This Time IS Different!

Business man running in the opposite direction of the crowd - This Time IS Different!

The Economist published an abstract of the book, “This Time Is Different, Eight Centuries of Financial Folly,” by Carmen M. Reinhart & Kenneth S. Rogoff.

They explain:

“Every so often, experts sucker people into bidding up the prices of stocks or real estate because they announce that the economy has fundamentally changed.

When You Hear ‘This Time Is Different,’ Don’t Walk, Run!

Every few decades, the economy’s major players develop bulletproof confidence in the efficiency of markets and the health of the economy. Known as ‘this-time-is-different syndrome,’ this unrealistic optimism afflicts bankers, investors and policy makers…. – a dangerous mix of hubris, euphoria and amnesia – (where) decision makers adopted beliefs that defied economic history.”

Carmen Reinhart concludes, “More money has been lost because of (these) four words than at the point of a gun.”

Since the repeal of the Glass-Steagall Act in 1999 we’ve experienced a major banking crisis, bailouts, historic low interest rates and out-of-control inflation.

A current snapshot!

Let’s start with the published functions of the Federal Reserve:

“The Federal Reserve…performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest. The Federal Reserve:

  • conducts the nation’s monetary policy to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy;
  • promotes the stability of the financial system and seeks to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad;
  • promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole;
  • fosters payment and settlement system safety and efficiency through services to the banking industry and the U.S. government…and
  • promotes consumer protection and community development….”

Soon after the repeal of the Glass-Steagall Act, the “too big to fail,” high-risk casino banks were bailed out, avoiding a banking collapse. The Fed poured money into the financial system, not worrying about the potential consequences.

To keep interest rates artificially low, the Fed created money out of thin air, monetizing US government debt, not allowing free market rates to prevail. Government debt skyrocketed, from around $6 trillion to over $34 trillion. The Fed’s balance sheet jumped nine-fold, topping $9 trillion.

fred assets total assets total assets less eliminations from consolidation wednesday level There are around 4,100 FDIC insured banks in the US. The big got bigger.

USA Facts shows the increase:

“Large financial institutions dominate the banking industry, managing more than 70% of total assets, compared to 42% in 2003.

large financial institutions have gained a majority share in the banking industry

This shift occurred between 2005 and 2008, when large financial institutions grew from owning roughly 47% of the industry’s assets to 66%.”

The consequences of Fed’s easy money:

  • Corporate America cheaply borrowed trillions, declared stock buybacks and extra dividends. The debt remains….
  • The Fed’s cheap money kicked off a government spending spree unlike this world has ever seen. The debt remains….
  • After inflation, interest rates were negative; money poured into the stock market creating a historic bubble, which will burst, just like the dot-com bubble.
  • High inflation followed and is still persistent.

What followed?

Banks hold trillions in low-interest government loans and mortgage-backed securities. With today’s higher rates, they would take a loss if they sold their debt in the free market.

Wolf Street explains:

“These unrealized losses were spread over the two accounting methods:

  • HTM: Unrealized losses on the $2.50 trillion in held-to-maturity (HTM) securities fell…to a cumulative loss of $274 billion (red in the chart below in total).
  • AFS: Unrealized losses on the $2.93 trillion in available-for-sale (AFS) securities fell…to $204 billion (blue).

unrealized gains and losses on securities at commercial CHART WOLF STREET

Banks don’t have to mark these securities to market value, but can carry them at purchase price. The difference between market value and purchase price is the ‘unrealized gain or loss’ that the bank must disclose in its quarterly financial filings.

In theory, ‘unrealized losses’ on securities held by banks don’t matter because at maturity,…banks will be paid face value.

…. But these disclosures of unrealized losses made uninsured depositors aware of what is going on, and they started yanking their money out of Silicon Valley Bank, Signature Bank, and First Republic – on the two fundamental principles of investing:

  • He who panics first, panics best.
  • After me the deluge.”

Depositors, understanding the limits of FDIC insurance, are moving their money to a safer place draining liquid banking assets.

Might the banks have to sell some of their debt and take a loss? The banks, with large paper losses shouldn’t be paying big dividends and bonuses; they need to hold on to their capital to protect against a run on their assets.

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Woe is me; profits and bonuses may suffer!

Meanwhile, the US government is borrowing, and rolling over existing debt, at much higher rates.

Wolf Street provides a graph showing the rapid increase in interest cost. Interest on our debt will soon be over 1/2 of the current government tax revenue.

us gov interest payments as percent of tax receipts WOLF STREET

Stock market bubble?

Business Insider reports:

“‘Stocks are dangerously overvalued and poised to disappoint,…a recession appears likely’, Jeremy Grantham has warned.

The bubble expert and long-term investment strategist at GMO issued the grim outlook…. Grantham noted the Shiller P/E ratio…stood at 34 on March 1, a level in the top 1% of the metric’s historical range.

…. ‘The long-run prospects for the broad US stock market here look as poor as almost any other time in history,’ he said, comparing the recent run-up in stocks to the rallies that preceded the Great Depression and the dot-com crash.”


Facing high inflation, the Fed raised interest rates (to what used to be normal), and is slowly unwinding their debt holdings. Fed Chairman Powell has stated, “We remain committed to bringing inflation back down to our 2% goal and keeping longer-term inflation expectations well anchored.”

On March 7, CNBC reported:

“Fed Chair Jerome Powell said inflation is ‘not far’ from where it needs to be for the central bank to start cutting interest rates. ‘I think we’re in the right place,’ Powell said of the current policy stance.”

How To Find A Financial AdvisorOops!

Four days later, they report:

“Long-term inflation expectations rise, spelling possible trouble for the Fed….

  • At the three-year range, expectations rose 0.3 percentage point to 2.7%, while the five-year outlook jumped even more, up 0.4 percentage point to 2.9%.
  • The indications are well ahead of the Fed’s 2% goal for 12-month inflation, indicating that the central bank may need to keep policy tighter for longer.”

Bill Bonner chimes in, combining inflation with market risk:

“The Labor Department said Thursday that its producer price index — which tracks inflation before it reaches consumers — rose 0.6% from January to February, up from a 0.3% rise the previous month.

Which means…this may not be just a temporary Big Loss for most of us…but a permanent one. When you buy stocks, you’re supposed to benefit from the ‘equity risk premium.’ That is, you earn a little more from stocks than from bonds.

But everything comes at a price. And the price for higher profits is greater risk. You give up the certainty that your money will be there when you need it. In fact, you may never see it again.”

So, why is this time different?

What does the Fed do? How do they fulfill their mission? Can they please everyone – or no one?

Historically they bail out the banks and corporate America (under the guise of protecting the labor market) by cutting interest rates to promote growth.

Cutting rates helps the banks by reducing their “unrealized losses.” Bond buyers may be reluctant to buy more low-interest debt and demand more interest, wary of getting caught with more “unrealized losses.”

Inflation is nowhere close to the 2% target, particularly on a sustainable long-term trend. Does “public interest” prioritize pleasing the government and banking system, ahead of the “people?”

If the Fed reverts to more money printing to bail out the banks, inflation will skyrocket, likely followed by a revolt, and who knows what else?

Will the government raise taxes or cut spending? The credit rating agencies have already downgraded our credit rating, how low can we go?

Peter Reagan asks “Is there a way out of this mess?”:

“We have two parties here, and only two. One is the evil party, and the other is the stupid party…. Occasionally, the two parties get together to do something that’s both evil and stupid. That’s called bipartisanship.”

— M.S. Evans

(quoting Brian Maher) “Yes there is a way out. Yet it is very rough medicine — worse even than the ailment it would cure. That is the therapy of hyperinflation. Hyperinflation would rinse away all debt while it rinsed away all your money.”

Nobody likes the possibility of having their hard-earned dollars wasted on the “tax no one voted for.”

(quoting Warren Buffett) “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital.”

So, what’s different this time? The Fed is out of ammunition…. Creating money out of thin air will no longer work, something has to break!

When You Hear “This Time Is Different,” Don’t Walk, Run!

Golden rectangle with check markThe government will try to continue to sucker us to believe all is well and under control, at least until after the election.

Personally, I’m casting my vote for Gold, and not buying the hype and hope!

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On The Lighter Side

I hope everyone had a great Easter Weekend. Jo and I watched a lot of fun basketball.

Congratulations are in order for Minnesota State, both their men’s and women’s teams won the Division II championship.

As of Sunday night, both UConn and NC State had both of their teams still alive in tournament play, so we could see the same thing in Division I.

basketball player with reporterWhen the game was over, the sideline reporter grabbed NC State Freshman, D. J. Burns Jr. for an interview. He is 6′ 9″ tall and 275#. He appears to be a happy-go-lucky personality, just having fun. He looked massive as he grinned and towered over the CBS reporter. Jo snapped a picture.

He gave a great interview and we are looking forward to seeing him play this coming weekend.

Quote Of The Week…

hands holding gold coins growing_99957866_L“Whenever an overall breakdown of a monetary or financial system occurs, return to gold always restores order, revives confidence and brings back prosperity.”

— Donald J. Hoppe

And Finally…

Vince the sign guy shares some cute puns…

  • Ants never get sick because they have little anty bodies.
  • James Bond sports gray hair in his latest film, “No time to dye.”
  • Swarms of flying insects threaten town! Police deploy the swat team.
  • Laughing out loud is forbidden in Hawaii because it’s a low ha state.
  • I was in a band called the hinges. We opened for the doors.
  • My landlord wants to discuss my high heating bills. I told him my door is always open.
  • To make a long story short, I became an editor.
  • Inspecting mirrors is a job I could really see myself doing.
  • If you wear a sweater and sweat, are you the sweater?

And my favorite:

  • My neighbor couldn’t afford his water bill so I sent him a get well soon card.

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken


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