The Shifty Long Wave

As you know I regarded as extremely important the breaking in November of the 2003 high in UST Bond futures above 123, and the breakdown below about 3.9% in the cash T bond interest rate. This destroyed the orthodox Long Wave notion that the disinflationary move down from 1980 had finally ended between 1999-2003, and that we would have inflationary growth until the late 2020‘s. The interest rate breakdown in November 2008 meant either that the long move down from 1980 (or earlier) had extended five or more years, or that the whole cycle concept was defective.

Traders yawned, but long term planners/investors were paralyzed. Was it all simply a very short term massive liquidity squeeze and giant margin call throughout the world that destroyed all asset classes? If so won't we spring right back into the inflationary growth path? Or was the rupture of the commodity bubble of 2008 the end of an era and the start of a long depression?

The bankers and the politicians disagree for personal and professional reasons. Treasury and Federal Reserve were convinced it was a short term liquidity issue of trust and confidence from bank to bank. If Bank A wasn’t sure if Bank B was going to be solvent, it wouldn’t want to be a counter party with B on anything. This was true for banks A through Z and beyond in September and October. So the Treasury tried to reassure the banking community by buying preferred shares in the banks to replace the blighted capital preferred shares in Fannie Mae and Freddie Mac which most banks had held as required Basel Tier 1 capital and which was now history. I doubt that one congressperson in a hundred understands bank capitalization requirements and how they influence interbank transactions legally and financially. Do read up on preferred stock at Wikipedia and elsewhere. It's very important right now.

Congresspersons DO understand pork barreling, which is seeking national taxpayer funds for their own district or state's pet projects which are dictated or directed by the locals who elected them to Congress or might help elect them the next time. So if the Treasury, with FED help, was "giving" to the banks, let’s get them to give to the politicians too. And so here we are today with a new and untested President about to take office with the drooling pork barrel barons of Congress egging him on to ever greater and obscene handouts for which there is no tax money in the Treasury. I wish Mark Twain were here to put this in proper perspective. The Treasury funds to the banks are repayable with interest. The pork barrel projects are repayable to Congress in votes and various other legal and semi-legal payoffs.

I've been reading a lot of market commentators, and they are as confused as anyone else. They definitely are not up to Basel Tier 1 capital snuff.  Harry Dent thinks inflation is always good as it implies progress, but he thinks all the current reinflation attempts are doomed to failure as we are headed for a long term depression on demographic and multiple cycle grounds. A lot of other people think inflation is evil, and we are headed for the deep depression as a result thereof. (See Dent's new book, "The Great Depression Ahead" which I have been reading this weekend for further detail.  I imagine Yogi Berra saying, "Dent writes so bad he's illiterate", but he gets his messages across clearly enough.)

Many people who think they know seem to feel that the deflation is temporary and that rampant inflation will be back soon, made far worse than ever by Congress and the new President. The markets seem to agree with this opinion which I have generally shared so far. Bonds are way up and interest rates are way down, but gold is holding up even with all other commodities in the abyss,  and the dollar is not screaming higher. It's a standoff so far.

 When ignorance and greed abound, as currently in Congress and Wall Street, it’s best to be safely hedged. I still think that short term (but not money market) government note funds are prudent, laced with a gold and/or energy exposure. Either gold or US T Bonds have to change direction dramatically in order to move me from my stance.