This Time Had Better Be Different

“Bank shares are also in a class of their own in this bubble, even after the sharp fall from 2007 till 2009. In terms of how high bank share prices climbed, this bubble towers over all that have gone before, and even what is left of this bubble is still only matched by the biggest of the preceding bubbles, the 1890s and the 1970s”.
Steve Keen, "This Time Had Better Be Different", below.


Below are articles/reports I have found interesting over the last week:

1. "The Liquidation of Government Debt" - latest paper (March) from Reinhart (and Sbrancia): "Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ½ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum).".

2. T2 Partners presented at the Value Investing Congress last week. The St Joe analysis is fit for Hollywood.

3. Australia Housing: “This Time Had Better Be Different: House Prices and the Banks” - Part 1 and Part 2. Superb two part analysis from Steve Keen. This week's must read.

If you’re really interested in Australia, attached below is a report from Fisher and Kent: “Two Depressions, One Banking Collapse”, that looks at the variation in the performance of the financial sector during two previous depressions. Differences in real external factors and government policies were not sufficient to explain variation in the performance of the financial sector. The depression of the 1890s in Australia was associated with the collapse of the banking system, whereas problems in the financial system during the 1930s depression were far less severe. This is despite the fact that the initial macroeconomic shock during the 1930s depression was at least as large as that during the 1890s depression.

4. Crispin Odey's Q1 2011 Conference Call - transcript: "So our forecast is that inflation, far from being 5% at the end of that, it will be at 11%. Which means at that moment interest rates have to rise because that is the moment that the central banks have got that mandate. If interest rates rise from 0% to 7%, you can be sure that at round about 35% to 40% of that rise will make its way again through to inflation. So our cry is that you move into a very different kind of cost cut inflation coming through in which essentially the central bank remains behind the curve even if they are raising interestrates which themselves are much higher, the rises are much steeper and faster than people anticipate but I think that is the shock bit and that is why I hope with all of you, I spend my life worrying about that bit, not really about where we are now but about that and making sure that we have got the right franchises.".

5. Last week George Soros spoke at the Cato Institute in Washington DC on a panel about Friedrich August Hayek's "The Constitution of Liberty".

6. Jim Rickards latest interview on KWN.

7. “ The Caine Mutiny (Part 2)” – Bill Gross for May continues on from his Skunked April piece.

8. “Low foreign debt means State will not go broke” – Daniel Gros writes in the Irish Times.

9. Greenlight Capital Q1 Letter: David Einhorn's hedge fund Greenlight Capital struggled last quarter, returning -2.5%. Their short positions caused a drag on performance and as a result they've covered some of their lower conviction names. "We are in a particularly difficult environment for shorting stocks. In response, we have reviewed many of the names in our short portfolio. We covered more than a dozen lower confidence shorts during the quarter. We exited four successful shorts in the for-profit education industry, two foreign bank shorts (one at a small gain, the other at a large loss), a domestic bank short (at a loss), and a technology short (also at a loss). We also covered several others where performance exceeded our expectations. We kept our highest conviction older ideas (including MCO and St. Joe) and our highest conviction newer ideas (including the energy-technology stocks described above).". They also added new positions in Best Buy and Yahoo.

10. Niagara Capital Q1 conference call: Overview of Q1 performance but also poses questions for Bernanke that weren't but should have been asked in the recent Q+A (1. why did we need QE 2 and now stilll accommodative monetary policy if deflation risk averted 2. why doesn't the Fed examine global inflationary impact of US monetary policy).