Saturday, September 25, 2010

It's Good to Be King

There is an old saying - "Fool me once, shame on you, fool me twice, shame on me."

Well, the American public is being fooled again. Shame on them.

According to the fuzzy-headed economists from the National Bureau of Economic Research (which sounds like a throwback to the old Soviet Union), the longest US recession since the Great Depression officially ended in June 2009.

Tell that to the unemployed. According to the latest figures, there are more people without jobs today than there were when the recession "ended".

My only regret is that the economists from the National Bureau of Economic Research aren't among those without jobs.

Ever since the recession "ended", more Americans have gone to the poorhouse than have come out of it. Not only do they lack jobs, but the value of their assets keeps falling too.

If one looks at the value of Americans' homes and stock market portfolios over the past few years, it is down 25.7 percent from June 2007 to the recent low.

The figure has dropped from $65.8 trillion to $48.8 trillion, a plunge of nearly $17 trillion! No wonder most people don't feel that the recession is over for them.

But don't worry, America. Wall Street is as healthy as ever and the bankers are gleeful. And they have every right to be.

Tough international banking regulations, the so-called Basel III, have been completely watered down. The "new" regulations still would not raise a red flag if Lehman Brothers were going bust today.

And no other meaningful changes in how Wall Street operates are coming. Here are a few examples.

Wall Street can continue freely producing toxic assets like the mortgage securities which nearly crashed the global economy.

In the rest of the world, they have a product called "covered bonds" which are much safer. They are called "covered" because the lenders who pool, package and sell these securities are forced to actually keep 'skin-in-the-game'. The banks are required to retain the underlying loans on their balance sheets, not dump them on some unsuspecting third party.

But Wall Street strongly opposes covered bonds and they will not be issued here. After all, why should the banks be responsible for the loans when they can leave US taxpayers holding the bag?

And look at the difference between how the United States bailed out its banks and Sweden did it in the 1990s.

Sweden did not just bail out its banks by having the government take over the bad debts. It extracted concessions from the banks before writing checks.

Banks had to write down losses and issue warrants to the government. That held banks responsible. Holders in bank stocks and bonds paid the price as well they should have. Meanwhile here in the US, owners of bank bonds paid no penalty and were paid in full.

No wonder the final cost of the Swedish bailout of its financial system came to only 2% of its gross domestic product (GDP). Here in the US, we have already spent 15%-20% of our GDP on the bailout and the costs are still rising.

There is another difference between Europe and the US too. In Europe, the heads of many of its major banks are being forced out by unhappy shareholders.

But here in the US, shareholders have very little say in how a company conducts its business. So nearly all the CEOs who were in place and helped cause the financial crisis are still in place and continue to collect tens of millions of dollars in compensation.

Yes, it's good to be the king, or a Wall Street banker. No worries about unemployment in the executive offices of Wall Street.

Saturday, September 18, 2010

Investing is a Waiting Game

Being a trader requires a mindset where your attention span is fleeting as, like a buttefly, you flitter from trade to trade.

However, being an investor requires a totally different mindset. You have to actually think and try to figure out where things will be in the future.

The most difficult thing for an investor to learn is patience. Sometimes you may have to wait for years for something to occur which you know should and will occur.

Look at the bubble. People who did not put money into these stocks were told they were "out of it" and that they just "did not get it".

The traders told them that new technology had changed the rules of the game forever. Now that the internet was here, the sky was the limit. You could pay anything for an internet stock because it would grow, like Jack's beanstalk, to the sky.

But then that fairy tale hit reality. Companies providing free services on the internet turned out to be worth no more than people paid for their services. And the internet bubble blew up in January 2000.

But investors had been forced to endure three years of being laughed at before proven to be right. The traders finally "got" it and they got it good.

And then there was, of course, the housing bubble. Once again, investors were forced to endure three years of being laughed at again because they did not "get" it. After all, who didn't know that house prices in the United States always go higher. Like Jack's beanstalk.....

But then the housing bubble burst in 2007 and the believers in fairy tales "got" it again.

What are investors waiting for now?

For the next bubble - the US bond market - to burst. Again, it will probably take several years of enduring derision of not "getting" it.

The weavers of fairy tales on Wall Street have created another wonderful delusion. This time it's a scary tale.....

It's a tale of monster called deflation. Deflation as in Japan...nevermind that the demographics in Japan are nothing like those in the United States.

It's a tale of a declining economy and oh my gawd - falling prices! Nerermind that the only falling prices are prices of assets, like houses, that were priced at bubble levels.

Even the US government's own distorted measure, the CPI - consumer price index - shows no scary deflation monster.

Over the past 10 years, the CPI is up 29%. It is only down 0.6% from its record high and yet that is being called deflation.

Yes, and it is such scary deflation that the Federal Reserve must keep rates near zero and everyone must purchase bonds to protect themselves against deflation.

Patience, investors. This bubble will eventually burst and bond holders will "get" what they truly deserve.

Saturday, September 11, 2010

America Is Off-Course

Japan was the world's most admired economy in the 1980s. But over the last twenty years, it has become the most disliked economy on the globe, as its economy has been mired in a two-decade long slump.

Japanese businessmen were feared in the 1980s. However, by 1995 economists pointed their fingers and laughed at the Japanese businessman...the world's most admired businessman had lost a "shoe".

In today's global economy, we have seen that most of the developed countries are "barefoot", caught in a seemingly never-ending cycle of too much debt and currency debasement caused by excessive money printing.

Respected economics professors Ken Rogoff and Carmen Reinhart (perhaps the most accomplished female economist today) studied 15 economic crises over the last 75 years.

What they found is what one would expect...Real recoveries in the post-Keynes economic era are very rare.

As mentioned in a previous article, modern-day politicians follow a perverted form of Keynesian economics. It makes sense to stimulate an economy when it is suffering. But politicians forgot about the other part - stimulus money is supposed to come from money SAVED during good economic times. Instead, politicians have resorted to adding enormous amounts of debt.

Professors Rogoff and Reinhart found that in the 10 years following an economic crisis economic growth rates are lower and unemployment is higher than in the years preceding the crisis.

In two-thirds of the episodes, jobless rates never recovered to pre-crisis levels, EVER.

And in 9 of 10 of the crises, housing prices were still lower 10 years after the crisis ended.

Their findings sadly should sound very familiar to many Americans today. The bad news is that if this financial crisis plays out like the prior ones have, the US economy looks set to struggle for years to come.

What is truly sad to me in America today is that most Americans still refuse to take actions to correct this.....

They need to hold the feet to the fire of the people responsible for this mess - the elites in Washington, on Wall Street, and in the Federal Reserve.

But instead, many Americans go off in search of bogeymen to blame for their problems. Bogeymen that are the most "different" from them.....

By all means, let's let the crooks off the hook and solve our problems by attacking the BP chief executive or Muslims or by burning books.

Saturday, September 4, 2010

Foggy AAA Ratings

Congress, the Obama Administration and government regulators have done next to nothing to rein in Wall Street excesses. So the games continue.....

One can describe Wall Street today as a foggy valley of shadows where clever bankers and brokers pick the pockets of the lost, wandering masses.

Where are the beacons of light in this fog-shrouded valley? They are nowhere to be seen.

One beacon of light is supposed to be the ratings agencies. Their job is to assess investment risk and provide a clear playing field for investors of every kind. They are supposed to be the guys with the lanterns leading the masses out of the fog.

Instead, they did the opposite - they led the lambs to slaughter. Last month, a Senate study determined that over 91% of the AAA-rated mortgage backed securities issued from 2006-2007 have since been downgraded to "junk" status. Wall Street snake oil salespeople sold these toxic securities - what I call "briefcase nukes" - all over the world.

The ratings agencies excuse? "Hey, don't blame us. Our economic 'models' said these bonds would be ok."

Maybe the housing statistics from the Great Depression were "lost". Or maybe the raters deliberately left those statistics out of their models. After all, in modern America housing prices could never drop 20% in a year - we're so much smarter than anyone else has ever been.

Whatever the reason, it is incredible that the ratings agencies not only remain, but prosper. The very obvious conflict of interest is still in place. Let me lay it out for the readers:

1) Investors want the "safety" of AAA-rated securities.

2) Investment banks deliver want their clients want.

3) Investment banks PAY ratings agencies for their services.

4) The service of a ratings agency is to rate securities.

Pick your metaphor. It's like a student paying his teacher to grade his homework. Or a plaintiff paying the judge's salary.

Despite all the obvious common sense issues - incompetence, conflict of interest, past performance - the US government is turning a blind eye to this tawdry corner of the financial services industry. And taxpayers around the world are paying the price for it.