- Fed Chair Jerome Powell, 2012
Since the global financial crisis of 2008, many Americans feel they are under siege by a money trust. These financiers, otherwise known as "too big to fail" investment banks, needed our tax dollars to stay afloat during the Great Financial Crisis. What you might not know is just how influential these banks are within the Federal Reserve system. Central bankers pumping equities - think of them as the colonial British for this piece.
The 80s and 90s saw a huge boom in stock prices, but also in terms of the overall financial industry and economy in general. The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007 mainly driven by rising management fees and loftier valuations combined with robust returns for equity investors. Stock market speculation became as American as baseball and apple pie by the late 1990s. The Fed put meant that the only risk was not taking on enough risk. We have been addicted to speculation for decades, but it wasn't always this important to ignore things like valuation or inflation.
The 1970s were extremely tough for stock brokers and investors - commodities and bonds absolutely crushed equities until around 1982 when rates came down. My mom once had a CD that paid 12% per annum and she had absolutely no concern with regards to the bank's solvency - it was inflation that drove markets. 1973 was when the inflation started, kicking up to 10% per year and putting stock market investors through a 45% decline before flatlining for a decade. Meanwhile, commodities, real estate, raw land, foreign stocks, and bonds held to maturity performed remarkably well. Besides; thinking, talking, or doing something stupid like writing about money back in the groovy 1970s certainly wasn't too cool:
The rally from the 1980s started with a market-wide PE ratio of just 6X cyclically adjusted earnings. Investors had been burned in stocks on an inflation-adjusted basis for an entire decade.
Plus, who wanted to think about stocks when your entire generation was wearing bell-bottoms and living in teepees? With interest rates at 10%, boomers were basically better off holding Treasuries (TLT) and some Gold (GLD). Inflation was a problem, but stocks were cheap enough that combined with good demographic trends (boomers marrying and having kids), GDP regularly grew at around 4% per year or more as interest rates entered a 30-year bear market - the yield on bonds was attractive but even better was the price appreciation that came with falling yields (as bond yields go down, the price of bonds goes up). It was the best of both worlds, and everything went up beside inflation and commodities markets.
The deficits mattered back then to voters, as did taxes and social programs. Americans were fiercely patriotic thanks in part to the cold war, which scared people but at the same time made them more courageous in business. If the world really might end tomorrow, why not take some risks?
The 80s and 90s aren't "the way things are supposed to be" but are instead the antithesis of how markets should operate going forward for several reasons, in this author's humble, old school opinion.
Going back to another financialization or derivatives might be great for a small cross section of the investment banking community, but such a boom would be to repeat the same mistakes of old - if I were in charge, we would simply repeal Dodd-Frank, end the Fed, and bring back Glass-Steagall. Fortunately, for those of you who are obsessed with equities, this likely won't happen without a revolution. Most folks pushing a revolution just want more free stuff, not sound money and honest banking (such as ending the fractional and federal reserve system).
The current backdrop is this: bonds yields are going up and so is inflation. The discount rate is also going higher with corporate bond yields, with AA corporate yields at around 3.5% but rising steeply in recent weeks. We feel the discount rate one should use is significantly higher than most future free cash flow enthusiasts are using currently because inflation is picking up.
Banking sector issues, inflation, and the $20 trillion of debt along with deficits and tax cuts are long-term bullish Gold (PHYS) and Silver (PSLV) and relatively bearish stocks (could go down sharply this year or could churn sideways for many years as inflation continues to destroy the dollar's purchasing power).
All we really need to do to solve the banking issues we face is bring the FED under the control of Congress, ban lobbying, and peg the currency to the price of gold and silver or a basket of commodities. Think Bitcoin pegged to gold, silver, timber, rice, wheat, etc., but with convertibility to any of the linked assets, including gold bullion, or paper money exchangeable to gold or silver. Bitcoin truly is fake gold. That doesn't mean it will go down, however, because citizens are so used to FIAT money. Maybe we don't see it the same way as Charlie Munger does, but it truly is a risk to the American way of life if it is allowed to continue in circulation. Henry Ford, who went nearly bust in the 1930s, was himself a victim of bad monetary policy.
"The people are naturally conservative. They are more conservative than the financiers. Those who believe that the people are so easily led that they would permit printing presses to run off money like milk tickets do not understand them. It is the innate conservation of the people that has kept our money good in spite of the fantastic tricks which the financiers play - and which they cover up with high technical terms. The people are on the side of sound money. They are so unalterably on the side of sound money that it is a serious question how they would regard the system under which they live, if they once knew what the initiated can do with it."
~Henry Ford, My Life and Work, p. 179
Gold and silver should be made legal tender if anything. Look, Bitcoin might go a lot higher, but not for the right reasons as governments will find a way to gain control of anything requiring an internet connection eventually. There is a paper trail with IP addresses and transaction ledgers which can be traced. It's called the "block chain" and to me, it represents a dystopia and not a Libertarian utopia. Most of all it is a sad commentary on global central banks. For that reason, I admire the alt-coin faithful and they have profited from the bailout culture among central planners.
The original intent of John Maynard Keynes and his Bancor was somewhat similar to Bitcoin because it could be converted into fungible commodities and could not be manipulated for short-term political reasons.
I don't think Keynes was interested in surrendering to anti-free market socialism, or borrowing and spending beyond our means indefinitely. He did not take the neo-liberal view that a free market in stocks and bonds is a bad thing and could add and subtract. That was never Keynes - he was not a fan of Stalin, or socialism for the already rich.
Sometimes nations simply need to let banks fail and go bust. Otherwise, we all get stuck paying off someone else's debts forever. I don't want to go long Enron into eternity simply because the price is rising due to the fact that some misguided CB is printing more and more money to buy shares. Just shut up and buy the dip, I guess.
Why should America be sacrificed for the sake of a financial house of cards system built for a permanent 1990s go-go culture which is incompatible with an environment like the 1970s? The current system has created Quadrillions in derivative debt by banks who are so untrusting of one another that they refuse to lend to each other, even overnight.
In any event, a day after I published "The Dip-Buyers Strike Back" which disclosed a 90% drop in interbank lending, my good pals at the Fed (not FedEx) have discontinued their interbank lending chart altogether - poof, what interbank lending crash? Katchum did a great job of pointing out this issue last week. And JTM trading did a good job of describing this as well. We are not in Kansas anymore, and the FED is about as Federal as FedEx (FDX). Many readers think I am being un-American when I explain that the FED is actually a private business - sure, the President gets to choose the figurehead but the owners and shareholders of the FED are global investment banks who have different interests than the average American line worker.
When the truth is no longer truth, we need to take a step back and ask whether all of these "progressive" technological advancements like Bitcoin and never-ending Nasdaq 100 (QQQ) rallies are serving the well being of our citizens or not, globalization be damned. What about the bondholders? What about bank runs?
Remember, the turkey always thinks everything is gravy, right up until the week or two before Thanksgiving. Is that where we are, troopers? Sorry that us Fed-speak nerds led to the removal of the truth about interbank loans:
What had been real in words began to be replaced By what was not real, by the not exactly real. "Well, not exactly, but... "became the preferred Administrative phrasing so that the man Standing with his hat in his hands would not guess That the phrasing of a few words had already swept The earth from beneath his feet. "That horse I had, He was more real than any angel, The housefly, when I had a house, was real too," Is what the man thought. Yet it wasn't more than a few months Before the man began to wonder, talking To himself out loud before the others, "Was my horse real? Was the house real?" An angel flew in and out of the high window In the factory where the man worked, his hands Numb with cold. He hated the window & the light Entering the window & he hated the angel. Because the angel could not be carved into meat Or dumped into the ossuary & become part Of the landfill at the edge of town, It therefore could not acquire a soul, And resembled in significance nothing more Than a light summer dress when the body has gone. The man survived because, after a while, He shut up about it."
Well, folks, I would rather not retreat or shut up about it when it comes to financial literacy and patriotism. Like my father, whose work is above, and my ancestor the Francois Levis below; I am bad at surrendering (it hurts me in trading too as I am not the best market timer). I am a pro-gun, pro-freedom constitutionalist - a libertarian liberal, if you will, like my beat nick shotgun owning peace and love poet father before me (PS: Pray for the kids in Florida! Don't let this tragedy become an opportunity to take away your Constitutional Rights, however). I want to see sound money backed by silver in my lifetime, the end of the money trust running the FED, and the return of free market capitalism. Like the general who shares my last name, I would rather be defeated than humiliated with insulting terms of surrender:
On 9 May the British frigate Lowestoft [see Robert Swanton*] sailed into the basin. The fleet under Lord Colvill* was close behind. Nothing remained for Lévis but to raise the siege and retire to Montreal for a last stand. Three British armies now converged on the town, Murray from Quebec, Jeffery Amherst down the St Lawrence from Lake Ontario, and Brigadier-General William Haviland down the Richelieu. Murray ordered all the farms from Jacques-Cartier to Cap-Rouge burned, the people driven south to be a burden on the foe. All the way up the river the habitants were ordered to lay down their arms and return to their homes. Deserted farms were put to the torch. The militia now began to desert en masse, heading to their homes to save them from destruction by laying down their arms. The French regulars also, even the élite grenadiers, deserted in batches. The French army was rapidly melting away; its officers were in despair.
Further resistance was clearly hopeless, and Lévis admitted as much, but he insisted on fighting on to preserve the honour of French arms. In May 1759 he had declared that the army would defend the colony tenaciously and that it would be more honourable to perish, arms in hand, than to submit to a capitulation as shameful as that of Louisbourg. He may well have been strengthened in this resolve by the minister of War's directive dated 19 Feb. 1759 to Montcalm, ordering him to hold out to the last extremity rather than accept terms as shameful as those accepted at Louisbourg, and thereby erase that memory.
On 6 September Amherst's army was at Lachine. Vaudreuil called a council of war and it was agreed that nothing remained but to draw up terms for the surrender of the colony. Amherst concurred with most of them, but demanded that the regular troops not serve again during the war. What was worse in the eyes of the French officers was that he churlishly refused to grant them the customary honours of war. Lévis thereupon demanded that negotiations be broken off and a last stand made to preserve the honour of the army. It would, he declared, be unthinkable to submit to such humiliating terms before the enemy had been obliged to launch an assault on the town. When Vaudreuil refused to agree to the destruction of Montreal merely for the sake of punctilio, Lévis requested permission to withdraw the French regiments in defiance to Île Sainte-Hélène, where they could only have succumbed to starvation. Again Vaudreuil refused. He commanded Lévis to conform to the terms of the capitulation and order his troops to lay down their arms. All that was left to Lévis was to have the regimental colours burned to deny them to the foe, and to refuse to meet with Amherst and extend him the courtesies customary between generals."
If fighting to the last man made the Duke a fool, it also made him honorable. I don't want to just go along to get along. A life like that is too self-serving and cowardly for me, which is why I will continue to fight for the little guy.
If that means I am a labeled a bear on some website "who is wrong" then so be it - we are 50% long, but it's not because everything is awesome. It's that things have become unreal and we will need ammunition in the future, whether real or virtual, to fight against tyranny. Have you seen a chart of this not so legal "competing currency" Bitcoin? Remember, under the US Constitution, there is to be no money coined other than money backed by gold and silver. Is this really happening in America? An all digital, Unconstitutional fiat currency where everything can be tracked and regulated by a totalitarian, unelected central government one day?
What's worse, if the above goes unchecked, the banking system is doomed as is the $USD and gold. Some say Bitcoin is the precursor to the "New World Order" system. If so, it is sad to see everyone racing head-first towards their own enslavement. And yes, that is relevant to stocks and bonds people - Bitcoin is deflationary as people withdraw from banks en masse to invest in shiny computer tokens. I really hope it's just a conspiracy theory; my grandpa was a Free Mason but was not a part of any clubs other than Christianity. I am willing to compromise by saying this: if the above chart is really happening, can't we just go back to issuing sound money and dissolve the big corrupt banks? Bitcoin is a direct result of the failure of securitization and "financial innovation."
I know we have to face some short-term pain to restore our republic. The dishonest sellside equity salesmen in all of us must be purged from the financial system one way or another - hopefully Democracy prevails over fintech and digital money, but if it does not let's fight to take back our freedom to the very last man.
To that end, you can count on my patriotism so long as my work remains uncensored. I applaud my editors here at Seeking Alpha for publishing my work, as I represent the liberal-anti Stalinist, pro small business, pro main street faction of "liberals" who see the world as I do - business hippies if you will, who hate monopolies and imperialism. We don't want to lose money, but at the same time want to understand the Gestalt, the big picture, the surrealism of the current Wall Street/FED/lobbyist reality - yes, tax cuts made stocks more reasonably valued. The problem, according to Jim Chanos, is rent-seeking behavior. No surrender, no retreat.
Disclosure: I am/we are long GOLD, SILVER, QQQ PUT OPTIONS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.