Oh my… Tim Geithner is back. The former secretary of the Treasury tells us that, thanks to him and his fellow fixers, the US was able to “prevent another Great Depression.”
“We put out the financial fire,” he claims, “not because we wanted to protect the bankers, but because we wanted to prevent mass unemployment.”
In any event, he prevented at least one person from being unemployed: Timothy Geithner. After his tour of duty at the Department of the Treasury was over, he turned up his nose and told the world he was not just another corrupt bureaucrat slipping through the revolving door to Wall Street. A few months later… whoosh!… and there he was in a private equity firm.
Our job is to connect the dots… and today we connect a few more.
Two Wolves, One Sheep
The definition of democracy is this: Two wolves and one sheep decide on what to have for dinner.
The wolves, no doubt, are with Pope Francis. The pope believes governments should redistribute wealth. Many people agree with him. They want to see the lucre passed around. It is a shame the pontiff did not bother to wonder how the wealth got where it is in the first place. If he had, he may have taken a closer look at Mr. Geithner.
Maybe God – with his invisible hand – let the chips fall where He wanted them to, following the crisis of 2008. Or maybe Geithner and his Wall Street cronies got their fat mitts on the loot first.
Everyone – believers and heathens alike – believes he knows the mind of God… or claims to. Reforestation, recycling, redistribution… and economic recovery! Surely, the Big Man is for them all.
Then you let it be known you favor higher marginal taxes (on someone else, of course); this puts you on the side of the angels, too. But for all we know, the angels prefer strip mining and flat taxes… and drive down the highway throwing beer cans out the window.
Stress Test
The mind of God, like the future, is unknowable. But that doesn’t seem to stop anyone. Geithner’s book comes out this week. It’s called Stress Test.
As the title suggests, Geithner claims he was tested by the financial crisis in 2008-09. He believes he passed. Now, he’s peddling his version of the story, complete with God in his pocket, and the future on the teleprompter.
In the autumn of 2008, for example, Geithner knew what was coming. As his colleague Meg McConnell put it, “There will be shantytowns and soup lines across the country.”
How did she know that? Because “panics kill economies,” says Geithner.
Based on the evidence, panics help bring economies to life. Like forest fires, they burn off the dead wood.
That happened twice in the early 20th century. There was a panic in 1907 and another in 1920. The stock market fell by half between June 1907 and January 1908. The economy retreated, too. But by mid-1908 stocks were back to their highs and the economy was booming.
Again, between July 1920 and June 1921, the US stock market lost half its value. And again, the feds did nothing. The economy went into a depression, with double-digit unemployment and 30% less smoke belching from factory chimneys.
Instead of running stimulative budget deficits, the federal government posted a surplus. No TARP. No TALF. No ZIRP. No QE. Despite, or perhaps because of, this government neglect, the fire burned hot for only a few months. By the summer of 1921, the tinder was consumed and the flames died out. Within 18 months people were back at work.
“Collateral Beneficiaries”
That was the last time federal firefighters let an economic blaze have its way. Since then, every conflagration has been met with smoke jumpers and water bombs. The Panic of 1929, for example, was fought by Hoover… and then by Roosevelt. Together, they dumped so much water on the economy it was soggy for more than a decade.
More recently, Alan “Smokey” Greenspan extinguished the campfires of 1987… and 2000. Then, it was Geithner’s turn.
Yes, it was “messy,” he admits. And yes, there were some “collateral beneficiaries” (he doesn’t mention himself by name; there was no need to do so).
“But this is the only way to ultimately protect the innocent victims of the crisis from the calamitous damage of economic depressions.”
St. Timothy to the rescue. Hallelujah!
Regards,
Bill
Further Reading: Geithner’s bailout of the banks in 2008 was just another example of how the US economic system is rigged. If you’re “mad as hell” about the situation, you’ll likely be a lot madder after you read Will Bonner’s exposé of the corruption of the American Dream here. Will also reveals a way to escape the rigged game – using a strategy currently being pursued by a handful of “rogue millionaires.” Get full details in Will’s shocking report.
Market Insight:
What Tobin’s “Q” Tells Us About Stocks Right Now
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
As you probably know, we are leery of the US stock market right now.
Looking at one of the few valuation measures worth a damn, Tobin’s q, you see that the market is trading at or near historic peak valuations.
Tobin’s q has its critics. But it is, nevertheless, a fairly logical way to tell if stocks are cheap or expensive.
It simply looks at the gap between what assets cost in the stock market and their cost in the economy. And it doesn’t rely on estimating companies’ future earnings, as Wall Street’s favorite forward P/E ratio does.
If the stock market places a much higher value on those assets than the economy does, then you can say that the stock market is overvalued. The reverse is true, if the price of assets in the economy is more than the stock market values them at.
As the chart below from Doug Short reveals, the q ratio of the US market is currently 75% above its geometric average.
You’ll also see (from the red dotted lines on the chart) that this deviation from the average is now closing in on what Jeremy Grantham of GMO calls a “2-sigma event” – meaning it’s almost two standard deviations above the norm. (In a purely randomly distributed world, a “2-sigma” event would only happen every 44 years. In the real world, it tends to happen every 31 years.)
Not only that, but we also have the Fed winding down QE… and smaller and more speculative stocks diverging badly from the main indexes.
All of this makes the US stock market an unattractive – even dangerous – bet for investors right now.
But that doesn’t mean you should run out and try to short the S&P 500.
As the old-timers say, “You don’t short new highs, and you don’t buy new lows.” The chances of catching a market on the turn like this are so remote as to be not worth pursuing.
But as a general rule, when Tobin’s q is stretched far above its average, caution is warranted. And when it is stretched below its average, as it was most recently in 1982 and 2009, that’s when it’s time to buy.
