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“I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared.”

-Thomas Jefferson

I have recently started to dig into one my favorite author's latest book, “The End of Wall Street”, by Roger Lowenstein. The title of the book is nothing like what UBS printed in quarterly earnings this morning ($2.4B of pretax gains; their best quarter of money making since Wall Street’s elite sold all political lemmings on the narrative fallacy that this was going to be the Great Depression).

Lowenstein is usually much more of a leading indicator than a lagging one. He is one of the great chroniclers of economic history. He understands that economic stories don’t always repeat, but the human behavior that creates them certainly rhymes.

In 1995, he wrote “Buffett: The Making of an American Capitalist.” This was right before I, and plenty of others on the “concentrated investor” side of the hedge fund community, started making up stories in our own heads that we were the next Oracles of Omaha.

In 2000, Lowenstein wrote “When Genius Failed”, the story of Long Term Capital Management. Not surprisingly, Wall Street proved to learn nothing from this very recent history that abusing leverage and financial products ends in tears. His least popular book, “While America Aged”, was penned in 2008 and, unfortunately, Roger’s call on the un-sustainability of America’s pension and off-balance sheet liabilities has yet to play out in full. Give it time.

So here we are in 2010 and Lowenstein is back with another early call. Have we evolved to protect our citizenry against the greatest of dangers to be feared? Sadly, we have not. Largely, I think that this is because the mother of all bubbles has yet to pop – I’ve called this the Bubble in Global Politics.

In “The End of Wall Street” Lowenstein’s starts off by reminding us where all of these issues were born. It wasn’t in the laundry list of finger pointing items that Robert Rubin gave you last week. Ultimately, he didn’t write this (but I will). The birth-child of this mess has always been grounded in an ideology of marking-government-liabilities-to-model.

Lowenstein gets right to the heart of the matter when he states plainly that Greenspan’s ideology “was a Rousseauean vision of markets as untainted social organisms”… and that “if central bankers could not be trusted to say that markets were wrong, neither could they be trusted to interfere in them.”

Maybe that’s why Roger told me on Bloomberg TV on Friday night that “Bernanke is basically Greenspan light.” We may very well have another man at the helm who looks more modest when he asserts that he couldn’t tell a bubble if he himself was in it, but we should definitely be taking his word for it.

This morning you are seeing the danger associated with Piling Debt Upon Debt Upon Debt onto the highest levels of sovereign debt that this world has ever seen. Ever, of course, is a very long time. And unless you know anyone who has lived beyond that, you’d be best served not taking their word for it that this won’t end with inflation.

This isn’t just a Bubble in American Politics – it’s global this time. Greenspan taught the Europeans and Asians well. Consider these 3 comments coming out of Europe and Japan this morning:

  1. “The package sends a clear message that nobody can play with our common currency and our common fate.” -Greek PM George Papandreou
  2. “It shows there is money behind this.” -Luxembourg PM Jean-Claude Juncker to reporters in Brussels after chairing the EU conference call.
  3. “There was no solid justification for enhancing easy monetary conditions” -Bank of Japan policy maker, Miyako Suda

Now the first two quotes are going to be pretty well disbursed to world news headlines this morning, but will the Manic Media be able to contextualize what this all means in the aggregate? This morning’s perceived Greek bailout may address Greece’s upcoming debt obligations for 2010, but this is not in a done deal and it’s less than 15% of the 304B in Euros these political bubble blowers ultimately owe.

The third quote comes from an island nation that is running close to 200% debt/GDP who decided to double its free-money lending program to 20 TRILLION Yen. Yes, that’s only another $213B in US Dollars. Heck, who is keeping track of these T’s and B’s anymore.

Reality’s Illusion is that globe-trotting politicians can all act with the same Greenspan Groupthink and that Piling Debt Upon Debt Upon Debt won’t end in either inflation or a massive sovereign blowup. This is a hope… and hope is not an investment process. So when we blow up again (and yes, we will), there is no telling stories that no one saw this one coming.

China reported its 1st trade deficit in 6 years last night. Why? Inflation. Imports were up a mind-numbing +66% year-over-year and this was largely driven by import prices climbing to +17% year-over-year. Great Depression in 2008 banker bonuses, maybe. But this is no time for “emergency” rates of ZERO percent.

Meanwhile, back in America, all of the inflation doves who are still pointing to the February CPI and the Fed minutes which were based on the same can look forward to being “surprised” by this Wednesday’s inflation report.  

Again, if your argument is that American wages are not inflating, you are likely going to amplify my argument. What do you think Thomas Jefferson would have called an environment where most citizens other than those chowing down on UBS’s Piggy Banker Spread (+283 bps wide this morning) are losing job and wage growth but everything that they buy (other than a levered up house in foreclosure) is going up?

My immediate term support and resistance lines for the SP500 are now 1181 and 1198, respectively. I’d be a short seller of all-hopes and lies from European Government Groupthinkers on any Euro strength today. Our refreshed immediate term TRADE range for the Euro is now 1.32-1.36.

Best of luck out there today,


Government Groupthinkers - Pic of the Day