Wednesday, March 19, 2014

Oy Vey, Grandma Is Meshuganah!

What can I say to top this one. The Twitter verse was alive today with crazy Grandma Janet jokes. Now we have to deal with a President who has no strategy and a Fed that also has no strategy and may know less about the economy than you or I.

News flash - The Fed is usually behind the curve. Unless your name is Paul Volker Jr, don't bother to apply for the job as Fed "Chair Ma." I always hated Fed day, because there were always two armies of machine traders ready to fire at each other. This resulted in wild ever narrowing up and down swings until a trend finally set in. For years I have called it the propeller pattern. Now we have a new name - The Meshuga pattern. Being that Janet is a member of my tribe, I will defer to the Yiddish vernacular, but please substitute if you wish. Loco in the coco is fine too.

Whatever one calls it, it shook me out of my $SPX short too early today - circled on chart below. Its hard enough to trade on Fed day, but usually the opening statement is enough to trade off of. I figured that Janet had nothing good or new to say, but I did not figure that she would start to come apart in front of the world as the press conference went on. Oh well, I missed the meat of the trade. Anyway, let's hope that Chair Ma is not too constipated from Passover Matzoh when she makes her statement next month.

One may think that Janet Yellin is a great intellectual who now as Fed Chair possesses the power of God. But she did not instill any confidence in us today. Many commentators said that she was flying by the seat of her pants. Something tells me that we already knew that, but we did not know just how shaky the pilot was and to what extent the Fed is in the dark. Also, something tells me that winging it goes with the turf. Milton Friedman famously said that we should abolish the Fed and replace it with a computer.

Lets go back in time to see how we got here:

1 - The great Paul Volker, a career Federal banking bureaucrat, came along at the end of the 70s when we had upwards of 20% inflation. There was no bullshit in this man's vernacular. He did not care what anyone though of him, or his cheap cigars and baggy suits. He only cared about doing what was right - damn the torpedoes! He raised interest rates in big chunks, threw the economy into a recession, and wrung the inflation (that dated back to Lyndon Johnson) out of the economy - along with the courageous President Reagan who killed the unions and their Wage Push inflation when he fired the striking air traffic controllers. After getting inflation out of the system he started to stimulate the economy in 1981. By 1982 the stock market got the message and exploded up when Henry Kaufman gave us all the high sign. The economy prospered for almost 20 years thanks to Volker setting the table. People might have hated Volker at first, but they knew where he was standing and he left the job as a hero.

The Greatest Ever

2 - In 1987 along came Alan Greenspan who used "Green Speak" (A scholarly version of "Stengalize" - a language invented by one Charles Dillon Stengal, another banker who used Stengalize to effectively testify before and mesmerise Congress) to obfuscate us into believing that he knew what he was doing.  He emphatically did not (because he could not conquer his personal demons), but he duped us by trying to abolish the business cycle. He was the main cause of today's economic problems. He was the man who had earlier given us "WIN" buttons (Whip Inflation Now) during the Ford administration. He then gave us the term "Irrational exuberance" in 1996. In both instances he was trying to jawbone the populace to stop inflation. But he was not doing anything about the problem.

Charles Dillon Stengal:

1987 Crash hurts Poor Alan's Scarred Psyche:

You see, Alan was a chicken who got scared by the 1987 Stock Market crash. He misunderstood the difference between a machine driven market crash and an economic driven bear market. Sure there were currency problems and pre crash comments by James Baker that did not help things. But from the day that the market crashed, Greenspan decided not to let the economy fall on his watch. The entire economy was held hostage to one fast talking person's scarred psyche. Greenspan did all the right things to turn things around when the market crashed. But later on when the economy was getting out of control and stocks were getting into bubble territory, he chickened out. Volker would have raised rates, cut back on the money supply and so on. But Greenspan chose to jawbone, charm the idiots in Congress and keep on pumping. Ayn Rand's disciple never learned her philosophy.

The Sleaze Ball Culprit: Howard Roark My Ass!

The pumping lasted through the start of the year 2000. his original reasoning for more pumping was to abolish the business cycle and avoid anything that could tarnish his good name. Added to the good times mix was the Clinton abolishment of the Glass Steagle Act and later the Barney Frank Fannie Mae led housing fiasco. Easy Alan created the speculative environment that led to all the banking system ills and so on.

Y2K And The Housing Bubble:

But I digress to discuss the much feared imaginary Y2K "problem." From 1996 through late 1999, Greenspan had lost all perspective on the economy. By late 1999 he feared that the Y2K computer issue would put us into a recession. So he pumped even more money into the system than ever before. This was like pouring gasoline on a fire and caused the internet bubble to blow off with a bang like nothing we had ever seen before. Then when Greenspan realized that the Y2K problem was not a problem, he lurched back on the monetary reins choking the horse, er economy. The stock market finally went into the dreaded and well deserved bear market that Greenspan had feared so much. Eventually Greenspan figured that the only way to get out of the hole that he dug was to substitute one bubble for another. So he pumped and created the housing bubble, kicking the can further down the road.

Greenspan Sneaks Out the Back Door:

All of Greenspan's policies led to the financial system imploding in 2008. He then quietly retired leaving Bernanke to hold the bag. What a slick operator. To screw up in front of the entire world and not be blamed for it is an amazing act.

3 - Ben Bernanke was a cool plain speaking honest man who did the right thing - albeit too late in 2009. He was welcomed to the job with the ultimate "Baptism of Fire."  At first he did not realize just how bad things were. He was therefore late to react. But when he did act, along with Hank Paulson, he was spot on and absolutely saved the economy. It took time, but Bernanke earned our trust. As a Great Depression scholar, he was correct with his 1937 deflation analogy.

Bernanke's problem was that the cure to the deflationary unraveling of our banking system was like giving a junkie more drugs to get high on. In my opinion he had no choice.  However, given the bad situation, the unwinding of his cure may still kill us or just forestall a 1989 Japan like stagnant economic situation. Anyway, now Bernanke has handed the ball and problems off to Yellin. Unlike Greenspan, at least Bernanke had the courage to start the tapering process in the end, before he retired. And he was transparent and truthful in his endeavors. Whether Bernanke started the taper too late or whether the entire QE process will work is up to history. One thing we know for sure is that he was working all alone without any intelligent fiscal policy effectuated by an ignorant misguided President and an even worse Congress.

What Can We learn From this?

1 -It is now clear that today's problems go all the way back to 1980. Like dominoes, each Fed Chairman is affected by the actions of the prior Fed Chairman.

2 - The clear culprit in this 34 year act is Alan Greenspan. Everyone is just cleaning up the remnants of his mess.

3 - It is also clear that trust in the Fed chairman is a must. In today's transparent live internet world, that is difficult, as today proved. 

4 - By now we should realize that the Fed does not have some magic formula that makes it understand the economy any better than the market place. In many cases the Fed's bureaucratic inertia, or myopic in the Fed bubble thinking, brings it late to the party. Greenspan was a late study to what program trading was doing to our markets and to the inventive ways bankers and insurers used leverage. Bernanke was late to understand just how much trouble the economy was in. Yellin is obviously late in understanding what is going on too. We are constantly amazed by how little the Fed knows.

5 - Doing the right thing like Paul Volker did, takes much foresight and guts. Plus no surprises were laid upon him. The problems he inherited were there for quite some time. 

Yellin stumbled today, but she has time to reestablish her credibility. The problem is that she is in a very difficult position. We really do not know if the economy can make it without the Fed. And the Fed has run out of tools. In its latter stages, QE is a weak potion. And there are problems with the other QE junkies of the world like China.

PS: All of this Fed uncertainty and this lousy market caused me to sell my FSLR way too soon. It was the only bullish game in town today and I sometimes like to kick myself when I get frustrated. That's what happens when nothing is working.

FSLR: I day traded it and sold too early.

GLD: Did gold just hit the wall today?  I'm not sure yet, but it has not made enough of an up move in 2014 to call it anything but a potential base building rally.

BIG Capital Advisors and Seaview Partners are not responsible for your investment decisions. We believe very strongly in our opinions, but you must perform your own due diligence in making your investment decisions.
Post a Comment

Google Search