'..Our central bank has clearly learned nothing from earlier crises..'

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'In my now 24 years in the industry, I’ve witnessed my share of market exuberance and excess. Yet 2013 took speculation to a new level .. Our central bank has clearly learned nothing from earlier crises..'

<blockquote>'From “Do Whatever it Takes:” “In September of 1939, President Roosevelt issued an “Appeal… on Aerial Bombardment of Civilian Populations” to the governments of France, Germany, Italy, Poland and Britain”… As the war commenced, efforts were indeed made by most “belligerents” to limit aerial attacks to military targets away from innocent civilians. It wasn’t long, however, before civilian deaths mounted as bombs were unleashed ever closer to population centers. And then not much time elapsed before industrial targets were viewed as fair game, with civilians paying a progressively devastating price. Somehow, an increasingly desperate war mindset saw targeting population centers in much less unacceptable terms. Soon it was perfectly acceptable. War-time justification and rationalization saw conventional bombing of civilian targets regress into direct firebombing and incendiary raids on major cities in Europe and Asia. Less than six years passed between President Roosevelt’s “Appeal” and the dropping of nuclear bombs on Hiroshima and Nagasaki.”

My worst fears from the summer of 2012 central banker “Do Whatever it Takes” chorus came to fruition in 2013. The Fed injected a Trillion dollars (BOJ providing somewhat less) of new “money” directly into overheated financial markets in a non-crisis environment. And following several years of mind-numbing escalation, this year’s egregious monetary inflation was met with nary a protest. To be sure, “war time” rationalizations and justifications turned more creative and sophisticated, as previously unimaginable monetary measures were heralded as “enlightened.”


In one of history’s most spectacular Bubbles, total 2013 Chinese Credit growth will approach $3.0 TN. The year will see record mortgage Credit growth and likely record growth in China’s ballooning “shadow banking” system. On a hypothetical chart of systemic risk, surging volumes of progressively riskier loans ensure a parabolic spike in risk during the late “Terminal Phase” of Credit Bubble excess. Clearly, much of China’s risky Credit has been intermediated through “trust deposits,” “wealth management” instruments and other opaque “shadow banking” vehicles. Indeed, 2013 saw an increasingly dangerous disconnect between the deteriorating quality of Credit and the perception of safety by holders of myriad liabilities throughout the Chinese banking system – both traditional and “shadow” varieties.


In my now 24 years in the industry, I’ve witnessed my share of market exuberance and excess. Yet 2013 took speculation to a new level. I have argued the breadth of excess throughout U.S. equities surpassed even 1999. The S&P 500 returned (including dividends) 31.9%, while the S&P400 Midcaps returned 32.8% and the Russell 2000 small caps returned 38.5%. The Value Line Arithmetic (average stock gain) posted a 2013 advance of 37.7% (compared to 1999’s 10.6%). The NYSE Arca Securities Broker/Dealer index gained 68.5%. The NYSE Arca Biotechnology index rose 51.5%. The Dow Jones Transports surged 38.5%, and the Morgan Stanley Cyclical Index gained 40.6%. The Philadelphia Semiconductor Index jumped 38.0% and the KBW Bank Index rose 34.7%. The Nasdaq Composite surged 37.8%, with the Nasdaq Industrial Index up 42.4% and the Nasdaq Bank Index gaining 39.3%. It will take a strong Q4 to push real 2013 U.S. GDP to 3%.


And, of course, the more conspicuous the financial Bubble the more boisterous the bullish propaganda arguing that Bubble talk is ridiculous. Our central bank has clearly learned nothing from earlier crises. Rather than moving to tighten monetary policy, the FOMC near year-end stated their intention to pump at least another $500 billion into the markets, while promising to keep rates at near zero for some time to come.


As an analyst of Credit, Bubbles and markets, 2013 was extraordinary. There was historic Credit growth (China), historic central bank monetary inflation (Fed, BOJ) and incredible speculative excess (U.S. equities & corporate debt, Japanese equities...). The year provided abundant confirmation of the global Bubble thesis. In particular, the May/June period of market tumult illuminated mounting vulnerabilities. Five years of extreme monetary stimulus have spurred Trillions of flows into markets, products and instruments with significantly greater risk than generally perceived. There has as well been a proliferation of perceived low-risk strategies that incorporate varying degrees of leverage.

The May/June period gave a hint of how quickly latent instabilities can manifest when market downturns incite a reversal of flows. In particular, some ETFs and various “risk parity” strategies demonstrated how quickly perceived highly liquid markets can prove liquidity-challenged. Central bank liquidity provided a great deal of market balm throughout 2013. It also further inflated dangerous Bubbles that will ensure a fascinating 2014.'

- Doug Noland, 2013 in Review, December 27, 2013</blockquote>

'..In the economy, the government’s central bank can try to suppress recessions and deflation, but this can result in catastrophic depressions, like the Great Depression..'

<blockquote>'Mark Spitznagel, a hedge fund manager, tries to take economic theory, specifically Austrian economic theory, and breathe life into understanding how the economy works and why it sometimes doesn’t. In his book, The Dao of Capital: Austrian Investing in a Distorted World, he uses these insights to explain the process of investment that he uses.


As a young trader in the bond pit at the Chicago Board of Trade, the author was lucky enough to come across Hazlitt’s Economics in One Lesson and Mises’s Human Action. He found in these books a theoretical explanation for the otherwise perplexing world of primary markets at the Chicago Board of Trade. He later partnered with Nassim Taleb of Black Swan fame and later still opened his own firm to employ his concept of “Austrian Investing.”


..In the economy, the government’s central bank can try to suppress recessions and deflation, but this can result in catastrophic depressions, like the Great Depression. As Rothbard showed in his America’s Great Depression, President Hoover’s interventions to suppress deflation and depression only made things worse.


The book takes us on a trip through time to explore the character, history, and contributions of the Austrian economists. He begins with Frédéric Bastiat (the seen and unseen), and moves onto J. B. Say (entrepreneurship), Carl Menger (marginal utility and price formation), Eugen Böhm-Bawerk (roundabout production and interest), and even Henry Ford (the assembly line as an example of roundabout production). This is followed by a fascinating discussion of the critical role of time preference in life before he turns his attention to Ludwig von Mises (monetary and business cycle theories and the market as a process). According to Spitznagel, Mises was “perhaps the greatest economist of all time.” '

- Mark Thornton, The Dao of the Austrian Investor, December 20, 2013 </blockquote>


<blockquote>'Sweden’s success in riding out the present financial crisis.'

(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'

Dr. Faber on the Fed's QE Program, December 18, 2013</blockquote>