Bernanke the Candyman as Detroit Declares Bankruptcy
Interest-Rates / Quantitative Easing Jul 31, 2013 - 12:28 PM GMTBy: John_Mauldin
By Grant Williams
Who can take tomorrow
Dip it in a dream
Separate the sorrow
And collect up all the cream?
The candyman, the candyman can
The candyman can 'cause he mixes it with love
And makes the world taste good.
And the world tastes good 'cause the candyman thinks it should.
– "The Candyman", Willy Wonka and the Chocolate Factory
In 1964, Roald Dahl penned what is arguably his most famous book. It tells the story of a poor boy who, thanks to the discovery of a golden ticket concealed in a bar of chocolate, wins his way into a magical factory run by a mysterious oddball named Willy Wonka.
The book, Charlie and the Chocolate Factory, was a smash hit; and inevitably the book was turned into a screenplay, which spawned a 1971 movie in which the word Charlie was replaced in the title with the name of the character the movie's producers felt was far more important to the narrative: Willy Wonka. And so it was that one of cinema's great transformations from written page to silver screen took place, and in the process one of its finest characters was born.
Gene Wilder's Willy Wonka is the only portrayal officially recognised and endorsed by Things That Make You Go Hmmm.... Accept no imitations.
As much respect and admiration as I have for the extraordinary talents of Johnny Depp, just ... no, sorry. There is only one Willy Wonka, and it's Gene Wilder.
Now that I've clarified my position on that particular issue, let's proceed.
I am sure that, somehow, there may be readers who haven't either read the book OR seen the movie; and so for them I include a short synopsis of the story. Please be apprised that it contains spoilers that, well, give away the entire plot and the ending, to be honest. If you have read the book or seen the movie, it may be worth reacquainting yourself with the plot before we dive in any deeper:
Mr. Willy Wonka, the eccentric owner of the greatest chocolate factory in the world, has decided to open the doors of his factory to five lucky children and their parents. In order to choose who will enter the factory, Mr. Wonka devises a plan to hide five golden tickets beneath the wrappers of his famous chocolate bars. The search for the five golden tickets is fast and furious....
Charlie Bucket, the unsuspecting hero of the book, defies all odds in claiming the fifth and final ticket. A poor but virtuous boy, Charlie lives in a tiny house with his parents, Mr. and Mrs. Bucket, and all four of his grandparents.
In the factory, Charlie and Grandpa Joe marvel at the unbelievable sights, sounds, and especially smells of the factory. Whereas they are grateful toward and respectful of Mr. Wonka and his factory, the other four children succumb to their own character flaws. Accordingly, they are ejected from the factory in mysterious and painful fashions.
During each child’s fiasco, Mr. Wonka alienates the parents with his nonchalant reaction to the child’s seeming demise. He remains steadfast in his belief that everything will work out in the end....
After each child’s trial, the Oompa-Loompas beat drums and sing a moralizing song about the downfalls of greedy, spoiled children. When only Charlie remains, Willy Wonka turns to him and congratulates him for winning. The entire day has been another contest, the prize for which is the entire chocolate factory, which Charlie has just won. Charlie, Grandpa Joe, and Mr. Wonka enter a great glass elevator, which explodes through the roof of the factory. (Source: iSL Collective)
In the movie's first act, Bill, the owner of the sweetshop, sings a song written by Anthony Newly and Leslie Bricusse, called "The Candyman", which praises the wonderful world created by Wonka and espouses the pure joy of living in a place where everything is deliciously sweet; miracles, dreams, and rainbows are ubiquitous; and any sorrow is separated and discarded in favour (yes, there's a u in favour — deal with it!) of cream ... pure cream.
As Bill hands out free candy to a group of wide-eyed kids, you can see in their eyes the pure joy that only comes of living in a world where everything is wonderful and nothing bad ever happens.
Ladies and gentlemen, I give you ... the S&P 500.
Source: Bloomberg
Yes, the US equity markets have bought firmly into the idea that everything is right in the world and that nothing will ever be allowed to go wrong. A prime example of this attitude emerged last Thursday, when we were greeted with two irreconcilable headlines on the same day:
Detroit declares bankruptcy, becoming largest city in U.S. history to go belly up
That was courtesy of the New York Post, and the opening paragraph — in true New York Post style — went straight to the meat of the story:
(NY Post): Detroit on Thursday became the largest city in U.S. history to file for bankruptcy, as the state-appointed emergency manager filed for Chapter 9 protection.
In paragraph 10 of the article, the Post went on to disclose the size of the hole on Detroit's balance sheet:
Detroit's budget deficit is believed to be more than $380 million. [State-appointed bankruptcy expert Kevin] Orr has said long-term debt was more than $14 billion and could be between $17 billion and $20 billion.
Wait ... what?
"... more than $14 billion and could be between $17 billion and $20 billion."
Sadly, this is the world we live in — where a state-appointed bankruptcy expert talks about a possible discrepancy of $6 billion in a city's accounts and the figure is relegated to paragraph 10. Unicorns and rainbows. (Jefferson County, AL, the biggest previous municipal bankruptcy, totaled only $4 billion.)
Meanwhile, gracing Reuters on the same day was this little beauty:
Dow, S&P 500 end at all-time highs on earnings, Bernanke
The first paragraph of that story read as follows:
(Reuters): The Dow and the S&P 500 closed at record highs on Thursday after Morgan Stanley and others reported better-than-expected earnings and Federal Reserve Chairman Ben Bernanke's comments further reassured markets.
A little higher up in the story than the Detroit balance sheet shortfall in the New York Post piece (in paragraph 6, for those of you keeping score at home) was this expansion on the headline:
(Reuters): Bernanke, speaking before the Senate banking committee, reiterated comments he made on Wednesday to the House Financial Services Committee. He stressed that the timeline for winding down the Fed's stimulus program was not set in stone.
"We got no negative surprises from the Fed chairman today, so the market liked that," said Bucky Hellwig, senior vice president of BB&T Wealth Management in Birmingham, Alabama.
Ladies and gentlemen, I give you Ben Bernanke — the Candyman. (Or perhaps that should be the Bendyman? Quite suitable, given the extent of his flexibility, don't you think?)
As Bucky Hellwig points out, the market likes it when there are no negative surprises from the Fed chairman — the corollary of which is that the market HATES it when the Candyman threatens to stop with the sugar — last month's Taper Tantrum being the obvious and most recent example.
But in its adherence to whatever is being handed out by Bernanke, the market is failing to pay attention to signals that would ordinarily call for caution. That is the danger of getting kids hooked on candy: rationality tends to fall by the wayside and behaviour becomes harder and harder to understand until, ultimately, a sugar crash occurs….
To continue reading this article from Things That Make You Go Hmmm… – a free weekly newsletter by Grant Williams, a highly respected financial expert and current portfolio and strategy advisor at Vulpes Investment Management in Singapore – please click here.
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