Posted by Bob Hoye - Institutional Advisors

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Not so long ago:

“It’s a battle of the politicians against the markets. But I’m determined to win the battle.”
– Angela Merkel, May 6, 2010

This represents what is wrong with the markets, which is the audacity of those who think they can change financial history. Often their ambition exceeds their skills and 100 years of intrusion has created a wild financial world.


Merkel would not challenge the financial markets without instruction from interventionist economists. This goes back to Ancient Greece when political leaders would not announce policy without the support of the Oracle of Delphi. If the present is any guide, no doubt some oracles sought to influence policy. It’s an ego thing.

The medieval church picked up on the concept as schoolmen discussed the concept of the divine right of kings. The priesthood grants extraordinary power to the monarchy, which would naturally ask for advice.

In England this reached its peak with the reign of James 1 in the early 1600s. This is important because the government was persuaded to make a huge investment in the clothing trade. In order to improve employment, much of the finishing processes that were available in the commercial capital (Netherlands) were duplicated. All was lost in the prototype of a post-bubble crash. This marked the end of a tyrannical century of experiments in authoritarian government funded by currency depreciation.

The divine right of kings was formally abandoned with the “Glorious Revolution” of 1688-89, which was an important step to the reduction of absolute power. Going the other way, this was also a time when politics began to favour regionalism and individuality.

Eventually the movement reached its height known as 19th-Century liberalism. Unfortunately, freedom and its prosperity became intolerable to ambitious intellectuals such as Lenin, Trotsky, Fabian Socialists and Keynes. Another tyrannical century ensued with massive experiments in brutal politics funded by currency depreciation. The divine right of bureaucracies has prevailed.

This is ending as more and more people are discovering that unlimited government requires unlimited funding. And even with the printing press such funding is not without serious limits. Credit markets continue to indicate ending action. On December 6th, fifteen EU nations were placed on negative credit watch.

“This [Federal Reserve Act] establishes the most gigantic trust on Earth. When the President signs this bill, the invisible government of the monetary power will be legalized…The worst legislative crime of the age is perpetrated by this banking bill.”
– Congressman Charles A. Lindbergh, 1913 (repeat 1913)

That was a time when “trust-busting” was a popular political activity, but it was OK for governments to set up trusts and monopolies.

“The average US household lost $21,261 of net worth this summer, the largest decline in family wealth in three years.”
– New York Post, December 9

This melancholy condition may not be limited to the U.S.

Last week, The New York Times headlined “Rousing Russia With a Phrase”.

A well-known political blogger described government as a “Party of Swindlers and Thieves”. What’s the Russian word for libertarian?

In America it’s Ron Paul and is his rising popularity due to his persona or to his principles?

The next couple of quotes suggest optimism as a Tea Party movement is becoming visible in Russia.

“Tens of thousands of people held the largest anti-government protests that post-Soviet Russia has ever seen.”
– The Washington Times, December 10

The reform that brought the Berlin Wall down in November-December 1989 is being revived, voluntarily.

“There are people standing here who were not recruited by anyone. No one drove us here in buses, no one paid us anything, but here we are anyway, and we have been here for more than a day.”
– Russian protestor, reported on December 9

Chancellor Merkel’s attempts to overwhelm market forces natural to a post-bubble contraction have not been successful. The contraction prevails as it did following the 1618 to 1623 credit crash. The consequent hardship prompted Edward Misselden’s vision that throwing credit at a credit contraction will make it go away. Today’s priesthoods of economists are no more skilled than the Oracle of Delphi.

The harvest of irony continues. President Obama’s legislative program to build the equivalent of the Berlin Wall continues as the Tea Party moves to take it apart. Both brick by brick and the advent of more credit problems next year will advance well-founded criticism of the increasingly dangerous interventions in the financial markets.

*   *   *   *   *


Choppy, choppy, choppy and the possible favourable bias has run out of enthusiasm. However, the Dollar Index is becoming overbought and a correction into January could provide a positive tone to stock and corporate bond markets.

Actually these markets have done well in not failing in the midst of the breakdown of the European Community. It has been a bureaucratic artifice that deserved to fail. The best way to have opened European markets would have been each country declaring universal free trade. For budgetary discipline the best system has been a gold standard. But until the control freaks are run out of town commonsense won’t happen.

The reason recent European dislocations have not prompted terror in the markets is that panics in August and September created a significant oversold condition. This was followed by the usually positive season that can run from October to around February or March.

The word terror was deliberately used in the sense of crashing prices which financial historians should not be moved by. Nor should those who have personally been terrorized by Mr. Margin. Both, on good timing, should take advantage of plunging markets.

But, even without falling prices the establishment can’t help but be extremely concerned. They must know that the most massive attempt in history to reflate another post-bubble contraction has not been successful. It’s bad enough that central bankers may be doubting their theories and practices but, worse, the public is beginning to understand that policymaking is a scam.

Then there is the prospect of Euroland actually coming apart.

The downside terrors (DTs) could resume in the first half of next year.


Link to the December 16th ‘Bob and Phil Show’ on