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Man is only truly great when he acts from his passions Print E-mail

"Man is only truly great when acts from his passions."

Benjamin Disraeli



Mine is an odd perspective born of the calm and conservative 1950’s and peppered with the curiosity and mistrust of the 1960’s.Coming of age in the 1970’s meant contemplating marching off to war in Asia when so many so vociferously opposed it. Black and white simplicity often faded to a murky and confusing gray. My working class mother, herself a child of the Great Depression wanted to instill a certain degree of toughness and self-reliance in me. She encouraged independent thought above all. Making decisions and living with the responsibilities and consequences that followed was the basic tenet from which all other lessons grew. She taught that attitude was a barometer for success and that every endeavor entailed risk. Mom recognized the fire in my belly as reflection of her own and often cautioned that,” passion is a double-edged sword.” Passion can drive us to great achievement and it can cloud our judgment and close our minds.



These early lessons are so very important to me as I field life’s challenges and strive to make sense of its riddles. I have come to love my country with a palpable passion, appreciating the unique opportunities offered to the sons and daughters of pauper immigrants. The risks taken by those that preceded us to provide an opportunity for a better life can’t be treasured enough. The passion that inspired those risk takers combined with the magic of America to produce a nation of boundless potential.



As I look at my country today and enjoy the privilege of putting my thoughts on paper for your consideration I am reminded of mom’s warning about passion. I am obliged to remember that it may propel me to fervor and that I must maintain objectivity and an appreciation for the gray areas where doubt resides and truth evades.


"To the man with only a hammer every problem looks like a nail." 




Those words belong to Abraham Maslow, the founder of “Humanistic Psychology”. His thoughts are original and useful to us in our task of understanding the “solutions” proposed to our economic challenges today. Unlike most of his predecessors in his field Maslow studied healthy minds and how they interacted with the world rather than the roots of mental afflictions. To a large extent he believed that happiness and success were dependent upon developing the necessary tools to cope with the world we live in.



What might Maslow have thought of the world’s central bankers and their Keynesian approach to the mess they helped to create? The toolbox of the modern central banker contains little more than a hammer used to drive interest rates down in the face of recession. In the U.S. this hammer takes the form of the Federal Funds Rate, the Discount Rate and the manipulation of money supply as the tools of modern day monetary policy. The credit stimulation and asset purchases associated with “quantitative easing” we see enacted across the globe today offer little more than a variation of this strategy designed to drive borrowing costs lower and promote lending and investment.  



In confronting economic contractions modern economic theory has yet to evolve beyond the diametrically opposed choices between Darwinist market driven solutions and the Keynesian scheme of government bailouts in our search to best endure the cyclical nature of capitalism. Regarding these two solutions the former seeks to recalibrate an unbalanced economy through market adjustments but condemns us to a bout of pain and loss. The later solution attempts to buy an economic recovery by depleting reserves and ramping up debt. Considering the severity and magnitude of the current economic and financial imbalances both solutions portend dire consequences. This thinking presents a false choice. There is a third option and that is prevention. Let us no longer follow the “wise men” who fail to see the danger before them and in fact fan the flames of ruin then promote its cause as cure.


"Intelligence is quickness in seeing things as they are."




At the risk of inundating you with quotes from people smarter than I, I share this gem from George Santayana. By this great historian’s measure of intelligence there was a glaring lack of this valuable commodity at virtually every level of leadership in government, commerce and the Fed. Few recognized the danger of the misallocation of capital away from productive industry and to the finance sector of the economy. The distortions that occurred were masked by faulty or felonious accounting. The result has helped to disrupt the global economy. For America the Keynesian cure may be as bad as the disease. Certainly we have bought a short term economic recovery for the United States, but at what cost? To varying degrees the same cure has been applied around the globe. For nations enjoying surpluses the cure is worth the risk. But for nations compromised by large structural deficits like the U.S. there is considerably more risk. Maslow might say that we need a few more tools in our box to manage our economy if we are to be happy and successful. Despite the general acceptance of Keynes brilliance what we must know is that we cannot cure a malady caused by too much debt and consumption by promoting greater consumption and debt burden; a burden laid at the feet of our children and theirs. Substituting government largesse for that of the citizens is no solution, it is avoidance.


"Through the unkown, we'll find the new."


Charles Baudelaire



I must heed my late mother’s advice and govern my passions to preserve my professionalism. It is difficult to ignore the human frailty that contributed to the financial and global economic imbalances of our day. It is infinitely more difficult to ignore the limited intellect and misinformation that prevails today. Sometimes when we are off course it becomes necessary to backtrack to get on the right path. We need to retrace our steps to the fork in the road that led us down this dark and dangerous alleyway.  



The “Great Moderation” was a fairytale created by Alan Greenspan and others to help Americans believe that the cycles of capitalism could be tamed with a sprinkle of Federal Reserve pixy dust. We bought the storyline because it made us feel smarter, safer and wealthier than we really are. In effect this fallacy lowered the bar for success and allowed us to grade capitalism on a curve where too many passed when failure was deserved. The answer today is not to perpetuate the fallacy and turn failure to success with the wave of a Keynesian wand. Capitalism demands failure as sacrifice for its bounty. When we face the fact that the “Great Moderation” is a myth and see capitalism for what it is we can begin to mend and advance. Our great consumer society is part of a global economy drastically out of kilter, our financial system lives on government support and our government serves special interests at the peril of its people.






America’s future is calling. The need for a new direction is clear. Courage will be required to abandon the failed solutions and to see through clear eyes untainted by the fallacy that bureaucrats can manage markets for a greater good. There is no clearer indication of the bankruptcy of this paradigm than Fannie Mae and Freddie Mac. America first tampered with and then socialized its housing market. How will this Gordian knot be undone? If it is to be undone it will require the bold stroke of an inspired leader’s sword, a sudden break from the endless entanglement. Through repetition we insure failure; through exploration we will find new solutions, new thoughts and new leadership.



The “left” and the “right” are both wrong. The mindless partisanship that grips our nation limits our thoughts, options and our future; our future generations deserve more from America’s current and dismal leaders than this cacophony of failure


"Patience is a necessary ingredient of genius."


Benjamin Disraeli



Patience is not a virtue we associate with youth. It takes time to learn the lessons of life and to govern one’s emotions. Paul Volker has lived 82 years and led the Federal Reserve through a difficult time in our history during the Carter and Reagan Administrations. He faced one of capitalism most destructive afflictions, hyper-inflation and fought it as a great leader must; with a deaf ear to doubters and naysayers. Over his long tenure he realized success because he understood the unforgiving and mechanical nature of capitalism. He stayed the course and did not buckle under the immense pressures and misguided critics of his day. His battle to choke off the demon of hyper-inflation caused many Americans to revile him for the deep scars left behind. But Volker did not create the inflation he slayed. Only in hindsight can we appreciate his success.




More than two decades have passed since Mr. Volker chaired the Federal Reserve. To a large degree his hard fought victory has been compromised by his successors. But today his wisdom comes to us again. He wants us to retrace our steps to that fork in the road where America went astray. Forces in the regime friendly to Wall Street bankers tried to muffle Volker’s voice as chairman of the President’s Economic Advisory Board. But the oracle was determined to be heard and traveled the globe to escape the narrow confines of the American debate.





Mr. Volker recognizes that the core of the capitalist system remains commercial banking. His message is clear, commercial banking must not be compromised for short term speculative gain. He draws a distinction between critical functions of the nation’s insured depository institutions and the non-critical capital markets activities like operating and financing hedge funds, equity funds, commodities and derivatives trading. To be clear Volker is no enemy of free markets. He views most capital markets activities as legitimate forms of risk management and speculation. Volker advocates the separation of capital markets activities from commercial banking. In his words,” Let’s leave the capital markets to their own devices without any expectation of government protection and keep the existing safety net for the commercial banking system. Contrary to the popular but erroneous argument he does not advocate greater regulation of capital markets activities but instead less! “But if they fail, let them fail.” Volker advocates the orderly dissolution of risk taking firms. To privatize reward and socialize risk is as dangerous an assault to capitalism as was the intrusion of government into the housing markets. (My words not Volker’s)





A second false position attributed to Volker is that he advocates a return to Glass-Steagall. He does not. He wants to return to that fork in the road not to repeat the past but to construct a new future.





Mr. Volker’s message has gained prominence in the Obama Administration not because it was favored by the President over the views expressed by Treasury Secretary Geithner and Larry Summers, Director of the White House Economic Council. Rather the volume of Volker’s argument has been turned up for what some interpret as largely political reasons. The administration and its party got a dose of reality in Massachusetts and have renewed the public flogging of bankers. But let us not lose Mr. Volker’s important messages in the political clamor. This is an imperative step toward healing America’s financial system.



"The most common sort of lie is the one uttered to one's self."





Mr. Volker also recognizes the need for a shift in the relationship between producers and consumers, debtors and creditors. There is a need to rebalance the global economy. Americans are deleveraging, cutting back on credit based consumption, reducing debt at a historically rapid rate. China recognizes that it must rethink its role in global supply side economics. Since the financial markets and credit mechanisms failed two years ago low cost producers mostly in Asia can no longer see America as the insatiable consumer with unlimited resources. This realization is reflected in recent credit tightening in the world’s third largest economy. Bubbles in housing and manufacturing capacity are already part of the Chinese landscape. Its stock market is in its infancy and so thinly traded its future path is anyone’s guess.  



The American people must avoid returning to “business as usual”. The current economic growth is largely a function of shifting profligacy from the private to public sector. This is not a solution but instead a shell game. Great risk remains in the global economy. The transition from public support to private function in financial markets will likely be messy. This is new territory with no known road map.





To be clear we are not free to throw off the shackles of Keynesian solutions and the mountain of debt. My fear is that we have distorted capitalism to the extreme in both disease and cure and must wean the system slowly to avoid market convulsions and social unrest. But let us stop telling ourselves lies.


"You cannot escape the responsibility of tomorrow by evading it today."










 Abe Lincoln



For ever story there is a message and a messenger. We cannot vouch for the validity of one and ignore the reliability of the other. I have channeled mom so often in this missive I hesitate to call on her again but she often reminded me to “consider the source.” There is an alarming dissonance in the information, the spin if you will, regarding the economy expressed by economists often emanating from within the same financial institution. Economists on the staffs of brokers and banks are compromised by the nature of their compensation and conditions of employment. When quotations are offered up for consumption by equity investors the recovery is on track to be strong. Get on board or miss the train to the next bull market. On the bond side we hear that the recovery will be halting and uneven reducing the threat of inflation thus keeping the Fed on hold for the indefinite future. Buy bonds or leave income on the table.



At ICM we recognize the threat of inflation that is driving commodities and the receding confidence in America’s fiat currency reflected in the gold markets. The threats of deflation and inflation are balanced and at elevated levels. So much can yet go wrong. The dollar may surely suffer in the face of perpetual deficits reducing the allure of related assets.



We are positioning portfolios for a push higher in rates generated not by a sustained robust recovery but instead by a lack of confidence in the Exit Strategies of central bankers here and abroad. We regulate our passions and consider the source as we analyze data to give you our best independent and carefully considered opinion.