Forget the V or W: This Is a 'Checkmark' Recovery

by: David Roskoph

One year ago I wrote "An American Renaissance: Capitalism Is Alive and Well", which highlighted the positive structural changes occurring as a result of the Modern Depression: a dose of reality for the (formerly) tragedy-of-the-commons auto unions, dismantling the facade of Government Sponsored Enterprises (GSEs) and illuminating the absurdity of "off-budget" expenses. The trend of meaningful structural reform continues.

A month ago I posted "The Fuse of an Economic Renaissance Has Been Ignited", which discussed the mathematical impossibility of our social net and why it will never be paid in full. I continue now because more blocks are falling into place for a multi-generational change, an economic renaissance. In the foreground is the first administration in my 50 years with an appetite for actually addressing, and aggressively moving to rectify, third world-like nonsense conveniently ignored by everyone else. In the background are countries whose economies' are exposed for what they are, pseudo-capitalistic welfare states. The notion that our house may be suffering a similar delusion is wafting through the air and setting the stage for a complete overhaul of how America does business. The time for a colossal change is right now.

The Sun Is Going Down on Japan

Greece's teenage tantrum over their soon-to-be-cut allowance is a scene that may unfortunately be repeated by their "La Dolce Vita" homies in Italy, Portugal and Spain. Their fate is foregone, their low-stress, low productivity lifestyle is an anachronism. Now they will begrudgingly drop the gray economies that hide income to avoid taxes, the institutionalized inefficiencies that gave them that quaint atmosphere and get real about their ability to afford lavish social nets. No one can afford to subsidize them anymore. They will change or slip back off the economic and political map to assume a market based (non-EU-fortified) standard of living. However, while all eyes are on the Greece fire in Europe, our attention should be directed to a country at the other end of the productivity spectrum. Japan, the second largest global engine, is on a demographic cliff and gravity will not be denied.

Despite their tiny geographical footprint, Japan produced their way to the top with virtually no natural resources, powered by a Samurai's work ethic and (an Edward Demming inspired) dedication to perpetual improvement. Their present fate is a function of decisions made decades ago and they will now begin their descent; doomed by their demographics.

Japan is imploding from the gravity of having one of the longest-lived and lowest replacement-rate-populations on earth. Stubbornly homogenous, their productivity has hit its zenith. They will now have to deal with the consequence of managing an aging population with ever-fewer worker bees. Presently second behind the US, over the next 10 years they should settle in at fourth behind India and China. Toyota's stuck accelerators are just in time to meet a rising quality standard and more affordable American car. Sayonara.

High Noon on Wall Street

The recent flash crash was symptomatic of the death throes of the unseen hands of Wall Street. We have largely ignored their ever-more-opaque world due to the distractions of an otherwise functioning, top notch, economy. To keep the pitchforks away, each recession produced a conga-line of orange jumpsuits to placate the masses. However, that Modern Depression interrupted our version of (the movie) The Producers. The Sting of American Capitalism is that it used contract law for a variety of trumped up "guaranteed profits". The marks signed on the X and lost their money before the ink dried. Those days are shorter.

It's high noon on Wall Street. The former investment , now (chartered commercial) banks, resurrected from technical bankruptcy and did what they do best - took risk. This time they won. The Obama administration suggested that the CEO's reconsider the disposition of their contractually-earned bonuses, specifically because they were aided with TARP infusions. After weeks of agonizing consideration, they ran with cash anyway. That shortsightedness triggered the showdown that we are now witnessing.

There was nothing illegal with the contracts that allowed for all those bona fide bonuses. The switch , however, made Deputy Volker beg the necessity of commercial banks engaging in proprietary trading to begin with. Why manage a trading floor in deference to their charter of making loans? For me, it's not a matter of the exact changes to the financial regulations, which are slowly being revealed, it's a matter of the stars lining up during a Teddy Roosevelt-like administration. As I see it -

  1. The ruse of Government Sponsored Entities, Fannie & Freddie, that undercut the residential mortgage market are done. Their sour assets subject to be split up between commercial banks perhaps, in an effort to undo the damage.
  2. The stage lights are coming on and shadow banking is being dragged into the sunlight of a new day, perhaps a new era. This private banking cartel, given the tacit nod by Greenspan, will one way or another now be regulated.
  3. The usury nature of loan fees, masked by the lure of easy credit, will now be written in comprehendible text. The (grifting) bloom is of the rose of duping the uninitiated marks.

The limits of American Capitalism have finally been exposed and positive change is happening. You see the former version of "Free Market Capitalism" produced those bubbles that fleeced the public and ultimately brought us to the precipice. Our middle class contracted in the aftermath of each bubble. Under these circumstances, financial reform portends to at least begin the process of incrementally dismantling the apparatus of an institutionalized con-game we call accidental financial bubbles. It's all about restoring confidence, which leads to the unleashing of potential. An explosion is about to occur.

The New Gold Standard: The US Dollar

The Euro's collapse is more than an adjustment for the incipient rise in its' float. It's exposing just how fragile every other industrialized nation's currency really is, given our universally overly generous projections. I believe the Euro is headed below its 1999 IPO price because their (socialized) actuarial pencils are the world's dullest. As well, their populations the most resistant to a restoration of mathematical sanity: less than 20 weeks of vacation per year and less than 20 years of retirement.

Now that the globe's (decades old) veneer of artificial prosperity is being stripped away, we're getting down to the truth. Goldman's fall from the heavens means there's no one left to prosecute absolute bankruptcy anymore (tongue in cheek). We've all floated our standard of living but those who produce the least will now have to scale back the most; "someday" is no longer sufficient collateral. Since no one can afford their present living standards, there will be a unified global contraction.

Ask yourself this: if oil or gold were becoming the new "global currency" wouldn't they be keeping pace with the tsunami of fiat the world is manufacturing? They're not, they're going down. After years of detachment from economic reality, they look as if they're returning to their supply/demand status as simple commodities. Even with the risk premium, the demand for oil suggests a price below $45 barrel and gold below $800/oz. Consider that - everyone else's experiment with capitalism has further to fall to reconnect with reality, the dollar will reemerge as the world's strongest currency.

With the overwhelming success of capitalism, the earth is no longer a place of absolutes, it's graded on a curve and there is only one A. No one, no one is going to call America's debt. At a time like this a currency's value is not simply a function of its natural resources, or employment statistics or even fiscal solvency. When the tide went out, the hybrid capitalism practiced by the other industrialized countries, showed its inherent flaw - its absence of franchise value. Now, when the industrialized world's bankruptcy looms large, the value of the currency is determined by the mettle of its populace. In other words, the dollar is the most stable currency on the earth, based upon the value of our infrastructure and culture. It will become is the new gold.

The events happening now are substantial and signal the end of an era. An era of, Japanese automotive dominance, southern Europe's La Dolce Vita, institutionalized financial skullduggery and of the delusion that we can afford our Great-Society-enhanced standard of living. Europe's implosion is the clarion, our bloated social net will now begin the process of deflating to reflect our extended lives and our replacement rates and that "new deal" will yield a tremendous burst of productivity.

This is just the beginning of an American Renaissance led by an administration determined to reestablish the US as capitalism's more-sober captain and redefine how best to run a free country. America is best poised to prosper through the adjustment and, when the smoke clears the US will have leapt further above the din. As a result our markets will recover not in "V" or a "W" but rather in a "". US dollars will be firmly established as the undisputable king and our markets' PE's will expand to reflect our unique stability.

P.S. While winding up to throw that electric tomato, check the leader board ; )

Disclosure: I remain very long the US market and the US dollar, short Japan, commodities and commodity companies.