He raised interest rates to 17.5% to slow the economy and stop inflation. He gets a lot of praise from the media and elsewhere, however not from me. It is BS! He wasn't fighting inflation only, but the growing perception by the public that paper money was worthless and
GOLD
was what maintained value. Not only that, the gold-bugs reminded everyone that gold should be our currency as stated in our constitution. If you forgot, this is the same period when gold went from $63 to $850 per ounce. As a result of the Fed's action, gold was defeated as savers could get T-Bills with no risk from the government that paid 12%. Don't worry about securing a place to keep gold. And of course, the banks won't pay interest on it and charge you to store it. The manipulators pass the laws that they want, regardless of what you want or stated in our constitution. There was one, big problem. As per usual, the bureaucrats never think through their ideas. The unintended consequences of their actions destroyed the S&L industry. You see when interest rates skyrocketed these lending institutions were caught between a rock and a hard place. They were capped by law on the amount that they could charge on money. Botton line: they had to borrow from the Fed at 12% to lend to customers at 10%. A losing season. A lost industry. Another government bailout at taxpayers expense all caused by the Fed and Volcker's actions.
Today
we have low, low interest rates, however what happens when they rise? Banks, investment institutions, pensions, hedge funds, etc. will be receiving interest payment on assets with rates as low as 2% like with Ten Year Treasuries, while say at that time, rates return to their normal level, say 6 to 8%. They will be losing money and if you add inflation, basically worthless. By the way, the Fed is getting away with low rates. They work with their pals at the treasury. They offer rates at 2% for ten years, but consider this. Ten years ago gasoline was $1.04 per gallon. The medium price home was around $100K and a loaf of bread was under one dollar. Today, Helicopter Ben has the nerve to say that inflation is under 2%. Bottom line: future prices will cause the banking industry to collapse by 2016 as they will have to pay more for money while receiving less revenues from their assets. End the Fed!
LIARS and CROOKS: This week goes to three employees of Credit Suisse Group Ag or should I say ex-employees. They were charged with mispricing bonds, wire fraud, conspiracy to falsify books among other charges. One said he did it under direction from his boss so their year end bonus world reflect higher profits. This was in 2007. Nice to know the government eventually catches up to some of these crooks, however let me leave you with this. What if someone else applied the same crooked thinking to derivatives? I guess just multiply the damage by one thousand and puff, there goes our economy.
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