Michael Krieger

In some ways it’s a battle of the politicians against the markets.  That’s how I do see it.  But I’m determined to win this battle.
– Angela Merkel

Gold Is Money, and Nothing Else.
– JP Morgan, testifying under oath to Congress before the Pujo Commission, 1913
The Selling Out of Germany
I feel very bad for the German people.  Not only do I feel bad for them but I can empathize.  I too am being forced to sit back and watch this comedy of errors as a corrupt, inept and increasingly dangerous class of elitist political and financial oligarchs destroys my nation.  On Sunday night an ex-client that I have remained in contact with since my days at Bernstein sent me an email with a simple question:  “What do you think of the bailout.”  I didn’t have time to answer it during trading Monday but when I finally sat down I wrote the following.

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The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin.  But both are the refuge of political and economic opportunists.
-Ernest Hemmingway

We think that generations move history along and prevent society from suffering too long under the excesses of any particular generation. People often assume that every new generation will be a linear extension of the last one… Instead, every generation turns the corner and to some extent compensates for the excesses and mistakes of the midlife generation that is in charge when they come of age. This is necessary, because if generations kept on going in the same direction as their predecessors, civilization would have gone off a cliff thousands of years ago.
– Neil Howe author of The Fourth Turning

There are two broad issues affecting banking.  One of them is the structure of the banks themselves, of the industry.  The other is the rules, if you like, under which the banks operate.  There was a big opportunity to change the structure of the industry.  The FDIC is actually quite good at taking over banks and resolving them.  In the case of small banks, what they usually do is merge them into bigger ones, find partners, so that the insurance fund isn’t touched at all.  In the case of larger banks, it’s more complicated.  You have to rip it up—sell it, close parts of it; you might have had to touch the insurance fund.  But the result would have been a smaller overall banking sector in relation to the economy, achieved very quickly.  And some part of the leadership class of bankers would have been gone, on the beach, replaced by middle managers and bankers from elsewhere who were not implicated in the same practices.  And the result of that would have been a clean audit of the books of the taken-over bank—a straightening out of all kinds of practices that banks should not be engaged in anyway.  Regulatory arbitrage, tax arbitrage, would have been a much smaller piece of the business—the government is not going to run a bank that’s in the process of facilitating tax evasion, just for example (at least one hopes). 
– James Kenneth Galbraith

Four Epic Battles
Those that assume that the financial crisis has passed and have gone back to thinking and seeing the world as it was will suffer immense financial and emotional trauma in the years ahead the likes of which has not been seen in the United States since the Great Depression.  This is precisely what makes this period in time so dangerous and is a significant driver behind my decision to write these pieces on a regular basis.  The biggest risk is that too few people understand on a very deep level what is happening and therefore will not be able to deal with the consequences of “The Fourth Turning.”  The more people that have a very strong comprehension of the massive social, political and economic changes that are about to occur the better chance we all have of getting through this period without a major war.  In this email I am going to introduce four epic battles that are currently underway, the outcomes of which will largely determine the way the world works for the next generation and understanding them is extremely important to capital allocation decisions today.  The battles as I see them are listed below and I will briefly outline each of them today and then will be referring back to them often in the future.

1. Speculators vs. Savers
2. Corporatism vs. Small Business
3. Baby Boomers vs. Their Children (and Grandchildren?)
4. Power of the State vs. Power of the Individual

Essentially, every generation experiences one of these moments and ours is now.  Let’s do the right thing and make the world a better place.

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History is a set of lies agreed upon.
–  Napoleon Bonaparte

Most people prefer to believe their leaders are just and fair even in the face of evidence to the contrary, because most people do not want to admit they do not have the courage to do anything about it.  Most propaganda is not designed to fool the critical thinker, but only to give moral cowards an excuse not to think at all
–  Michael Rivero

Every man gotta right to decide his own destiny,
And in this judgment there is no partiality.
So arm in arms, with arms, we’ll fight this little struggle,
‘Cause that’s the only way we can overcome our little trouble.
–  Bob Marley, Zimbabwe

A Thousand Words On Conventional Wisdom
Conventional wisdom.  Many market analysts define conventional wisdom in relation to what direction the market is going to head in the future, but I think this is an utter mischaracterization of the concept.  For example, someone that is bullish on the market right now is likely to see conventional wisdom on stocks and the economy as overly bearish after ten years of no returns for U.S. equities.  In contrast, someone that expects a market collapse will say that everyone is a cheerleader and that the “conventional wisdom” after such a huge rally is for stocks to continue to go up.  This is not how I would describe conventional wisdom and all is does is drag the debate into the intellectual gutter.  Rather, to me conventional wisdom is more the “zeitgeist” of the financial and economic community at any given time.  Zeitgeist is defined by the Merriam-Webster dictionary as:  the general intellectual, moral, and cultural climate of an era.  In this sense an “era” will generally mean a lengthy period of time, several decades or perhaps even more extended periods.  That said, what is interesting is that every cycle in the global economy seems to bring forward distinct “mini-zeitgeists” that the experts create to justify market movements or give credence to economic dogma.

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In the end the Party would announce that two and two made five, and you would have to believe it.  It was inevitable that they should make that claim sooner or later: the logic of their position demanded it.  Not merely the validity of experience, but the very existence of external reality was tacitly denied by their philosophy.  The heresy of heresies was common sense.  And what was terrifying was not that they would kill you for thinking otherwise, but that they might be right.  For, after all how do we know that two and two make four?  Or that the force of gravity works?  Or that the past is unchangeable?  If both the past and the external world exist only in the mind, and if the mind itself is controllable – what then?
– Winston Smith in George Orwell’s 1984

A government big enough to give you everything you want is a government big enough to take from you everything you have.
– Thomas Jefferson

We Must Move to a Free Market and Shun the Welfare-Warfare State or all will be Lost
Unfortunately for all of us, the primary economic policy of the U.S. government as well as many others around the world is an extend and pretend strategy that is economic suicide primarily in that it keeps the irresponsible in their assets and it makes the responsible shudder and shun productive investments.  Whether it be a homeowner that is subsidized to stay in a home that he cannot afford or a bank that doesn’t want to come clean on the extent of its bad assets, the result is the same.  Complete economic inertia.  Now of course there has been a rebound in demand, but my argument has been and continues to be that this is the most unproductive rebound in aggregate demand that perhaps the world has ever seen.  Whether it be in the U.S. or China, the demand is taking away spare capacity in many areas indeed but we must question the methods.  This is where the whole idea of inflation comes into play.  The whole reason why printing a million dollars and giving it to everyone doesn’t work is because this “liquidity” is not created through a productive process.  It is purely an injection of new dollars into the economy.  The basic rule of supply/demand kicks in.  In the average person’s pocket, this money is unlikely to be “invested” in productive capital endeavors, rather the vast majority of it will simply be spent to consume the resources of that which can be supplied by the already existing capital stock.  So in many ways it isn’t that the creation of the money itself that is the biggest problem, it is the distribution channel of that money.  Only a small percentage of the population that receives the million dollars has the ability, drive and discipline to invest the money into something that will create economic value for the society at large rather than just blow it on a flat screen television.  This is the entire premise of why a free market economy works when it is allowed to work (which I would argue is not possible under the current Federal Reserve system).  The Fed is a socialist organization that SETS the most important price in the economy, the price of money.  Even worse, when they set that price at say 0% as is basically the case today that 0% or anything close to it is not offered to all the small businessmen or potential entrepreneurs out there.  It might not even be so bad if the low interest rates weren’t simply being used to gamble or play a carry trade with treasuries.  Of course, the banks or anyone else for that matter playing a spread by borrowing at near zero to buy long-term treasuries is doing irreparable harm to this nation.  They are complicit in the gross misallocation of capital to the government, capital that can then be doled out at will to favored interests.  So all we have today is essentially a creation of money and credit out of thin air that is allocated to two major constituents.  First, it has primarily been used to maintain the people of wealth, power and political connections (on both sides of the isle) before the crash entrenched in their socioeconomic roles.  Second, is to pay off political favors.  Those who supported the President in his campaign have been paid back handsomely and are today much more powerful and secure than before whether we are talking unions or the oligopoly banks.  If we wish to have any hope of a sustainable recovery preventing the inevitable social unrest to come from truly getting dangerous we must restore the free market and end the union of big business and government, which historically has presented an extremely dangerous situation.  For those that are in big business and think they have made a great move by joining forces with the state I suggest you go back and read your history.  You never will possess the ultimate power, you will be seduced into thinking you do and then when the time is right government can eliminate you and your fortune with the stroke of a pen.  Power is granted to you by this authority when you engage in this unholy union and it can be taken away on whim and your wealth confiscated.  Selling out freedom and your fellow citizens for some extra money or government contracts will come back to haunt you.  Your legacy to the United States will be a neo-feudalistic, gulag casino economy that has already begun.  Below is a link to an excellent interview with Bill Moyers on PBS about our financial oligarchy (I believe many industries here are becoming oligarchies but the financial one is the most powerful) and the need to stop its cancerous growth.

http://www.pbs.org/moyers/journal/04162010/watch.html

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The USA is addicted to debt.  No matter what the NY Bankers do to destroy our economy, they are above the law because they are the drug dealers.  With the U.S. hopelessly in a downward spiral of debt, they fear prosecuting them (since it will) cut off the salesmen who raise money to keep the borrowing going.  A drug addict will not turn on his supplier and cut off his own drugs.  There will never be a criminal charge against NY Bankers as long as the government needs to borrow.
– Martin A. Armstrong

At what point shall we expect the approach of danger? By what means shall we fortify against it? Shall we expect some transatlantic military giant,  to step the Ocean, and crush us at a blow? Never! All the armies of Europe, Asia and Africa combined, with all the treasure of the earth (our own  excepted) in their military chest; with a Buonaparte for a commander,  could not by force, take a drink from the Ohio, or make a track on the Blue Ridge, in a trial of a thousand years. At what point, then, is the approach of danger to be expected? I answer, if it ever reach us it must spring up amongst us. It cannot come from abroad. If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide.
– Abraham Lincoln

Disclaimer:  I am sure some of you will dislike me after reading this email and that is fine.  I am not trying to make friends, rather my intention is to speak out and call the situation as I see it.  More than anything else, the primary purpose of these emails is to get as many of the influential and moral people in the financial services industry as possible to become more aware of how serious a threat we face as a nation as a result of the actions being done by a fiendish and destructive union of big corporate interests across many sectors and an increasingly undemocratic political class.  My second intention is to advise people on how they can protect themselves and their clients from the financial calamity that is to come which will make 2008 looks like a picnic. 

How to Commit National Suicide:  America After the Crisis
We are in the process of committing national suicide on a grand scale.  Well, perhaps suicide isn’t the right word.  It is more akin to a death penalty being imposed upon the Republic by a greedy, corrupt and entirely unethical entrenched political and economic elite.  This elite deserved to go broke, get kicked out of office and lose their positions of power and influence as a consequence of the prior collapse.  This is how a free market economy would have worked.  When the collapse came; however, those that were appointed by an administration ushered in on the false promise of change appointed to key positions the very people that were responsible for the misguided and toxic economic policies of the past.  As soon as I heard Tim Geithner and Larry Summers were to hold key economic positions in the administration I knew my vote in November was wasted.  They were placed there to maintain the status quo, protect the financial interests of those that contributed to the campaign and ironically to specifically PREVENT change in the cesspool that is today’s financial services industry.

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Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin!  Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.

Government directors an official report establishing beyond question that this great and powerful institution had been actively engaged in attempting to influence the elections of the public officers by means of its money, and that, in violation of the express provisions of its charter, it had by a formal resolution placed its funds at the disposition of its president to be employed in sustaining the political power of the bank.
– Andrew Jackson on the Second Bank of the United States (the prior Central Bank before the Fed) which Jackson destroyed.  Some things never change…

Commodities: And We’re Off…
This week has been tremendously significant for commodities in numerous ways.  Copper first got my attention on Monday and Tuesday as it breached the $3.50/lb area and then proceeded to climb above the early January high of $3.52/lb.  The action is crude today is very important since it has finally breached its own prior high from early January as well of $83.95/b.  Crude has been able to sustain above $80/b for the entire month of March despite some recent headline bearish DOE numbers and reports that much of the oil floating in tankers as storage has been liquidated.  In addition, the DXY was very strong in March yet crude held its ground in the face of this as well.  This is just further proof that there was no dollar strength just a massive devaluation of the euro.  Have you looked at the EUR/CHF cross?  That says a lot.  So does the fact that the Indian rupee keeps hitting new post-crisis highs versus the dollar.  There is no dollar strength, there is dollar propaganda.  While the topic of conversation now is that OPEC will raise volumes to keep a lid on prices I do not believe this will work.  There hasn’t been enough capex spent on the supply side since the crash from $150/b to $35/b and any boost from OPEC will merely be seen as a reduction in spare capacity and they could lose control of the market again rather quickly.

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Must the citizen ever for a moment, or in the least degree, resign his conscience to the legislator?  Why has every man a conscience then?  I think that we should be men first, and subjects afterward.  It is not desirable to cultivate a respect for the law, so much as for the right. The only obligation which I have a right to assume is to do at any time what I think right.
– Henry David Thoreau in Civil Disobedience (1849)

I would rather live my life as if there is a God and die to find out there isn’t, than live my life as if there isn’t and die to find out there is.
– Albert Camus

Why the Residential Housing Market Doesn’t Stand a Chance
Before I proceed I want to make it clear that I am no expert on the housing market and no doubt many may read this and say this guy has no idea what he is talking about.  That being said, there is one area in which I have had a pretty solid track record and that is in macro trend forecasting.  So whenever I see the sands shifting in a major way in a particular area based on new secular factors that the “experts” always tend to overlook in their models I try to share it.  What I am about to point out is something that I have been thinking about for a very long time and is one of the main reasons I believe residential real estate in the United States generally will remain depressed for a long time.

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After having thus successively taken each member of the community in its powerful grasp, and fashioned him at will, the supreme power then extends its arm over the whole community.  It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate to rise above the crowd.  The will of man is not shattered but softened, bent and guided; men are seldom forced by it to act, but they are constantly restrained from acting.  Such a power does not destroy by it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to be nothing better than a flock of timid and industrial animals, of which the government is the shepherd.  I have always thought that servitude of the regular quiet, and gentle kind which I have just described might be combined more easily than is commonly believed with some of the outward forms of freedom and that it might even establish itself under the wing of the sovereignty of the people.
– Alexis de Tocqueville from Democracy in America (1835)

Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.
– George Washington

The DXY has been Strong but the Dollar Hasn’t
The DXY is a simple Bloomberg function that for many including myself at times in these pieces has been used as a proxy for dollar strength/weakness.  Last year I pointed out that this index had becoming increasingly useless because it really only measured the dollar versus a basket of other terminally ill OECD nations and that it wasn’t very important to the macro picture as relates to commodities because the biggest adjustment that needs to occur is a major devaluation of the OECD currencies to the currencies of emerging Asia and the commodity nations.  It doesn’t take much effort to see why the DXY is so unhelpful as an indicator at this stage, all you need to do is examine its composition.  The DXY is the dollar versus the euro (57.6% of the index), the yen (13.6%), the pound (11.9%), the Canadian dollar (9.1%), the Swedish Kroner (4.2%) and the Swiss Franc (3.6%).  We may as well call  this thing the dollar/euro cross.  It’s a relic.

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During times of universal deceit, telling the truth becomes a revolutionary act.
– George Orwell

Those whom the gods wish to destroy they first make mad.
– Euripides (some say wrongly attributed to him, but a great quote nonetheless).

The Great Illusion and the Importance of Seeing Through it  
Last year I wrote a piece on the theory of “Reflexivity,” something that George Soros has talked about in the past and it basically concerns the notions of positive and negative feed-back loops.  Greenspan also spoke a lot about this, particularly as it relates to the equity market.  Without re-writing the entire piece, the main point was this observation that a rising equity market (even if illusionary at first) can inspire confidence and thus kick-off another economic cycle.  The opposite can occur in a plunging stock market.  I have many times mentioned that to get things right in this market it is more important than ever to know that mentality and philosophy of those that pull the strings since the U.S. basically ceased to be a free market back in the fall of 2008.  When you look at the dominant mentality of those in economic power there are two driving economic philosophies.  One relates to this idea of Reflexivity and the other is Keynesianism.  Both are essentially economics of illusion and both will be disproven in striking clarity in conjunction with the wealth devastation of multitudes over the next 1-2 years.

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