The Ides of March Redux

Two thousand and fifty-six years ago, on March 15, 44 B.C., Julius Caesar — the most powerful man in the world — was stabbed to death, in fulfillment of a soothsayer’s prophesy: “beware the ides of March.”  One notable ringleader, one Marcus Junius Brutus the Younger (of “et tu Brute?” fame) was a former enemy whom Caesar had forgiven and brought into Rome’s inner circle.  It is said that when Caesar saw Brutus among his attackers, he covered his face with his toga and resigned himself to his fate.

Brutus’ mother was one of Caesar’s mistresses and some speculate that Caesar himself was Brutus’ true father — meaning, of course, that Brutus may have committed the unspeakable sin of killing the goose that might have laid many golden eggs for him.  But, he was persuaded by his fellow conservative senators that Caesar threatened the elite’s power and prestige, and thus had to go.

Needless to say, it wasn’t the smartest move the lad ever made.  Although the Senate hastily granted amnesty to its homicidal members, the plebeians were less forgiving.  Brutus found himself haunted and hunted and, after losing a battle of epic proportions, took his own life.  It marked the beginning of the end for the Republic.  Could’a, should’a, would’a.

Ben Bernanke, arguably the most powerful man in the financial world, has found himself in the crosshairs more than a few times lately.  Although hired by Bush as his chief economist and later Fed Chairman, Republicans have been leading the assault.  In turns, the bearded one has been accused of being too conservative, too aggressive, too dovish, too accommodative, too political, too aloof, too stilted, too talkative and…of course, too hairy.

Ron Paul proudly refers to himself as the thorn in Bernanke’s side.  Rick Perry warns that Bernanke will be “treated ugly” in Texas if he continues to print money so recklessly (not sure what that means, but I think it involves a pickup truck and 50 feet of chain.)  On the other side of the political spectrum, Paul Krugman faults Bernanke for “wimping out” and Maxine Waters wants him examined for signs of demonic possession.  Even yours truly has disparaged the guy.

What the politicians all seem to have forgotten is that Bernanke, for all his faults, is their golden goose.  He and his spawn are the only people on Earth willing and able to perpetuate the ponzi scheme that’s preventing them from being lynched.  Bernanke’s no great fan of the American body politic.  In fact, he lays the blame for the financial crisis squarely at politicians’ feet.  But, he understands that failing to keep the music playing will reveal the fundamental flaw in the way the economy has been run for the past, oh, sixty years.

In short, we industrialized nations have made too much money.  In a world where billions work for less than a dollar a day, we’ve paid ourselves too handsomely.  America, as keeper of the world’s reserve currency, has particularly benefited.  And, our financial system is spectacular at funneling excess liquidity into needy ventures — whether or not they make good economic sense.

Unfortunately, as we’ve learned from the South Sea Bubble, the Dutch Tulip Mania, the Dot Com debacle and the Housing Crisis, the system isn’t so great at turning off the spigot.  And our political leaders, whose continued employment is made possible through the largesse of those profiting most from needy ventures, aren’t about to stop the music.

And, so, we’re left with bubbles — both popped and in need of popping.   To put it simply, the world can’t afford cars, clothing or electronics made in the USA.  So, those Americans employed in the making of things are, by and large, part of a bubble.  Many of our services, crops and natural resources are, likewise, overpriced in a global economy.  And, thanks to the wizards of Wall Street, assets in this country are burdened with debt in excess of their ability to service it.

The only viable solution is the Big Red Reset Button — only, no one’s got the nerve to press it.  Politicians?  Forget it.  The financial establishment?  Only if suicide somehow became profitable.  The Fed?  Bernanke’s a self-acclaimed expert on all things Depression. Read his treatise on the Japanese problem, or his famous helicopter speech and you’ll see how deathly afraid of deflation he is.

And, so, on we go — creating out of thin air the trillions needed to fool people into believing the economy is doing just fine.  With the national debt at $15.5 trillion and interest rates around 3%, we’ll only pay about $474 billion this year in interest ($241B net.)  The CBO says that’ll hit $846B ($562B net) in 2016 at 5.2% interest rates.  But, if the 10-year returns to its 50-year mean of about 7%, that $846B is more like $1.1 trillion — as much as we now spend on defense and medicare combined.  At 1980’s rates, it’ll exceed those two and social security combined.  Americans approaching retirement who value their health and their borders are likely to be disappointed.

Bernanke knows how, if not when, this will end.  We’re out of wiggle room.  Because, whether it’s $20 trillion, $30 trillion or $50 trillion, there will come a point of recognition when those we count on to finance our deficits will find other bubbles in which to invest.  In other words, the music will stop. Runaway inflation, crushing deflation, currency wars, soaring interest rates — they’re all on the table.  The politicians will need someone to blame.  And, so, the man who let it happen will draw his toga across his face and quietly await his fate.

~ sequere pecuniam ~

Comments

The Ides of March Redux — 25 Comments

  1. Wow… that sure makes a visual difference.  Of course the meat of your message is still all there.  That looks great.  I'm guessing that JL must be taking a rare weekend off because he usually gets back to me within minutes.  And we often do our communications very late at night, into the wee hours of the mornings even.  So I expect that I'll probably hear back from him tonight at the latest.  Hang in there 🙂

  2. Sorry for the delay in getting back to you Pebble.  It's been a bit of a busy weekend.  I just read your answer and have just sent off an email to John Lounsbury that includes a link to this page.  He's a big fan of my work and a huge supporter of my writing.  He will definitely read you article.  Whether or not he can fit it in is his call of course, but he's an awesome good guy.  In the event that he will publish it, would you be interested in touching it up, perhaps add a picture as a simple break for the readers' eyes?  Maybe something like that?  A picture of Caesar perhaps or something more sinister, like his assassination, lol.

    In any event… we wait.  The great thing about Lounsbury is that he's lightning quick to respond.  I mean sometimes that guy answers my emails just a fraction of a second before I can even hit the send button, lol.  We'll know real quick.

  3. That's too funny!  I just had coffee with a friend who brought me a copy to read.  Can't wait to dig in this weekend. 

    I've seen Bill Strauss perform many times and am a huge fan of Capitol Steps. 

  4. Well that leads to another great book: "The Forth Turning". The authors' found that the reason they believed history seemed to repeat was because it took about 80 years ( 4separate generations of 20 years) for people to forget the lessons of the past and subsequently do them all over again.Especially, here in the US where we fail to see the importance of our elders and listen to them. Lastly……loved Mr. Roth going back years later after in his diary and adding an entry such as; "glad I did not buy that home – it is another 20% off"……….   

  5. I don't know, but I'd start here:  http://www.econ.yale.edu/~shiller/data.htm

    There's a link to Robert Shiller's economic data set going back to the 1890s.  Pick the period you think we're most likely to repeat and see what happened to different asset classes.  If you're not confident in your ability to see the future, there's always diversification.  Might be a little boring, but it could save your bacon if/when things go wonky.

    I think inflation will eventually come back in a big way, but as we've seen throughout the past 10 years, bubbles can go on for a long time before popping.  Ask anyone who sold their house in 2003 because prices were getting too crazy. 

  6. Hadn't noticed that before, but it makes sense.  Having a daughter in middle school — I'm learning more now than I ever did in school.  When she studied Ancient Rome last year, we rearranged Spring Break to be in Rome and study it up close.  Endlessly fascinating place, with lessons that will will reverberate for years.   Should I infer from your name that you're from Salerno?

  7. Good question. Someone once suggested non-denominated US Postage Stamps (in jest).

    Our plan, which we have not acted well on, was Mexico. Pretty stable (ok a little violence), good economy, nice people, has some natural resources, affordable health ins. and real estate. Money should go further down there. I doubt they have nuclear warheads pointed at Mexico. Important election coming up.

  8. I'm not a very sophisticated person so please bear with me. If the economy gets more 'robust' (which I guess means employment improves and consumption goes up) then the Fed is off the hook ? What happens then ? The Fed sells off assets it has acquired, taking the cash and burning it, thus removing it from circulation and dropping the monetary base back where it was in early 2008 ?

    I honestly don't know how this works. Has the Fed laid out a plan which is understandable by a simple person ?

  9. PW a very nice piece you have written. I often think of the Roman Empire, it relates in many aspects to our times. But one thought don't let me go. The rise of the Empire is well documented, but there's little about the fall. Maybe because it was much faster and of course devastating.

  10. Thanks.  Glad to know a fellow fan.  It's a powerful book, absent of historians' revisions and interpretation.  For those wondering what it was "really like", this is solid gold.  I, too, think about Roth and his observations/experiences all the time.  He was a smart, honest, optimistic guy, paying attention and doing his best.  Yet he was still hit hard. 

    You'd think we could avoid repeating past mistakes by better understanding the past, but misallocation of capital, bubbles, failure to regulate, political favors, harsh corrections, etc. have always been with us and always will.

  11. Thanks, AR, you're too kind.  What it really takes is OPEX, where an hour or two with nothing happening is the rule rather than the exception, lol.   Would love to see it on GEI, thanks.

  12. You are a gifted writer!! Thanks for the site and the time you put into it and your analysis. Also, funny that you mentioned the book by Benjamin Roth. Very insightful and great read…. I think about his observations and compare them to today all the time – the attitude of the people and the similarities are just amazing in so many ways…..As Bob Hoye always says, this has all been done before and the outcome has always been the same…..

  13. Awesome piece of work Pebble.  We all knew you had great writing skills but I didn't realize you would take the time to sit down and pen something that was such a nice easy read but which contained so much substance.  Very impressive.  It certainly takes a particular mindset or the proper mood to be able to pull that off.  Very nice work.  You should get that published elsewhere too.  Would you be interested in having me pass it on to John Lounsbury to see if GEI would like to publish it?  Why don't you publish it as an article on Seeking Alpha?

  14. Great question, Tommy.  The short answer is go back and study the past.  I recommend The Great Depression, A Diary by Benjamin Roth.  He keeps a faithful record of the fits and starts in the economy, the markets, unemployment, etc. through the Depression.  It's a great reminder of the cycles that all markets go through.

    Regarding the stock market, I think it is a reflection of liquidity — to a point.  Right now things are out of whack.  Rates are incredibly low because of the Fed's actions.  These absurdly low rates — which are supposed to reflect inflation, credit and currency risks — enable stocks to look attractive by comparison.  For instance, valuation models all incorporate a risk-free rate of return, IRR's all incorporate a discount rate, etc.   If those rates should ever rise, stocks must take a hit.  

    Can we keep the 10 year at 2% when the debt is $20/30/50 trillion?  If so, maybe we'll break the 2007 highs, I don't know.  But, what if the dollar ever weakens to the point where the Fed needs to raise rates to preserve its value?  What if inflation starts ramping up?  What if we get into another war that costs a few trillion? 

    There are just too many questions.  And, the factor that makes the whole mess untenable is the debt.  We have no wiggle room anymore — not when we're paying $200 billion/yr in interest already at these absurdly low rates.  As we discussed the other day, at 6% interest exceeds medicare, social security or defense.  At 12%, it exceeds 2 of them put together.  The crowding out has to have a breaking point.

    Now, does that mean the market is crashing tomorrow?  That's a separate question, and not meant to relate to these larger, systemic problems.  For tomorrow, I'll stick to harmonics and trend lines and chart patterns and try to capture a little extra profits here and there.

    You can rely on the trend (and BB and the PPT and CNBS) right?  There's no way they'll let this go down, right?  Except, weren't they all around in July?  Or May 2008?  Like the finest snake oil, QE will work as long as people expect it to work.  When their fears outweigh their greed, watch out below.

    Oops, I hit my 10-minute ramble limit.  Any longer and I'll drive people away – bad for business 🙂

  15.  What do you think would happen to you if you tried to pay off your maxed-out credit card by getting another credit card…then another…and so on….may work for a while…but eventually…no free lunches.

  16. Bravo!
    And who should we cast as Crassus, the super-rich, greedy ally of Caesar who eventually gets killed by the Persians, having molten gold poured down his throat?
    How about Buffet, self-proclaimed gold hater.
    DK