Good day… And a Wonderful Wednesday to you! A total reversal of Friday’s risk assets sell off was the soup du jour for Tuesday… This is beginning to remind me of a Wayne and Garth street hockey game… Here comes a car… Game off… Game on…

So, as I just said, Tuesday saw the currencies trade right back to the levels they enjoyed VS the dollar last Thursday, before risk assets began to sell off on Friday. These are the types of trading patterns you normally see when the assets involved are getting ready for a break out… A jail break… Tonight there’s going to be a jail break!

OK, I’m not saying that the jail break takes place tonight, I just broke out in a song from the 70’s… That’s all… Seriously though, I hope we’re seeing a return to fundamentals.

Speaking of fundamentals… I guess yesterday just shows me that I shouldn’t (and neither should you!) pay attention to the cable news, eh? OK, remember yesterday, I said this: “I saw a news story on the TV yesterday that said “Home Builders were seeing a pick-up of new homes being built”… Well… That should be our indication that Housing Starts for April will be stronger! See how easy this stuff is? HAHAHAHAHA!”

And what happened? The government reported that construction on new housing projects slowed to a record-low pace in April. Don’t expect Housing to lead us out of this recession / depression folks!

Stocks rebounded too along with currencies yesterday… Long time readers will recall that I’ve pointed my finger at the PPT a few times in the past… Well, I’m pointing it again! Don’t know what I’m talking about here? Well, you see the PPT (Plunge Protection Team) was created by President Reagan after the stock market crash of 1987. It consists of major players (financial institutions) and their job, when called on, is to provide support for a falling stock market. And, what’s the reason for me thinking this has happened now? Well, Friday you would have thought the stock rally was over, but an “Indian election result pulls U.S. stocks out of the fire?” I’m not buying it! This rally has somebody’s finger prints all over it…

A news story at the top of the screen this morning says, “U.S. said to consider stripping SEC of power, shifting duties to the Fed.” Hmmm… Doesn’t that bother you? We had this independent regulator (yes they dropped the ball with Madoff, among other gaffes), and the Gov’t is thinking about shifting it to the Fed? Yes, I know the Fed is not a Government division… But… I don’t like a regulator being directed by the institutions that own the Fed… It’s like giving the fox the keys to the hen house!

OK… A week or so ago I talked to you about the 200-day moving average… Explained it all, and told you how the dollar index had fallen through its 200-day moving average, which would indicate further declines for the dollar index. On May 8th, the euro moved higher through its 200-day moving average and then went on to gain almost 2%… There’s another currency that’s moving stealth-like up to its 200-day moving average… The pound sterling! Here’s the skinny as I see it… Pound sterling’s 200-day moving average is 1.5554, the current level of pound sterling is 1.5480… Within spittin’ distance!

And while we’re following price charts… I see where a new “player” has jumped on the Chuck, Mogambo, Bill Bonner, and others Gold Bandwagon! Gold has gained 6.8% since the last low on April 17th, and an analyst at BNP Paribas believes this is an indication that Gold will trade to $1,096 in the coming months, as long as it does NOT fall below key support at $880…

Charts people are interesting, in that they can come up with things that you can’t see with the naked eye!

All I know is that the fundamentals point to a higher Gold price, and fundamentals are what cause trends to happen, and together they are the straw that stirs the drink… Everything else is just an explanation of what happened or what they “believe” will happen. But none of it takes place without the fundamentals creating a trend…

And speaking of Gold and fundamentals… Recall, that I’ve coined Gold the “uncertainty hedge”… And this morning we have more “uncertainty” in the world… According to the Washington Post, Iran has fired a test missile overnight that has a range of 1,200 miles, enough to reach Israel or Southern Europe…

The data cupboard is empty today, so we’ll have to depend on a testimony by Treasury Sec. Geithner to the Senate Banking Committee on TARP… Speaking of TARP, I read a story last night, in between innings of a 3-0 shut-out victory by my Cardinals over the Cubs, that detailed how some Major Banks are discussing the repayment of TARP with the Treasury Dept. I see the Treasury Dept balking at this… Why? Because, the Gov’t wants control of these institutions, folks… And they can’t have control over them if their tentacles aren’t all intertwined in the banks…

I know that this is a touchy subject… But here’s another example of the Gov’t taking over control… The Senate overwhelmingly passed a bill that would sharply curtail credit card issuers’ ability to raise interest rates and charge fees… Yes, these institutions took advantage of people for years… But! They also provided credit to people that “signed the papers agreeing to the terms” I’m NOT talking about whether its right or wrong to raise interest rates on credit cards to “stupid” levels… I AM talking about the Gov’t dictating to the bank that issued the credit, and is on the hook for the credit, just how and how much interest rates will be raised…

OK… Let’s talk about something else, that stuff gets my blood pressure rising! How about…. Oh, yeah, the Aussie dollar (A$) saw a bit of selling overnight after Australia printed a less than stellar consumer confidence report. I guess all the money the Gov’t of Australia had sent out to consumers is gone, spent, put in coffee cans and buried in the back yard, and now the consumers are sad… You give money to people for no reason, and it’s like a drug, they want more and more… I like the A$ for the prospects related to China’s economic recovery… But beyond that, Australia seems to be struggling, and it will take a Chinese recover to overcome this struggle…

And, in India… The rupee has not been able to add to its gains that followed the election results this weekend… But, I think it’s more a case of stopping to catch its breath, and not a road block.

Last week, we heard about how China had passed the U.S. as the number one trade partner of Brazil… Now, I’m hearing about how Brazil and China are in discussions to form a currency swap line, just like the one China signed with Argentina two weeks ago. These currency swap lines are HUGE folks. Because, it allows the two parties doing trade with one another to eliminate the use of dollars, and only use their own respective currencies. That means, China reduces its exposure to the dollars! And if China has less dollars to spend on U.S. Treasuries, that’s not a good thing! But, almost important as that, is the thought that China is spreading the use of their currency… This thought plays well with the idea that China proposed last month… That the U.S. dollar be replaced as the world’s reserve currency.

China has now signed currency swap agreements with: Indonesia, Malaysia, Hong Kong, South Korea, Belarus, and Argentina, with Brazil waiting in the wings…

And then there was the price of Oil… I filled up the Pfennig-mobile this morning, and noticed gas prices had gone up… Well… When I came in and checked the screens, I saw the price of Oil had reached $60 again! Oil prices have been rising very slowly in recent weeks, and long side of those rising Oil prices, we have rising Canadian loonie prices! I’ve said this more than once over the years… The Canadian dollar / loonie is so energy driven, and recent moves are a prime example!

Currencies today 5/20/09: A$ .7720, kiwi .6035, C$ .8670, euro 1.3665, sterling 1.5480, Swiss .9040, rand 8.4350, krone 6.45, SEK 7.6775, forint 203.40, zloty 3.20, koruna 19.52, yen 95.70, sing 1.4610, HKD 7.7525, INR 47.48, China 6.8250, pesos 12.95, BRL 2.04, dollar index 81.91, Oil $60.69, Silver $14.34, and Gold… $932.40

Source: Game On!

All three began in early September.  All three saw the big selling in late October. Both in the case of ’29 and ’09 a near-term bottom was hit in mid-November.

“Moreover, the percentage declines,” writes Dominic Frisby at MoneyMorning, “were virtually identical. An initial decline from the high to a late October low of about 40%, then a rebound of about 15%, followed by a final low in late November – down about another 22%. The parallels are uncanny.

“The worrying thing…it is not unreasonable to expect the eventual low to come no earlier than 2010-11.”

After the initial lows were hit in the Crash of 1873, a rebound continued until May of the following year. After the Crash of ’29, the rebound continued until late April of the following year. In the case of the 1873 sell-off, the final low was not hit until four years later, and in the case of the ’29, the final low was hit in 1932, with stocks 90% below their peaks.

This time the rebound following the November low only recovered 15% of the losses…then, stocks headed down again…and have just now slipped to a new low. If the pattern of the previous two major crashes continues; the final low won’t come for a couple years.

Unless we have a Japan-style slump…in which case, it will take much, much longer. Everything keeps falling in the land of the rising sun. Exports have fallen 45%. And stocks are now at a 26-year low. If we follow that pattern, the eventual low in the Dow may not come until 2019…when stocks will be back to 1994 levels.

And just look at what has already happened to some of America’s leading companies. Citigroup is down 90% from its high. You can buy a share for just $2. But be careful. A government takeover could wipe out the shareholders. The Bank of America has lost 90% of its value. GM is only worth about 3% of what it once was.

JP Morgan (NYSE:JPM) cut its dividend by 87%…to just 5 cents a share. Overall, dividends are being cut by a record amount.

Yesterday, the Dow fell again – down 80 points. We have been estimating that it would fall to between 3,000-5,000. But we are eternal optimists. Always looking on the bright side – every glass has a silver lining…and every cloud is half-full! But if the stock market repeats the experience of ’29, it will fall below 2,000.

Frisby reminds us that Bob Prechter has been right about deflation, but wrong about how gold would react to it. Prechter assumed that the price of gold would fall along with everything else. Instead, gold resisted the general downtrend and now seems to be moving in the opposite direction. How come?

We explained it yesterday. Investors aren’t buying gold as a protection against inflation; they’re buying it to protect themselves against deflation. Markets are always trying to figure out what things are worth. At times like this, it becomes obvious that they’re not worth nearly as much as people thought. One company doesn’t have enough sales to pay its overhead. Another can’t make its debt payments. One counterparty fails. Another was counting on that counterparty to pay a third.

When investors buy a stock…they wonder: does this company have unseen liabilities…hidden losses? How will it survive the financial crisis? Will it flourish in the post-bubble economy?

Even if the company is solid…what about the firms that owe it money? What about the firm’s assets? What about its bank account? What about the bank itself?

Question marks had been unwanted and unloved during the boom period. Everyone was so sure of everything. Every sentence was declaratory – stating a fact: ‘Stocks always go up in the long run.’ ‘You can’t go wrong in housing.’ ‘America has the world’s most dynamic and flexible financial system, where risks are spread thanks to the use of derivative instruments.’

Now, suddenly, question marks are in demand. People are pulling them out of closets and desk drawers; there’s hardly a sentence that doesn’t seem to need one. Every one of them is an interrogatory: ‘When will this bear market end?’ ‘What do you mean you can’t pay me?’ ‘Are you doing any hiring?’

Investors buy gold because they want something that doesn’t have a question mark behind it. Does the yellow metal depends on its lenders? No. Are its earnings at risk? No. Does it have any toxic assets? No.

Gold is what it is…and nothing more. Useless most of the time; occasionally indispensable.

*** Uh oh… gold is putting in a “double top” says Frisby:

“I remain convinced of gold’s long-term future, but it looks like we are in the early stages of an intermediate correction.

“I suppose a 50% retracement of the gains since October is not an unreasonable target. That would take us back to the $850 area. (It would also give us a superbly bullish, inverted head-and-shoulders pattern – more on that another day). I said in my new year predictions in MoneyWeek magazine that a retest of $1,000 was likely in the first part of the year, but that gold would not break through $1,000 until next autumn or winter. We still seem to be on course for that. For now though, the late February to March seasonal correction for gold is playing out to the script…”

*** Gold is correcting from its recent high. It rose over $1,000 last week. Since then, it’s been giving ground. Yesterday, for example, it lost $3 more…taking it down to $966. Colleague Byron King ruminates on the subject:

“It’s as if the ancient Chinese or Babylonians or Etruscans all figured out how things work in the universe of money, savings and exchange. The trick was to use gold as the key unit of monetary measure. They figured it out back in ancient days. They all had their own Galileo who explained the monetary equivalent of how planets orbit the sun, moons orbit the planets…how the universe worked…except it was that their Galileos explained the meaning of gold. When you have gold, you possess wealth. And it keeps your society honest.

“And in the 20th century, along came the central bankers of the world… modern monetary Copernicuses, of a sort. ‘No,’ they said. ‘Gold is irrelevant. It’s a barbarous relic.’ It’s the monetary equivalent of saying that the planets all orbit around the earth. So no wonder that nobody in modern monetary theory can explain anything, or solve the current mess. Just as you can’t explain the positions of the planets with Copernican methods, modern monetarism is unable to explain why the economy has frozen and won’t get moving again. No one can trust the money. The modern financiers created so much fake currency, that nobody trusts anybody anymore.”

*** There are 19 million empty houses in America. In Maricopa, Arizona, you can buy a house for $69,000, says a news report.

“Heck, you can buy good houses for just $50,000 in the Miami area,” reports a friend. “I’m beginning to think that property is the best investment I can make now. Stocks could fall another 50%. I’ve got municipal bonds, but who knows what towns are going broke. I don’t trust the dollar. What else can I do?

“I buy a decent house and I know what I’ve got. And right now, I can rent those $50,000 houses for $1,000 a month. So, figuring I miss a few months, I’ll get a gross return of 20% per year. I pay my expenses for half of that. So, I’m getting a very good yield. And I don’t think they will go down much further.”

*** Want an even better yield? As you know, we try to keep up with events in Argentina. The country is a mess, of course…but it’s always a mess. A major drought is killing thousands of cattle (we’re selling ours as fast as we can find buyers). And the government is losing whatever little credibility it ever had.

All of these factors, combined with the worldwide financial meltdown, hit Argentine debt like an Australian brush fire. Debt fell 58%. Yields rose to 30% in October ’08.

Since then, investors have calmed down. And now, analysts from Fidelity say they think the Argentine 8.23% bonds of 2033 are a good by. They say the government has enough money to keep going for a couple years. So, investors can collect a 25% yield while they wait for the government to go broke.

Source: Gold: The Barbarous Relic You Can Trust

This from Money Morning:

For the 50 million Americans with 401(k) plans – many of them close-to-retirement Baby Boomers – the heavy lifting is just beginning.

In the 12 months after the U.S. stock market hit its record peak in October 2007, more than $1 trillion worth of stock-market wealth held in 401(k)s and other “defined-contribution” plans was eviscerated, The Wall Street Journal reported. The lost wealth is more like $2 trillion if individual retirement accounts (IRAs) are taken into account.

For many, the pain will be especially acute. For instance, workers aged 55 to 64, who have been contributing to the same 401(k) plan for the past 20 years, have seen their the 401(k) account balance plunge by a staggering 25%-plus since the start of 2008, according to research by the Employee Benefit Research Institute. Since those figures don’t separate out new cash contributions to the plans, the statistics actually tend to drastically understate the actual level of losses, The Journal reported.

Given that many Americans were already trying to deal with major declines in the values of their homes – and given that thousands of households are dealing with, or are expecting, job losses – this eradication of their retirement savings is taking on a kind of “last straw” quality.

After all, any one of those three things alone  – falling housing prices, loss of incomes due to lost jobs or a retirement plan haircut – is tough enough to rebound from. But the combination of all three is the kind of triple-whammy that can put an entire economy out for the count.

“This is the biggest test that the 401(k) plan has seen to date, and it has failed,” Robyn Credico, head of defined-contribution consulting at Watson Wyatt Worldwide Inc. (WW), told The Journal. “We’ve put people close to retirement in a very challenging position.”

There are plenty of ways to react, ranging from indifference to outright panic. Neither extreme will prove productive. However, there are some options in between that will form the foundation of any sound retirement plan rebuilding strategy.

After reviewing a plethora of options, Money Morning offers you the three best ones.

Retirement Rescue Tip No. 1: Don’t Cash Out

Possibly the worst thing you could do to your retirement is cash in your 401(k) – a move that would level your finances come tax time, extend your pre-retirement career by a number of years, and/or reduce your income when you start retirement.

So let’s rule that out immediately. That will put you well ahead of others who didn’t resist this urge, or who were forced to make this unattractive choice due to extenuating circumstances.

In the last two months of 2008, requests to withdraw from retirement plans rose 59% from the same period in 2007.

Magnifying this mistake is the fact that the contributions participants have funneled into their retirement have steadily declined since July, HR consultancy firm Mercer Inc. reported after polling 1.2 million participants with employer-sponsored defined contribution retirement plans.

Luckily – for now – less than 1% of plan participants account for both these declines.

“What should sound the alarm with plan sponsors, however, is the growth trend, not the absolute figures. As most experts would agree, withdrawals from 401(k)-type retirement plans and reducing participant contributions to zero are two actions that are completely counter to preparing for retirement,” Eric Levy, Retirement Business Leader at Mercer, said of the firm’s poll. “This may point to the dire straits that a small-but-growing number of participants find themselves in where withdrawals and zero contribution rates are seen as a type of financial last resort.”

Levy raises the central issue: It’s less of a lack of faith that the markets will bounce back, and more of a basic need for money for daily expenditures.

That’s understandable, and excusable to a large degree. After all, you won’t be able to enjoy retirement if you lose your house in the process of putting away money for later.

But the bottom line is less money contributed now translates into less money you’ll have to enjoy life and meet your basic daily needs after you punch that company timecard for the last time.

Sometimes you have to take one step back before you can take two steps forward.

Retirement Rescue Tip No. 2: Balance and Rebalance

The phrase “rebalance your assets” sounds intimidating. But 401(k) managers and financial planners know their clients aren’t financial wizards.

They know a large portion of 401(k) participants don’t have the time or knowledge to actively manage their plan’s holdings. And they know investors have different tolerances for risk.

That’s why 401(k) plans have asset-allocation models designed to assess a participant’s risk tolerance, manage that risk and maximize returns by setting a percentage for each category of assets. Over time, these ratios can change as some assets surge in value, while others hold steady or even decline.

That, in turn, could skew your asset allocation. Assets that performed well could now comprise 20% of the portfolio’s value, instead of once accounting for 15%, if other asset categories tanked.

Levy says that many employers offer quarterly or semi-quarterly rebalancing programs, as well as some that rebalance automatically.

“Conceptually, you should be regularly looking at the asset allocation of your account relative to your age and risk tolerance,” Levy said. “And [you should be] looking to rebalance that at least on an annual basis if not more often.”

Retirement Rescue Tip No. 3: It’s a Marathon, Not a Foot Race

Since 1947, of the 11 times the quarter-over-quarter change in gross domestic product (GDP) was a minus 4% or more, the Dow Jones Industrial Average index was higher by an average of 25% one year later and 35% two years later.

This information especially applies to 401(k) participants. The reason: The more you invest when markets are down, the quicker you will recover the losses you sustained over the past two years.

Just take a look at the following chart.

“The latest projections suggest we’re right in line with historical norms, given that economists expect that the U.S. economy suffered a mind-numbing decline of 4.35% in the final quarter of last year,” says Money Morning Investment Director Keith Fitz-Gerald. “When everyone else believes the worst; that’s when you should be buying.”

For prospective retirees – those who watched as their 401(k) plans trip and fall right before the finish line to their working days – take heart: The markets will rebound. It’s just not clear when. While that may mean you have to stay in the race a little longer, consider this: You’ll be able to keep contributing to your retirement cache, magnifying your retirement war chest when that rebound does come.

For those 40 and under, this is possibly the biggest opportunity to build long-term wealth in your lifetime. Keep saving. And stay focused.

Source: Retirement Strategies: The Three Best Ways to Rescue Your 401(k)

I am pointing out the obvious because I’m so sick of mainstream media’s economic coverage. We know, in fact, that our so-called Fourth Estate has the collective IQ of an underachieving adolescent. We know this because the mainstream media utterly failed to cover the oncoming credit crisis. They did so even as rational analysts were screaming that Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) were headed for a cliff. When the media spin current events, remember how wrong the pinheads were until now.

So let me quote someone who is not a pinhead: economist Thomas Sowell. He wrote a great piece recently criticizing the media’s constant connection of the 1929 stock market crash and the Great Depression.

“Let’s start at Square One, with the stock market crash in October 1929. Was this what led to massive unemployment?” Sowell asks.

He then presents the fact that the unemployment rate was at 5% in November 1929, a month after the stock market crash. “It hit 9% in December – but then began a generally downward trend, subsiding to 6.3% in June 1930.

“That was when the Smoot-Hawley tariffs were passed, against the advice of economists across the country, who warned of dire consequences.

“Five months after the Smoot-Hawley tariffs, the unemployment rate hit double digits for the first time in the 1930s.

“This was more than a year after the stock market crash. Moreover, the unemployment rate rose to even higher levels under both Presidents Herbert Hoover and Franklin D. Roosevelt, both of whom intervened in the economy on an unprecedented scale.”

So the real question is will the Obama administration duplicate the Hoover and Roosevelt fiasco? Frankly, I don’t think it could if it wanted to. I say this for several reasons.

One is Obama’s choice of economic advisers, a group praised by free-market economists and criticized by those who want a new deal. Moreover, there are significant international factors driving economic growth that simply didn’t exist in the 1930s. Specifically, India, China and the old Soviet satellite countries have been growing at double-digit rates for years.

In many ways, policymakers in these countries are smarter than their American peers. This is because they are playing catch-up for populations that demand real economic improvements. In fact, our portfolio will expand this year to include breakthrough technologies in these unstoppable markets.

In this month’s newsletter, I go into more detail about the Obama administration’s impact on nuclear energy. What I will say here, though, is that “Only Nixon could go to China.” That famous catchphrase has come to refer to the fact that sometimes only opponents of policies have the ability to change them. Bill Clinton, for example, ended entitlement status for welfare.

Therefore, the Obama administration has the power to end the influence of the anti-nuclear energy movement. His science adviser, in fact, has stated that he intends to do just that. More importantly, he has been personally involved in researching next-generation nuclear technologies.

Source: End of Nuclear Energy Bottleneck Will Power Enormous

More from Justice in Taipan Daily:

The 1920s – widely known as “the roaring twenties” – were a time of great dynamism and change in the United States.

The decade earned its nickname and then some. Car ownership took off… movies and radio captivated the nation… and the stock market went through the roof.

The Dow went from a trough of 63.90 in 1921 to a peak of 381.17 in 1929. That’s just under a 500% gain in a mere eight years’ time. To repeat such a feat today (from the 2008 lows on a closing basis), the Dow would have to top 48,000 by the year 2016.

Sounds hard to imagine, doesn’t it? And of course, we know how the roaring twenties ended. (Badly… very badly.) But rather than talk about the crash of 1929 – a topic most worthy of future discussion – let’s talk about how the roaring twenties began.

Grizzly Beginnings

What few realize is that the twenties kicked off with a raging bear market… not unlike the grizzly we’re wrestling with today.

We noted a low point of 63.90 in 1921, but didn’t highlight where the Dow had been before that point. The Dow had reached a previous peak of 119.62 in the year 1919. In the two years that followed that 1919 peak, the market saw a gut-wrenching 47% decline. (Sound familiar?)

Imagine how you might have felt as an investor in the year 1920. Would you have any notion that, in less than eighteen months, a stock market boom for the ages would begin? Not likely.

It’s far more likely you would have been in a state of mild catatonic shock, fretting over how your portfolio had been cut nearly in half after the 1919 peak.

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Full of Surprises

As we discussed just recently, history is full of surprises. Am I calling for Dow 48,000 by 2016? Of course not. I have no idea how things will look that far out.

It may be that a wholly different index – something more akin to the Nasdaq – captures the next boom, while the Dow gets left behind. It may be that the biggest action takes place on a foreign shore. We just don’t know… no one can look that far out.

But we can remember that “endless gloom” scenarios are just as foggy and unsupported as “endless boom” ones. And once freed from the bounds of conventional thinking, we can explore the realm of the possible.

Consider, for example, how technology – car technology in particular – served as the driver (no pun intended) for much of the 1920s optimism. Could technology play a similar role in the coming decade? It’s certainly possible.

When you consider the intertwining roles of computer processing power, biotech, healthcare and alternative energy – not to mention breakthrough concepts like cloud computing – there’s just no telling what could be next. (By the way, if you really want to blow your mind on this topic, check out The Singularity is Near by Ray Kurzweil.)

The Subprime of Yesteryear

Something else history teaches is that it’s really, truly, all been done before. Techno-wizardry aside, there is nothing truly “new” in markets. As Jesse Livermore observed, there can’t really be anything new because speculation is as old the hills – and human nature is the same.

We can see this by winding the clock back 90 years or so…

In the years leading up to the 1919 peak, the frenzy du jour was tied to commodity prices and farmland. In his excellent history, Money of the Mind: Borrowing and Lending from the Civil War to Michael Milken, James Grant tells the tale:

Like bull markets in stocks, the bull market in farmland engendered the belief that prices would rise forever. “Speculators who had no interest whatever in farming bought land for the 6 percent or 8 percent annual rise that seemed a certainty throughout the early years of the century…” The rise in farm prices had only begun.

The farmland frenzy – and a rising tide of commodity prices, spurred by an inflationary gold boom – went right on making speculators rich through World War I and beyond. Grant continues:

The price of wheat was 62 cents a bushel in 1900. It was 99 cents in 1909, $1.43 in 1916, and $2.19 at the peak in 1919. To put $2.19 in perspective, it was not a price seen again until 1947.

Is this starting to feel familiar yet?

The vastly expanded gold supply of those years acted like a money pump, having the same effect as “Easy Al” Greenspan’s money spigot. Farmland was the main speculation vehicle – not unlike today’s residential real estate. Commodities soared and swan-dived in all too familiar fashion.

And leverage (i.e. speculation fueled by debt) made it all worse, as Grant points out:

The collapse of prices in the early 1920s would have been devastating enough, but the damage was compounded by debt. By the summer of 1921, crop prices were down by no less than 85 percent from the postwar peak. Nebraskans, finding that corn had become cheaper than coal, burned it. As it does in every market, the fall in prices revealed the weaknesses in the structure of credit that had financed the rise.

The parallels are amazing. They were even burning corn at the end – much as America elected to burn corn in its gas tanks via loony ethanol subsidies.

And there were plenty of early warnings back then too. Doomsayers were calling farmland an unsustainable bubble as early as 1915 – four years before it all went bust.

National City Comes a Cropper

And here’s the icing on the cake: we even saw a major bank get a “bailout” as a result of the commodity bust.

Many a money house bit the dust after commodity prices caved. No fewer than 724 (seven hundred and twenty four!) banks failed in the three-year span of 1919 through 1921. One of the biggest players of them all, National City Bank, nearly went under too as the result of a bad sugar bet.

The price of sugar had rocketed higher in 1919, when Russia failed to deliver its expected sugar-beet crop. By 1920, the price of sugar had risen nearly five-fold on the strength of speculative buying. Nat City got a piece of the action by plowing 80 percent of its core capital into loans to Cuba (a big sugar producer).

To make a long story short, the price of sugar eventually collapsed… Nat City’s all-in Cuba bet went “toxic”… and the once-revered bank found itself on the brink of insolvency.

The bank only survived by pulling off a very slick accounting trick – a trick not far removed from the “special investment vehicle” peek-a-boo tricks of recent years. The move was a blatant violation of the day’s banking codes, but Uncle Sam averted his eyes. Later that same decade Ferdinand Pecora, Chief Counsel to the United States Senate Committee on Banking and Currency, referred scathingly to the move as “this $25,000,000 bailing out.”

(Alas and alack, Nat City made it through that carnage but not through 2008. The venerable old bank was scooped up by PNC Financial a few weeks ago in an all-stock deal worth $5.2 billion.)

Takeaways for Today

So what’s the point of this trip down memory lane? There are at least a few takeaways we can rummage up:

• As Mark Twain once said, “History doesn’t repeat, but it rhymes.” Some of what’s happening now is breathtaking in scope, but none of it is truly new. Bailouts, booms, busts… we’ve seen it all and we’ll see it again.
• It may be improbable to imagine equities going on an epic tear in the next ten years… but no more improbable than it might have seemed from the beaten-down vantage point of 1921.
• We can’t use the past to predict the future – every era has its own quirks – but we can sure as heck learn from it.

Source: The “Roaring Twenties” Began with a Commodity Bust – and a Bank Bailout

While things can always get worse, things are rarely as bad off as they might seem.

So along comes Stein with a mea culpa for missing the recent stock market crash.  OK, so a lot of genuinely smart people didn’t think it was going to be as horrific as it turned out to be.  But Stein chalks it up to just one little misstep of the otherwise brilliant Paulson-Bernanke-Geithner team.  “I did not foresee the catastrophic mistake, as I view it, by Treasury Secretary Henry M. Paulson Jr. to allow Lehman Brothers to fail,” Stein writes. “That failure left a gaping hole in the financial services industry, and blew away confidence that the Feds knew what they were doing.”

Actually, Stein is sort of onto something here.  At the time Lehman blew up, Paulson & Co. had already engineered the demise of Bear Stearns and the full government takeover of Fannie and Freddie.  Nothing appears to have happened to alter my hypothesis at the time of Lehman’s demise about why it was allowed to happen.  But looked at from the Paulson interventionist standpoint, it was a blunder of the first order.  Lehman’s downfall pretty well doomed AIG (NYSE:AIG) and put a host of money-market funds in grave danger.

At this stage, it was obvious to all that Paulson & Co. were pretty much making it up as they went along.  Stein writes, “After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks. But that didn’t happen, the stock market fell apart, credit went icy cold and the wheels started to come off the economy. This also took me by surprise.”

This smacks of disingenuousness, an after-the-fact conceit that, “If I’d been in charge, I’ve have known which levers and pulleys to manipulate to make everything just so.”  So what does Ben think ought to be done now?  Well, it has nothing to do with the free market he allegedly reveres.  “The need for the government to take action seemed so clear — and still seems so clear that I cannot believe a day passes without its happening. But the days pass, nothing happens, and I am proved wrong again. And I lose some of my life savings and it hurts.”

Yes, the government is now going to own a piece of insurance companies, just as they’ve moved to own a piece of banks — but government is “doing nothing” in Stein’s view.  It’s enough to leave you speechless.

But no, Stein has one more whopper to lay on us before bringing this column to its merciful end.

And, closer to home, a talented makeup artist who works with me almost daily in my TV appearances asked what happened to people in a recession. (She is young.) I said that fear and insomnia happened to most people but that a few million would actually lose their jobs and millions more would lose income.

“What do they do?” she asked, looking worried.

“They find other work or live off their savings,” I said. “They certainly cut back on their spending.”

“What if they don’t have any savings?” she asked. “I don’t have any savings,” she said. “No one I know except you has any savings.” She looked extremely worried.

This is perhaps the main lesson of this whole experience. It is basic but still unlearned: human beings must have savings. This is not just a good idea. It’s the difference between life and death, terror and calm. So start saving right now, and don’t stop until you die.

Ben, where the hell were you all these years when Alan Greenspan was — by his own admission to Jon Stewart — discouraging people from saving by slashing interest rates, thus encouraging them to speculate wildly, first on tech stocks, then on real estate?

The only redeeming thing about Stein’s column is a postscript in which he says a windfall profits tax on oil companies is a dumb idea.  Yes, it is, Ben.  But you and Kudlow and Cavuto and the rest of you shrieking jackasses don’t help make the case when you’ve been so stunningly, breathtakingly wrong about everything else when Greenspan and Bernanke and Bush were running this country off a freaking cliff.  So do us all a favor:  Just shut up.  SHUT UP!  Go away for a while.  Your “free market” patina is going to make it damn near impossible for genuine free-marketeers to state their case for the next couple of years, at least.  We’re left to cry, not unlike pathetic hardened communists confronted with the demise of the Soviet bloc, “But what’s been happening isn’t really a free market!”

Oh well.  If you can’t change any minds, at least you can take a step to recover from whatever whacking the market has recently dealt you.

Source: Ben Stein’s mea culpa