By John Galt
September 25, 2011 – 23:00 ET
The Historical Circle of Economic Mistakes is now Complete
For once in my life, I wish I had some doubts as to my calculations and ideas being incorrect. While many may disagree with the conclusions I have ascertained, the truth is that the macro or big picture review from a historical perspective appears to have repeated itself right down to the arrogance of the financiers and the ignorance of the political elites.
For the loss will come. The market at this stage is inherently unstable. At some point something—no one can ever know when or quite what—will trigger a decision by some to get out. The initial fall will persuade others that the time has come, and then yet others, and then the greater fall will come. Once the purely speculative component has been built into the structure, the eventual result is, to repeat, inevitable.
There will previously have been moments of unease from which there was recovery. These are symptoms of the eventual collapse. In 1928 and through the winter, spring, and summer of 1929 the stock market divorced itself from all underlying reality in the manner just cited. Justification was, of course, asserted: the unique and enduring quality of Coolidge and Hoover prosperity; the infinitely benign effects of the supply-side tax reductions of Secretary of the Treasury Andrew W. Mellon, who was held to be the greatest in that office since Alexander Hamilton; the high-tech future of RCA, the speculative favorite of the time, which so far had not paid a dividend.
But mostly speculators, amateur and otherwise, were getting on for the ride. In the spring of 1929 came the initial indication of instability—a very sharp break in the market. Prices recovered, and in the summer months they rocketed up. There was another bad break in September and further uneasy movements. Then, at the end of October, came the compelling rush to get out and therewith the crash. No one knows what precipitated it. No one ever will. A few—Bernard Baruch and, it has long been said, Joseph P. Kennedy—got out first. Most went down with the mob; to an extraordinary degree, this is a game in which there are mainly losers.
-The Atlantic, January 1987
“The 1929 Parallel” by John Kenneth Galbraith
Instead of attempting to befuddle or frustrate my readers with numerous charts and technical viewpoints as to why this could well be a repeat of the crashes we have seen in American stock market history, I think this weekend provides a pause that refreshes, a moment to reflect on the arrogance of the elites and the ignorance of the masses which has allowed and encouraged a new disaster to occur.
This is not the time to listen to the same type of prognosticators and promoters who created the speculative frenzy which began in 1998 and first paused at the start of the decade only to see one more frenzy heading into the real estate and stock bubble of 2005-2007. Unfortunately for those who believe that “this time it is different” they may have some issues which I might agree with, yet in reality there is a daunting secret behind this last gasp of a dying economic model and financial market system:
The situation might seem different, but the mistakes and theories behind this collapse are almost identical.
We are now at that moment us historians relish, not because of the doom, gloom, and destruction or opportunity to brag about previous warnings; alas it is because we can now analyze and find parallel descriptions of events which have a haunting familiarity to the past along with the denials of the people who created the mistakes now charged with fixing them. This is that time and I’m afraid the errors committed by the managers of the system this time have a designated and designed plan which has yet to be revealed to the masses to change our society for decades to come.
I. The “It Can’t Happen Here” Belief
There is this strange theory that the United States has evolved so far ahead of the rest of the world technologically that there is no possible way the mistakes of the 1830′s, 1930′s, and of course the 1987 crash era could ever occur again. The idea that our corrupted regulatory authority, infested with bureaucrats looking for positions within the financial system they oversee, will ever logically address the criminal activity by our financial corporations is laughable. To add to this fiasco, the political leadership be it within the Executive or Legislative branches, are as dependent on the companies who have destroyed our economy as the Ferrari dealerships in Connecticut, New Jersey, and New York.
While our television talking heads on the alleged financial news networks and the compliant mainstream media continue to offer the “wow, look at how screwed up the Europeans are” defense which is akin to blaming the neighbor’s kids for burning your house down after teaching him how to play with matches, gunpowder, and gasoline, the entire world financial system is looking to the nation which created the grand Ponzi for a solution. Despite the belief that we have a clue, the truth is that trillions, not billions, of dollars in liabilities remain including defaulting residential and commercial mortgages, municipal and state bond implosions, and the worst aspect, further collapses of the regional and community banking system due to inept and unequal application of the regulatory terror by the Federal government.
But “it can’t happen here again” is all one can hear from the media.
Again.
Beginning to sound like 2007-2008 all over again, isn’t it? Or perhaps 1931 if I may indulge my readers to open up a book or two to understand that changing the names does not change the pattern of inept and sometime criminal behavior.
II. In the Fed We Trust
Sacrilege against our nation’s Judeo-Christian beliefs or the quotation on our monetary units?
Uh, no.
But an indication as to just how the marriage of the American people and political elite continues to a private corporation created by the very same corrupt financial institutions that led to the three greatest crashes in American history, the Panic of 1907, the Great Depression, and the 2007 to still to be determined recession/depression, is that every word that Chairman Ben Bernanke utters has an influence on equity and bond pricing indicates an obsessive disorder akin to alcoholism or masochism. The first reaction from those astute readers will be to point out my factual inaccuracy that the Federal Reserve did not exist in 1907; I simply wish to point out that in the early 1900′s that for those who ignored the evolution of the Progressive political movement and the intense desire by the financial community for the re-creation of a new national or central banking system (refer to The Panic of 1907: Lessons Learned from the Market’s Perfect Storm by Robert Bruner and Sean Carr). This desire lead to the Federal Reserve Act of 1913 and the re-emergence of a new Federalism, under the guise of the Progressive movement disguised as the savior of America.
Glenn Beck focused on this movement to a new order, but failed to expose the truth of the nightmare creation of not just the Federal Reserve, but that of the concept of centralized economic management expanded under the administrations of FDR through George W. Bush. The entire Federal Reserve infiltration and corruption of our economic system was not envisioned in 1913, but evolved over decades as the ability to influence the business cycle and political outcomes became apparent. This reality is about to bite the American people in a very private body location just as a pit bull devours the crotch of a burglar in a thug’s home.
Unfortunately, ninety-five percent of the American people have faith in the established institutions and actually believe they can manage the crash of ages which is about to accelerate.
III. Shenandoah Here We Come
As long as I have held this domain name, which is now over four years, the question has been asked, why Shenandoah?
My answer, in the typically sarcastic tradition of those who love history and wish to educate the masses in a manner as arrogant as the current elites is simple; Why not?
The truth though is founded in the current Exchange Traded Fund structure which is an almost direct historical duplication of mistakes of old.
For example:
Sampling of components of XLF:
Is it due to my affinity for the valley located in the U.S. state of Virginia?
Perhaps a strange obsession with the television show “Bonanza” or other old Westerns?
Maybe, just maybe, I found the name cool and the 1288 examples cited by Yahoo Finance are irrelevant?
OR is it that perhaps, just perhaps, history is repeating itself in a very nasty, disgusting, repulsive manner once again?
From the same article via The Atlantic cited above:
Senator Couzens: Did Goldman, Sachs and Company organize the Goldman Sachs Trading Corportation?
Mr. Sachs: Yes, sir.
Senator Couzens: And it sold its stock to the public?
Mr. Sachs: A portion of it. The firms invested originally in ten per cent of the entire issue for the sum of ten million dollars.
Senator Couzens: And the other ninety per cent was sold to the public?
Mr. Sachs: Yes, sir.
Senator Couzens: And what is the price of the stock now?
Mr. Sachs: Approximately one and three quarters.—from the Senate Hearings of Stock Exchange Practices, 1932
What happened in the late 1920′s which parallels today’s modern financial corporations and should cause a shudder throughout the financial industry far beyond the hysterical moves of double and triple leveraged ETFs? Perhaps they should open up a history book.
From the book (p. 62 paperback version), The Great Crash, by John Kenneth Galbraith:
Meanwhile Goldman, Sachs (sic) was already preparing its second tribute to the countryside of Thomas Jefferson, the prophet of small and simple enterprises. This was the even mightier Blue Ridge Corporation, which made its appearance on August 20 (1929). Blue Ridge had a capital of $142,000,0000, and nothing about it was more remarkable than the fact that it was sponsored by Shenandoah, its precursor by precisely twenty-five days. Blue Ridge had the same board of directors as Shenandoah, including the still optimistic Mr. Dulles, and of its 7,250,000 shares of common stock (there was also a substantial issue of preferred) Shenandoah subscribed a total of 6,250,000. Goldman, Sachs by now was applying leverage with a vengeance.
Thus a review of the current Exchange Traded Funds seems to be in order. The system has allowed creation of double and triple leveraged ETFs for the purpose of “investors” to purchase a basket of companies; sort of like oh, I don’t know, a 1929 holding company? What makes the ETF system even worse is the idea that speculators and investors can ignore the balance sheets of the components of some members and invest on the idea based on the theory that a 75/25 split of profitable and sustainable corporations will outweigh the losses from the weaker members.
This is the same theory of the holding companies, but until the masses learn that not only do the rules of leverage moving within a bull market versus a bear are worse during declines, ETFs like holding companies are viewed as “safe” investments. The holders of shares within the Blue Ridge Corporation never envisioned the failure of the holding company known as Shenandoah nor the ultimate parent, the Goldman Sachs Trading Corporation. Yet here we are today, feeling that the XLF or other similar funds are totally secure investment instruments because nobody can imagine the failure of fifty percent of the largest member components, even though derivative instruments and the failure to regulate the parent companies within the ETFs could well indeed destroy the viability of the funds and the leveraged sister stocks within a crash scenario.
Thus the danger of a renewed “flash crash” scenario and 1987 decline approaching in perhaps just weeks, not months. The pattern outlined in the originating paragraph at the start of this entry appears to be renewing itself now. In the era of 1906-1907, the early 1930′s, and 2006-2008 the policy elites elected to make the easy choices to enforce idealistic theories rather than practical solutions to regulatory and economic distortions created by previous policy mistakes.
This outline of historical errors and beliefs by our society are the precise reason that I feel the day to day gyrations of our markets are not as important as the sum total of the moves and repeated mistakes of the past.
1. The U.S. Dollar is destined for an uncontrolled spike in valuation despite central bank policy in our nation which parallels the unintended spikes in valuations of 1987 right before the crash. While many attribute the errors of 1987 to the Treasury Department, the Federal Reserve was somewhat complicit with the recovery and stable dollar policy of that era as they are now.
2. Faith in the Federal Reserve was misguided in 1976 and in 1929; the perceived level of sophistication and ability to manage the business cycle and credit fluctuations was misjudged in those eras as it is now.
3. External forces impacting the American economy created by the currency war declared by the U.S. central bank and political elites will boomerang into a de facto rejection and invalidation of the two Bretton Woods agreements creating the potential for a deflationary spike followed by a hyperinflationary over reaction by our nation’s financial authorities in an attempt to stave off a total collapse.
The end result of these idiotic misinterpretations of the historical shift and cyclical rebellion of societies against fiat currency based economic systems will result in massive changes to the world’s political landscape and a destruction of traditional economic models.
Welcome to the era of change.
Welcome to a polar shift of historic proportions.
Welcome to my two ounces worth of perspective tonight.
Thank You again John. A donation will be sent to JMR.