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Y2 Cliff

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Have you become sick of hearing about it?  The Mayan End of the World is less than three weeks away and the people on the teevee keep talking about the Fiscal Cliff.  I’m still waiting for Comet Kohoutek.  For those of you who are too young to remember, here is what Wikipedia tells us about Comet Kohoutek:

Before its close approach, Kohoutek was hyped by the media as the “comet of the century”.  However, Kohoutek’s display was considered a let-down, possibly due to partial disintegration when the comet closely approached the sun prior to Earth flyby.

Our next media-hyped non-event was the infamous Y2K story.  Thousands of people started hoarding canned food, building shelters and preparing for a Cro-Magnon lifestyle because the computers thought that every year began with the two digits 1 and 9.  Yeah, that happened.

This week, everyone is talking about the Fiscal Cliff.  By now, there have been enough sober reports (and lawsuits by the Mayans) to force people into the realization that the world will not end on the 21st day of this month.  The country has found a better focus for its consensual panic:  The Cliff.  Concerns voiced by Ben Bernanke and others brought our attention to the possibility that if our government resumes its budget standoff – after the can was kicked down the road last summer – our government’s credit rating could face another cut.  As a result, Bernanke invented the cliff metaphor and everyone ran with it – despite the fact that it is not appropriate.

The best Fiscal Cliff Smackdown came from Barry Ritholtz, who wrote a great piece for The Washington Post entitled, “How important is the fiscal cliff for investors?  Hint: Not very.”  The explanation of the cliff contained in the article was quite helpful for those unfamiliar with the details:

Let’s start with a definition:  The term refers to the deal that Congress made in late 2011 to temporarily resolve the debt ceiling debate.  The “sequestration,” as it is known, calls for three elements:  tax increases, spending cuts and an increase to the payroll tax (FICA).  The Washington Post’s Wonkblog has run the numbers and finds “$180 billion from income tax hikes, $120 billion in revenue from the payroll tax, $110 billion from the sequester’s automatic spending cuts and $160 billion from expiring tax breaks and other programs.”

*   *   *

The term “fiscal cliff,” popularized by Fed Chairman Ben Bernanke, is really a misnomer.  As several analysts have correctly observed, the effects of sequestration are not a Jan. 1, 2013, event.  The impact of the spending cuts and tax hikes would be phased in over time.  A fiscal slope is more accurate. Additionally, as students of history have learned, single-variable analysis for complex financial issues is invariably wrong.  Because of the inherent complexity of economies and markets, we cannot adequately explain or predict their behavior by merely looking at just one variable.

Ritholtz brought our attention to a great article about the fiscal cliff hype, written by Ryan Chittum for the Columbia Journalism Review.  Chittum blamed CNBC’s “Rise Above” publicity campaign as the primary force driving fiscal cliff anxiety:

Any time you see Wall Street CEOs and CNBC campaigning for what they call the common good, it’s worth raising an eyebrow or two.

*   *   *

You’ll note that CNBC has not Risen Above for the common good on issues like stimulating a depressed economy, ameliorating the housing catastrophe, or prosecuting its Wall Street sources/dinner partners for the subprime fiasco.  But make no mistake:  even if it had, it would have been stepping outside the boundaries of traditional American journalism practice into political advocacy.  And that’s precisely what it’s doing here, at further cost to its credibility as a mainstream news organization instead of some HD version of Wall Street CCTV.

*   *   *

Last but not least is the hypocrisy of CNBC in talking about Rising Above politics.  This is the network, after all, that kicked off the Tea Party, an austerity push that was one of the more damaging political movements in recent memory.

*   *   *

It’s just not CNBC’s job, institutionally, to campaign for anything. Cover the news, as they say, don’t become it.

December 21 will come and go with nothing happening.  It will be January 1, 2000 all over again.  The fiscal cliff “deadline” – January 1, 2013 – will come and go with nothing happening.  The budget can will be kicked down the road again by the “lame duck” Congress.

In the mean time we can entertain ourselves by learning how celebrities are preparing for Armageddon.  After all, they’re here to entertain us.


 

When the Music Stops

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Forget about all that talk concerning the Mayan calendar and December 21, 2012.  The date you should be worried about is January 1, 2013.  I’ve been reading so much about it that I decided to try a Google search using “January 1, 2013” to see what results would appear.  Sure enough – the fifth item on the list was an article from Peter Coy at Bloomberg BusinessWeek entitled, “The End Is Coming:  January 1, 2013”.  The theme of that piece is best summarized in the following passage:

With the attention of the political class fixated on the presidential campaign, Washington is in danger of getting caught in a suffocating fiscal bind.  If Congress does nothing between now and January to change the course of policy, a combination of mandatory spending reductions and expiring tax cuts will kick in – depriving the economy of oxygen and imperiling a recovery likely to remain fragile through the end of 2012.  Congress could inadvertently send the U.S. economy hurtling over what Federal Reserve Chairman Ben Bernanke recently called a “massive fiscal cliff of large spending cuts and tax increases.”

Peter Coy’s take on this impending crisis seemed a bit optimistic to me.  My perspective on the New Year’s Meltdown had been previously shaped by a great essay from the folks at Comstock Partners.  The Comstock explanation was particularly convincing because it focused on the effects of the Federal Reserve’s quantitative easing programs, emphasizing what many commentators describe as the Fed’s “Third Mandate”:  keeping the stock market inflated.  Beyond that, Comstock pointed out the absurdity of that cherished belief held by the magical-thinking, rose-colored glasses crowd:  the Fed is about to introduce another round of quantitative easing (QE 3).  Here is Comstock’s dose of common sense:

A growing number of indicators suggest that the market is running out of steam.  Equities have been in a temporary sweet spot where investors have been factoring in a self-sustaining U.S. economic recovery while also anticipating the imminent institution of QE3.  This is a contradiction.  If the economy were indeed as strong as they say, we wouldn’t need QE3.  The fact that market observers eagerly look forward toward the possibility of QE3 is itself an indication that the economy is weaker than they think.  We can have one or the other, but we can’t have both.

After two rounds of quantitative easing – followed by “operation twist” – the smart people are warning the rest of us about what is likely to happen when the music finally stops.  Here is Comstock’s admonition:

The economy is also facing the so-called “fiscal cliff” beginning on January 1, 2013.  This includes expiration of the Bush tax cuts, the payroll tax cuts, emergency unemployment benefits and the sequester.  Various estimates placed the hit to GDP as being anywhere between 2% and 3.5%, a number that would probably throw the economy into recession, if it isn’t already in one before then.  At about that time we will also be hitting the debt limit once again.   U.S. economic growth will also be hampered by recession in Europe and decreasing growth and a possible hard landing in China.

Technically, all of the good news seems to have been discounted by the market rally of the last three years and the last few months.  The market is heavily overbought, sentiment is extremely high, daily new highs are falling and volume is both low and declining.  In our view the odds of a significant decline are high.

Charles Biderman is the founder and Chief Executive Officer of TrimTabs Investment Research.  He was recently interviewed by Chris Martenson.  Biderman’s primary theme concerned the Federal Reserve’s “rigging” of the stock market through its quantitative easing programs, which have steered so much money into stocks that stock prices have now become a “function of liquidity” rather than fundamental value.  Biderman estimated that the Fed’s liquidity pump has fed the stock market “$1.8 billion per day since August”.  He does not believe this story will have a happy ending:

In January of ’10, I went on CNBC and on Bloomberg and said that there is no money coming into stocks, and yet the stock market keeps going up.  The law of supply and demand still exists and for stock prices to go up, there has to be more money buying those shares.  There is no other way in aggregate that that could happen.

So I said it has to be coming from the government.  And everybody thought I was a lunatic, conspiracy theorist, whatever.  And then lo and behold, on October of 2011, Mr. Bernanke then says officially, that the purpose of QE1 and QE2 is to raise asset prices.  And if I remember correctly, equities are an asset, and bonds are an asset.

So asset prices have gone up as the Fed has been manipulating the market. At the same time as the economy is not growing (or not growing very fast).

*   *   *

At some point, the world is going to recognize the Emperor is naked. The only question is when.

Will it be this year?  I do not think it will be before the election, I think there is too much vested interest in keeping things rosy and positive.

One of my favorite economists is John Hussman of the Hussman Funds.  In his most recent Weekly Market Comment, Dr. Hussman warned us that the “music” must eventually stop:

What remains then is a fairly simple assertion:  the primary way to boost corporate profits to abnormally high – but unsustainable – levels is for the government and the household sector to both spend beyond their means at the same time.

*   *   *

The conclusion is straightforward.  The hope for continued high profit margins really comes down to the hope that government and the household sector will both continue along unsustainable spending trajectories indefinitely.  Conversely, any deleveraging of presently debt-heavy government and household balance sheets will predictably create a sustained retreat in corporate profit margins.  With the ratio of corporate profits to GDP now about 70% above the historical norm, driven by a federal deficit in excess of 8% of GDP and a deeply depressed household saving rate, we view Wall Street’s embedded assumption of a permanently high plateau in profit margins as myopic.

Will January 1, 2013 be the day when the world realizes that “the Emperor is naked”?  Will the American economy fall off the “massive fiscal cliff of large spending cuts and tax increases” eleven days after the end of the Mayan calendar?  When we wake-up with our annual New Year’s Hangover on January 1 – will we all regret not having followed the example set by those Doomsday Preppers on the National Geographic Channel?

Get your “bug-out bag” ready!  You still have nine months!


 

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Scientists Bust the Top One Percent

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Ever since the Occupy Wall Street movement began last fall, we have been hearing the incessant mantra of:  Don’t blame the rich for wealth inequality.  In fact, Herman Cain’s futile bid for the Presidency was based (in part) on that very theme.  Last January, James Q. Wilson (who passed away on Friday) wrote an opinion piece for The Washington Post entitled, “Angry about inequality?  Don’t blame the rich”.  Paul Buchheit of the Common Dreams blog rebutted Wilson’s essay with this posting:  “So say the rich:  ‘Don’t blame us for having all the money!’ ”.  How often have you read and heard arguments from apologists for the Wall Street banksters, upbraiding those who dared speak ill of those sanctified “job creators” within the top one percent of America’s economic strata?

Finally, a group of scientists has intervened by conducting some research about the ethics of those at the top of America’s socioeconomic food chain.  Stéphane Côté, PhD, Associate Professor of Organizational Behavior at the University of Toronto’s Rotman School of Management, worked with a team of four psychologists from the University of California at Berkeley to conduct seven studies on this subject.  Their paper, “Higher social class predicts increased unethical behavior” was published in the February 27 issue of the Proceedings of the National Academy of Sciences (PNAS).  Here is the abstract:

Seven studies using experimental and naturalistic methods reveal that upper-class individuals behave more unethically than lower-class individuals.  In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals.  In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals.  Mediator and moderator data demonstrated that upper-class individuals’ unethical tendencies are accounted for, in part, by their more favorable attitudes toward greed.

The impact and the timing of this article, with respect to the current debate over income inequality, have resulted in quite a bit of interesting commentary.  I enjoyed the perspective of Peter Dorman at the Econospeak blog:

The tone of the first wave of commentary, as far as I can tell, is that we knew it all along – rich people are nasty.  I would like to put in a word, however, for the other direction of causality, that dishonesty and putting one’s own interests ahead of others are conducive to wealth.

*   *   *

The reason I bring this up is because there is a constant background murmur in our society that says that greater wealth has to be a reward for more talent, more effort or more contribution to society.

Most of the commentary written about the PNAS article has been relatively non-partisan.  Two-day access for reading the article on-line will cost you ten bucks.  For those of us who can’t afford that (as well as for those who can afford it – but are too greedy to pay for anything) I have assembled a number of excerpts from articles written by those who actually read the entire scientific paper.  The following passages will provide you with some interesting details about the research conducted by this group.

Christopher Shea of The Wall Street Journal gave us a brief peek at some of the specific findings of the studies conducted by this team.

It went so far as to show that higher-class people will literally take candy from the mouths of children.

An excerpt quoted by Shea illustrated how the group expanded on an observation made by French sociologist Émile Durkheim:

 “From the top to the bottom of the ladder, greed is aroused,” Durkheim famously wrote.  Although greed may indeed be a motivation all people have felt at points in their lives, we argue that greed motives are not equally prevalent across all social strata.

Brandon Keim of Wired offered us more research data from the article, while focusing on the observations of team member Paul Piff, a Berkeley psychologist:

“This work is important because it suggests that people often act unethically not because they are desperate and in the dumps, but because they feel entitled and want to get ahead,” said evolutionary psychologist and consumer researcher Vladas Griskevicius of the University of Minnesota, who was not involved in the work.  “I am especially impressed that the findings are consistent across seven different studies with varied methodologies.  This work is not just good science, but it is shows deeper insight into the reasons why people lie, cheat, and steal.”

According to Piff, unethical behavior in the study was driven both by greed, which makes people less empathic, and the nature of wealth in a highly stratified society.  It insulates people from the consequences of their actions, reduces their need for social connections and fuels feelings of entitlement, all of which become self-reinforcing cultural norms.

“When pursuit of self-interest is allowed to run unchecked, it can lead to socially pernicious outcomes,” said Piff, who noted that the findings are not politically partisan.  “The same rules apply to liberals and conservatives.  We always control for political persuasion,” he said.

For Thomas B. Edsall of The New York Times, the research performed by this group helped explain the rationale behind a bit of Republican campaign strategy:

Republicans recognize the political usefulness of objectification, capitalizing on “compassion fatigue,” or the exhaustion of empathy, among large swathes of the electorate who are already stressed by the economic collapse of 2008, high levels of unemployment, an epidemic of foreclosures, stagnant wages and a hyper-competitive business arena.

Compassion fatigue was fully evident in Rick Santelli’s 2009 rant on CNBC denouncing a federal plan to prop up “losers’ mortgages” at taxpayer expense, a rant that helped spark the formation of the Tea Party.  Republican debates provided further evidence of compassion fatigue when audiences cheered the record-setting use of the death penalty in Texas and applauded the prospect of a gravely ill pauper who, unable to pay medical fees, was allowed to die.

Jonathan Gitlin of Ars Technica reported on some of the juicy details from a few experiments.  When reading about my favorite experiment, keep in mind that the term “SES” refers to socioeconomic status.

Study number four involved participants rating themselves on the SES scale to heighten their perception of status; they were then answered a number of questions relating to unethical behavior.  At the end of the experiment, they were presented with a jar of individually wrapped candy and told that, although it was for children in a nearby lab, they could take some if they wanted.  At this point you might be able to guess what the results were.  High SES participants took more candy.

Gitlin concluded his review of the paper with this thought:

The researchers argue that “the pursuit of self-interest is a more fundamental motive among society’s elite, and the increased want associated with greater wealth and status can promote wrongdoing.”  However, they point out that their findings aren’t absolute, and that philanthropic efforts such as those of Bill Gates and Warren Buffet buck the observed trend, as does research which has shown a relationship between poverty and violent crime.

Meanwhile, the debate over economic inequality continues to rage on through the 2012 election cycle.  It will be interesting to observe whether this scientific report is exploited to bolster the argument that most of the one-percenters suffer from a character flaw, which not only got them where they are today – but which is shared by their kleptocratic comrades, who have facilitated a system of legalized predation.


 

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Rampant Stock Market Pumping

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It has always been one of my pet peeves.  The usual stock market cheerleaders start chanting into the echo chamber.  Do they always believe that their efforts will create a genuine, consensus reality?  A posting at the Daily Beast website by Zachary Karabell caught my attention.  The headline said, “Bells Are Ringing!  Confidence Rises as the Dow –  Finally – Hits 13,000 Again”.  After highlighting all of the exciting news, Mr. Karabell was thoughtful enough to mention the trepidation experienced by a good number of money managers, given all the potential risks out there.  Nevertheless, the piece concluded with this thought:

The crises that have obsessed markets for the past years – debt and defaults, housing markets, Europe and Greece– are winding down.  And markets are gearing up.  Maybe it’s time to focus on that.

As luck would have it, my next stop was at the Pragmatic Capitalism blog, where I came across a clever essay by Lance Roberts, which had been cross-posted from his Streettalklive website.  The title of the piece, “Media Headlines Will Lead You To Ruin”, jumped right out at me.  Here’s how it began:

It’s quite amazing actually.   Two weeks ago Barron’s ran the cover page of “Dow 15,000?.  Over the weekend Alan Abelson ran a column titled “Everyone In The Pool”.  Today, CNBC leads with “Dow 13,000 May Finally Lure Investors Back Into Stocks”.   Unfortunately, for most investors, the headline is probably right.  Investors, on the whole, have a tendency to do exactly the opposite of what they should do when it comes to investing – “Buy High and Sell Low.”  The reality is that the emotions of greed and fear do more to cause investors to lose money in the market than being robbed at the point of a gun.

Take a look at the chart of the data from ICI who tracks flows of money into and out of mutual funds.  When markets are correcting investors panic and sell out of stocks with the majority of the selling occurring near the lows of the market.  As the markets rally investors continue to sell as they disbelieve the rally intially and are just happy to be getting some of their money back.  However, as the rally continues to advance from oversold conditions – investors are “lured” back into the water as memories of the past pain fades and the “greed factor” overtakes their logic.  Unfortunately, this buying always tends to occur at, or near, market peaks.

Lance Roberts provided some great advice which you aren’t likely to hear from the cheerleading perma-bulls – such as, “getting back to even is not an investment strategy.”

As a longtime fan of the Zero Hedge blog, I immediately become cynical at the first sign of irrational exuberance demonstrated by any commentator who downplays economic headwinds while encouraging the public to buy, buy, buy.  Those who feel tempted to respond to that siren song would do well to follow the Weekly Market Comments by economist John Hussman of the Hussman Funds.  In this week’s edition, Dr. Hussman admitted that there may still be an opportunity to make some gains, although the risks weigh heavily toward a more cautious strategy:

The bottom line is that near-term market direction is largely a throw of the dice, though with dice that are modestly biased to the downside.  Indeed, the present overvalued, overbought, overbullish syndrome tends to be associated with a tendency for the market to repeatedly establish slight new highs, with shallow pullbacks giving way to further marginal new highs over a period of weeks.  This instance has been no different.  As we extend the outlook horizon beyond several weeks, however, the risks we observe become far more pointed.  The most severe risk we measure is not the projected return over any particular window such as 4 weeks or 6 months, but is instead the likelihood of a particularly deep drawdown at some point within the coming 18-month period.

Economist Nouriel Roubini (a/k/a Dr. Doom) provided a sobering counterpoint to the recent stock market enthusiasm in a piece he wrote for the Project Syndicate website entitled, “The Uptick’s Downside”.  Dr. Roubini focused on the fact that “at least four downside risks are likely to materialize this year”.  These include:  “fiscal austerity pushing the eurozone periphery into economic free-fall” as well as “evidence of weakening performance in China and the rest of Asia”.  The third and fourth risks were explained in the following terms:

Third, while US data have been surprisingly encouraging, America’s growth momentum appears to be peaking.  Fiscal tightening will escalate in 2012 and 2013, contributing to a slowdown, as will the expiration of tax benefits that boosted capital spending in 2011.  Moreover, given continuing malaise in credit and housing markets, private consumption will remain subdued; indeed, two percentage points of the 2.8% expansion in the last quarter of 2011 reflected rising inventories rather than final sales.  And, as for external demand, the generally strong dollar, together with the global and eurozone slowdown, will weaken US exports, while still-elevated oil prices will increase the energy import bill, further impeding growth.

Finally, geopolitical risks in the Middle East are rising, owing to the possibility of an Israeli military response to Iran’s nuclear ambitions.  While the risk of armed conflict remains low, the current war of words is escalating, as is the covert war in which Israel and the US are engaged with Iran; and now Iran is lashing back with terrorist attacks against Israeli diplomats.

Any latecomers to the recent festival of bullishness should be mindful of the fact that their fellow investors could suddenly feel inspired to head for the exits in response to one of these risks.  Lance Roberts said it best in the concluding paragraph of his February 21 commentary:

With corporate earnings now slowing sharply, the economy growing at a sub-par rate, the Eurozone headed towards a prolonged recession and the American consumer facing higher gas prices and reduced incomes, a continued bull market rally from here is highly suspect.   Add to those economic facts the technical aspects of a very extended market with overbought internals – the reality is that this is a better place to be selling investments versus buying them.  Or – go to Vegas and bet on black.


 

Harsh Reality

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Several years ago, at one of the seven Laurie Anderson performances I have attended, Ms. Anderson (now Mrs. Lou Reed – although I seriously doubt whether she uses that moniker) described her first meeting with Philip Glass.  Immediately after meeting Glass, she anxiously asked him:  “Are things getting better or are things getting worse?”

These days, that same question is on everyone’s mind.  It appears as though the mainstream news media are hell-bent on convincing us that everything is just fine.  Nevertheless, many of us remember hearing the same thing from Ben Bernanke and Hank Paulson during the summer of 2008.  As a result, we ponder the onslaught of rosy prognostications about the future of our economy with a good degree of skepticism.  Regardless of whether there might be some sort of conspiracy to convince the public to go out and spend money because everything is all right  . . . consider these remarks by Steve Randy Waldman from a discussion about market monetarist theory:

Self-fulfilling expectations lie at the heart of the market monetarist theory.  A depression occurs when people come to believe that income will be scarce relative to prior expectations and debts.  They nervously scale back expenditures and hoard cash, fulfilling their expectations of income scarcity.  However, if everybody could suddenly be made to believe that income would be plentiful, everyone would spend freely and fulfill the expectations of plenty.  The world is a much more pleasant place under the second set of expectations than the first.  And to switch between the two scenarios, all that is required is persuasion.  The market-monetarist central bank is nothing more than a great persuader:  when “shocks happen”, it persuades us all to maintain our optimism about the path of nominal income.  As long as we all keep the faith, our faith will be rewarded.  This is not a religion, but a Nash equilibrium.

The persuasion described by Steve Waldman has been drowning out objective analysis lately.  Obviously, the sovereign debt crisis in Europe has created quite a bit of anxiety in the United States.  The mainstream media focus is apparently targeting that consensual anxiety with heavy doses of “feel good” material.  One must search around a bit before finding any commentary which runs against that current.  I found some and I would like to share it with you.  The first item appeared in Bloomberg BusinessWeek on November 22:

Pacific Investment Management Co.’s Chief Executive Officer Mohamed A. El-Erian said U.S. economic conditions are “terrifying” as the nation struggles to recover from recession.

The odds of the U.S. returning to recession are as much as 50 percent, El-Erian said during an interview on Bloomberg Television’s “In the Loop” with Betty Liu.  U.S. economic growth was worse than expected and congressional policy makers are gridlocked over what to do about the economy and the deficit, which risk exacerbating an already weak recovery, he said.

“We have less economic momentum than we thought we had and we have no policy momentum,” said El-Erian, who also serves as co-chief investment officer with Pimco founder Bill Gross at the world’s largest manager of bond funds.

“What’s most terrifying,” he said, “we are having this discussion about the risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time then the fiscal deficit is at 9 percent and at a time when interest rates are at zero.”

Let’s not forget that all of this is happening at a time when we are plagued by the most dysfunctional, stupid and corrupt Congress in our nation’s history.  President Obama is currently preoccupied with his re-election campaign.  His own leadership failures are conveniently re-packaged as products of that feckless Congress.  As a result, Americans have plenty of justification for being worried about the future.

One of my favorite commentators, Paul Farrell of MarketWatch, recently shared some information with us, which he acquired by attending an InvestmentNews Round Table, as well as from reading Gary Shilling’s expensive newsletter:

Get it? Main Street America, you should “expect very slow growth” in 2012.  That was the response when asked what “scenarios are you painting for your clients?”  The panelist at a recent InvestmentNews Round Table then added:  “It’s going to be ugly and violent.”  Why?  Because the politicians “are driving things” and they are “capricious, which leads to volatility.”  And clients are “not really happy,” but “they lived through ‘08 and ’09,” so 2012 will be “just a little bump in the road.”

*   *   *

So don’t kid yourself folks, recent economic and market “ugliness and violence” not only won’t end soon, it’ll get meaner and meaner for years after 2012 elections … no matter who wins.  Only a fool would believe that a new bull market will take off in 2013.  Ain’t going to happen.  That’s a Wall Street fantasy.  Fall for that, and you’re delusional.

In fact, you better plan on a very long secular bear the next decade through 2020.  With the European banks, credit and currency on the edge of a global financial meltdown, there’s a high probability that a black swan virus, a contagion will sweep the world, making all investing “uglier” and more “violent” for Americans in 2013, indeed for the rest of the decade.

*   *   *

Shilling sees “a secular bear market really started in 2000 and may persist for a decade as a result of slower GDP growth,” yes, persist till 2020 “with 2% to 3% deflation.”  He warns:  “Nominal GDP might not gain at all,” like recent flat-lining.  Which coincides with the expectations of America’s professional financial advisers.

Are you still feeling optimistic?  Consider the closing thoughts from a piece by Karl Denninger entitled, “The Game Is About Done”:

30+ years of lawless behavior has now devolved down to blatant, in-your-face theft.  They don’t even bother trying to hide it any more, and Eric “Place” Holder is too busy supervising the running of guns into Mexico so the drug cartels can shoot both Mexican and American citizens.

What am I, or anyone else, supposed to do in this sort of “market” environment?  Invest in…. what?  Land titles are worthless as they’ve been corrupted by robosigning, margin deposits have been stolen, Madoff’s clients had confirmations of trades that never happend and proved to worthless pieces of paper instead of valuable securities and while Madoff went to prison nobody else has and the money is still gone!

Without enforcement of the law — swift and certain — there is no deterrent against this behavior.

There has been no enforcement and there is no indication that this will change.

It will take just one — or maybe two — more events like MF Global and Greek CDS “determinations” before the entire market — all of it — goes “no bid” as participants simply stuff their hands in their pockets and say “screw this.”

It’s coming folks, and I guarantee you this:  Whatever your “nightmare” scenario is for such an event, it’s not bearish enough.

Keep all of this in mind as you plan for the future.  I would not expect that you might hear any of this on CNBC.


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Losing The Propaganda War

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The propaganda war waged by corporatist news media against the Occupy Wall Street movement is rapidly deteriorating.  When the occupation of Zuccotti Park began on September 17, the initial response from mainstream news outlets was to simply ignore it – with no mention of the event whatsoever.  When that didn’t work, the next tactic involved using the “giggle factor” to characterize the protesters as “hippies” or twenty-something “hippie wanna-bes”, attempting to mimic the protests in which their parents participated during the late-1960s.  When that mischaracterization failed to get any traction, the presstitutes’ condemnation of the occupation events – which had expanded from nationwide to worldwide – became more desperate:  the participants were called everything from “socialists” to “anti-Semites”.

Despite the incessant flow of propaganda from those untrustworthy sources, a good deal of commentary – understanding, sympathetic or even supportive of Occupy Wall Street began to appear in some unlikely places.  For example, Roger Lowenstein wrote a piece for Bloomberg BusinessWeek entitled, “Occupy Wall Street: It’s Not a Hippie Thing”:

As critics have noted, the protesters are not in complete agreement with each other, but the overall message is reasonably coherent.  They want more and better jobs, more equal distribution of income, less profit (or no profit) for banks, lower compensation for bankers, and more strictures on banks with regard to negotiating consumer services such as mortgages and debit cards.  They also want to reduce the influence that corporations – financial firms in particular – wield in politics, and they want a more populist set of government priorities: bailouts for student debtors and mortgage holders, not just for banks.

In stark contrast with the disparaging sarcasm spewed by the tools at CNBC and Fox News concerning this subject, The Economist demonstrated why it enjoys such widespread respect:

So the big banks’ apologies for their role in messing up the world economy have been grudging and late, and Joe Taxpayer has yet to hear a heartfelt “thank you” for bailing them out.  Summoned before Congress, Wall Street bosses have made lawyerised statements that make them sound arrogant, greedy and unrepentant.  A grand gesture or two – such as slashing bonuses or giving away a tonne of money – might have gone some way towards restoring public faith in the industry.  But we will never know because it didn’t happen.

On the contrary, Wall Street appears to have set its many brilliant minds the task of infuriating the public still further, by repossessing homes of serving soldiers, introducing fees for using debit cards and so on.  Goldman Sachs showed a typical tin ear by withdrawing its sponsorship of a fund-raiser for a credit union (financial co-operative) on November 3rd because it planned to honour Occupy Wall Street.

The Washington Post conducted a poll with the Pew Research Center which compared and contrasted popular support for Occupy Wall Street with that of the Tea Party movement.  The poll revealed that ten percent of Americans support both movements.  On the other hand, Tea Party support is heavily drawn from Republican voters (71%) while only 24% of Republicans – as opposed to 64% of Democrats – support Occupy Wall Street.  As for self-described “Moderates”, only 24% support the Tea Party compared with Occupy Wall Street’s 45% support from Moderates.  Rest assured that these numbers will not deter unscrupulous critics from describing Occupy Wall Street as a “fringe movement”.

The best smackdown of the shabby reportage on Occupy Wall Street came from Dahlia Lithwick of Slate:

Mark your calendars:  The corporate media died when it announced it was too sophisticated to understand simple declarative sentences.  While the mainstream media expresses puzzlement and fear at these incomprehensible “protesters” with their oddly well-worded “signs,” the rest of us see our own concerns reflected back at us and understand perfectly.  Turning off mindless programming might be the best thing that ever happens to this polity.  Hey, occupiers:  You’re the new news. And even better, by refusing to explain yourselves, you’re actually changing what’s reported as news.  Because it takes a tremendous mental effort to refuse to see that the rich are getting richer in America while the rest of us are struggling.  Maybe the days of explaining the patently obvious to the transparently compromised are finally behind us.

By refusing to take a ragtag, complicated, and leaderless movement seriously, the mainstream media has succeeded only in ensuring its own irrelevance.  The rest of America has little trouble understanding that these are ragtag, complicated, and leaderless times.  This may not make for great television, but any movement that acknowledges that fact deserves enormous credit.

Too many mainstream news outlets appear to be suffering from the same disease as our government and our financial institutions.  Jeremy Grantham’s Third Quarter 2011 newsletter will be coming out in a few days and I’m hoping that he will prescribe a cure.  My wilder dream is that those vested with the authority and responsibility to follow his advice would simply do so.


 

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Unwinding The Spin

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We are caught in a steady “spin cycle” of contradictory reports about our most fundamental concerns:  the environment and the economy.  Will China financially intervene to resolve the sovereign debt crisis in Europe and save us all from the economic consequences that loom ahead?  Will the “China syndrome” finally become a reality at Fukushima?  When confronted with a propaganda assault from the “rose-colored glasses” crowd, I become very skeptical.

Widespread concern that Greece would default on its debt inflamed lingering fear about debt contagion throughout the Eurozone.  Economist John Hussman, one of the few pundits who has been keeping a sober eye on the situation, made this remark:

Simply put, the Greek debt market is screaming “Certain default. Amésos.”

Meanwhile, the Financial Times reported that China Investment Corporation has been involved in discussions with the government of Italy concerning Italian bond purchases as well as business investments.  Bloomberg BusinessWeek quoted Zhang Xiaoqiang, vice chairman of China’s top economic planning agency, who affirmed that nation’s willingness to buy euro bonds from countries involved in the sovereign debt crisis “within its capacity”.

Stefan Schultz of Der Speigel explained that China expects something in return for its rescue efforts:

The supposed “yellow peril” has positioned itself as a “white knight” which promises not to leave its trading partners in Europe and America in the lurch.

In return, however, Beijing is demanding a high price — the Chinese government wants more political prestige and more political power  .  .  .

Specifically, China wants:  more access to American markets, abolition of restrictions on the export of high-technology products to China as well as world-wide recognition of China’s economy as a market economy.

Even if such a deal could be made with China, would that nation’s bailout efforts really save the world economy from another recession?

As usual, those notorious cheerleaders for stock market bullishness at CNBC are emphasizing that now is the time to buy.  At MSN Money, Anthony Mirhaydari wrote a piece entitled, “The bulls are taking charge”.

Last week, Robert Powell of MarketWatch directed our attention to an analysis just published by Sam Stovall, the chief investment strategist of Standard & Poor’s Equity Research.  Powell provided us with this summary:

Consider, at a place and time such as this, with the economy teetering on the verge of another recession, none of the 1,485 stocks that make up the S&P 1,500 has a consensus “Sell” rating. And just five, or 0.3%, are ranked as being a “Weak Hold.”

*   *   *

From his vantage point, Stovall says it “appears as if most analysts are not expecting the U.S. to fall back into recession, and that now is the time to scoop up undervalued cyclical issues at bargain-basement prices.”

However, in S&P’s opinion, it might be high time to “buck the trend and embrace the traditionally defensive sectors (including utilities), as the risk of recession — and downward earnings per share revisions – appear to us to be on the rise.”

On September 14, investing guru Mark Hulbert picked up from where Robert Powell left off by reminding us that – ten years ago – stock analysts continued to rate Enron stock as a “hold” during the weeks leading up to its bankruptcy, despite the fact that the company was obviously in deep trouble.  Hulbert’s theme was best summed-up with this statement:

If you want objectivity from an analyst, you might want to start by demanding that he issue as many “sell” recommendations as “buys.”

It sounds to me as though Wall Street is looking for suckers to be holding all of those high-beta, Russell 2000 stocks when the next crash comes along.  I’m more inclined to follow Jeremy Grantham’s assessment that “fair value” for the S&P 500 is 950, rather than its current near-1,200 level.

While the “rose colored glasses” crowd is dreaming about China’s rescue of the world economy, the “China syndrome” is becoming a reality at Japan’s Fukushima nuclear power facility.  Immediately after the tragic earthquake and tsunami, I expressed my suspicion that the true extent of the nuclear disaster was the subject of a massive cover-up.  Since that time, Washington’s Blog has been providing regular updates on the status of the ongoing, uncontrolled nuclear disaster at Fukushima.  The September 14 posting at Washington’s Blog included an interview with a candid scientist:

And nuclear expert Paul Gunter says that we face a “China Syndrome”, where the fuel from the reactor cores at Fukushima have melted through the container vessels, into the ground, and are hitting groundwater and creating highly-radioactive steam . . .

On the other hand, this article from New Scientist reeks of nuclear industry spin:

ALARMIST predictions that the long-term health effects of the Fukushima nuclear accident will be worse than those following Chernobyl in 1986 are likely to aggravate harmful psychological effects of the incident.

As long as experts such as Paul Gunter and Arnie Gundersen continue to provide reliable data contradicting the “move along – nothing to see here” meme being sold to us by the usual suspects, I will continue to follow the updates on Washington’s Blog.


 

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Obama Presidency Continues To Self-Destruct

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It’s been almost a year since the “Velma Moment”.  On September 20, 2010, President Obama appeared at a CNBC town hall meeting in Washington.  One of the audience members, Velma Hart, posed a question to the President, which was emblematic of the plight experienced by many 2008 Obama supporters.  Peggy Noonan had some fun with the event in her article, “The Enraged vs. The Exhausted” which characterized the 2010 elections as a battle between those two emotional factions.  The “Velma Moment” exposed Obama’s political vulnerability as an aloof leader, lacking the ability to emotionally connect with his supporters:

The president looked relieved when she stood.  Perhaps he thought she might lob a sympathetic question that would allow him to hit a reply out of the park.  Instead, and in the nicest possible way, Velma Hart lobbed a hand grenade.

“I’m a mother. I’m a wife.  I’m an American veteran, and I’m one of your middle-class Americans.  And quite frankly I’m exhausted.  I’m exhausted of defending you, defending your administration, defending the mantle of change that I voted for, and deeply disappointed with where we are.”  She said, “The financial recession has taken an enormous toll on my family.”  She said, “My husband and I have joked for years that we thought we were well beyond the hot-dogs-and-beans era of our lives.  But, quite frankly, it is starting to knock on our door and ring true that that might be where we are headed.”

The President experienced another “Velma Moment” on Monday.  This time, it was Maureen Dowd who had some fun describing the confrontation:

After assuring Obama that she was a supporter, an Iowa mother named Emily asked the president at a town hall at the Seed Savers Exchange in Decorah what had gone wrong.

*   *   *

“So when you ran for office you built a tremendous amount of trust with the American people, that you seemed like someone who wouldn’t move the bar on us,” she said.  “And it seems, especially in the last year, as if your negotiating tactics have sort of cut away at that trust by compromising some key principles that we believed in, like repealing the tax cut, not fighting harder for single-payer.  Even Social Security and Medicare seemed on the line when we were dealing with the debt ceiling.  So I’m just curious, moving forward, what prevents you from taking a harder negotiating stance, being that it seems that the Republicans are taking a really hard stance?”

President Obama can no longer blame the Republicans and Fox News for his poor approval ratings.  He has become his own worst enemy.  As for what Obama has been doing wrong – the title of Andrew Malcolm’s recent piece for the Los Angeles Times summed it up quite well:  “On Day 938 of his presidency, Obama says he’ll have a jobs plan in a month or so”.

Lydia Saad of the Gallup Organization provided this report on the President’s most recent approval ratings:

A new low of 26% of Americans approve of President Barack Obama’s handling of the economy, down 11 percentage points since Gallup last measured it in mid-May and well below his previous low of 35% in November 2010.

Obama earns similarly low approval for his handling of the federal budget deficit (24%) and creating jobs (29%).

*   *   *

President Obama’s approval rating has dwindled in recent weeks to the point that it is barely hugging the 40% line. Three months earlier, it approached or exceeded 50%.

The voters have finally caught on to the fact that Barack Obama’s foremost mission is to serve as a tool for Wall Street.  In Monday’s edition of The Washington Post, Zachary Goldfarb gave us a peek at Obama’s latest gift to the banksters:  a plan to provide a government guarantee of mortgage backed securities:

President Obama has directed a small team of advisers to develop a proposal that would keep the government playing a major role in the nation’s mortgage market, extending a federal loan subsidy for most home buyers, according to people familiar with the matter.

The administration’s reaction to curiosity about the plan was a tip-off that the whole thing stinks.  Mr. Goldfarb’s article included the official White House retort, which was based on the contention that the controversial proposal is just one of three options outlined earlier this year in an administration white paper concerning reform of the housing finance system:

“It is simply false that there has been a decision to move forward with any particular option,” said Matt Vogel, a White House spokesman.  “All three options remain under active consideration and we are deepening our analysis around how each would potentially be implemented.  No recommendation has been made to the president by his economic advisers.”

And if you believe that, you might be interested in buying some real estate located in  . . .

Zachary Goldfarb explained the plan:

Fannie, Freddie or other successor firms would charge a fee to mortgage lenders and banks and use the money to create an insurance pool to cover losses on mortgage securities caused by defaults on the underlying loans.  The government would be the last line of defense in case of another housing market meltdown, using taxpayer money to cover losses only if the insurance pool ran dry.

The Washington Post report inspired economist Dean Baker to expose the ugly truth about this scheme:

It would be difficult to find an economic rationale for this policy other than subsidizing the financial industry. The government can and does directly subsidize the purchase of homes through the mortgage interest deduction.  This can be made more generous and better targeted toward low and moderate income families by capping it and converting it into a tax credit (e.g. all homeowners can deduct 15 percent of the interest paid on mortgages of $300,000 or less from their taxes).

There is no obvious reason to have an additional subsidy through the system of mortgage finance.  Analysis by Mark Zandi showed that the subsidy provided by a government guarantee would largely translate into higher home prices.  This would leave monthly mortgage payments virtually unaffected.  The diversion of capital from elsewhere in the economy would mean slower economic growth and would kill jobs for auto workers, steel workers and other workers in the manufacturing sector.

For these reasons, if President Obama was really against big government and job killing measures, he would oppose this new scheme to subsidize mortgage securitization.  On the other hand, if the goal is to ensure high profits and big salaries for top executives in the financial sector, then a government subsidy for mortgage securitization is good policy.

Frustration with the inevitability that the 2012 Presidential Election will ultimately become a choice between two corporatists has inspired a movement to encourage a Democratic Primary challenge to Obama.  The organization – StopHoping.org – is based on this simple objective:

The majority of U.S. citizens favor protecting Social Security, Medicare, and Medicaid; taxing the rich; cutting military spending; and protecting the environment.  We don’t have a candidate . . . yet.  Potential candidates supported on this site will be notified and encouraged to run.

I hope they succeed!


 

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Goldman Sachs In The Crosshairs

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Last December, I expressed my disappointment and skepticism that the culprits responsible for having caused the financial crisis would ever be brought to justice.  I found it hard to understand why neither the Securities and Exchange Commission nor the Justice Department would be willing to investigate malefaction, which I described in the following terms:

We often hear the expression “crime of the century” to describe some sensational act of blood lust.  Nevertheless, keep in mind that the financial crisis resulted from a massive fraud scheme, involving the packaging and “securitization” of mortgages known to be “liars’ loans”, which were then sold to unsuspecting investors by the creators of those products – who happened to be betting against the value of those items.  In consideration of the fact that the credit crisis resulting from this scam caused fifteen million people to lose their jobs as well as an expected 8 – 12 million foreclosures by 2012, one may easily conclude that this fraud scheme should be considered the crime of both the last century as well as the current century.

Fortunately, the tide seems to have turned with the recent release of the Senate Investigations Subcommittee report on the financial crisis.  The two-year, bipartisan investigation, led by Senators Carl Levin (D-Michigan) and Tom Coburn (R-Oklahoma) has given rise to new hope that the banks responsible for causing the financial crisis – particularly Goldman Sachs – could face criminal prosecution.  Tom Braithwaite of the Financial Times put it this way:

The Senate report criticised rating agencies, regulators and other banks.  But Goldman has drawn particular focus.  Eric Holder, attorney-general, said this month the justice department was looking at the report “that deals with Goldman”.

Will Attorney General Eric Hold-harmless initiate criminal proceedings against President Obama’s leading private source of 2008 campaign contributions?  I doubt it.  Nevertheless, the widespread meme that no laws were violated by Goldman or any of the other Wall Street megabanks, is coming under increased attack.  Matt Taibbi recently wrote an excellent piece for Rolling Stone entitled, “The People vs. Goldman Sachs”, which took a humorous jab at those who deny that the financial crisis resulted from illegal activity:

Defenders of Goldman have been quick to insist that while the bank may have had a few ethical slips here and there, its only real offense was being too good at making money.  We now know, unequivocally, that this is bullshit.  Goldman isn’t a pudgy housewife who broke her diet with a few Nilla Wafers between meals – it’s an advanced-stage, 1,100-pound medical emergency who hasn’t left his apartment in six years, and is found by paramedics buried up to his eyes in cupcake wrappers and pizza boxes.  If the evidence in the Levin report is ignored, then Goldman will have achieved a kind of corrupt-enterprise nirvana.  Caught, but still free:  above the law.

Taibbi focused on the easiest case to prosecute:  a perjury charge against Goldman CEO Lloyd Blankfein for his testimony before the Levin-Coburn Senate Subcommittee.  Blankfein denied under oath that his firm had a “short” position, betting against the very Collateralized Debt Obligations (CDOs) that Goldman had been selling to its customers.  As Taibbi pointed out, this conflict of interest was the subject of a book by Michael Lewis entitled, The Big Short.  At issue is the response Blankfein gave to the question about whether Goldman Sachs had such a short position:

“Much has been said about the supposedly massive short Goldman Sachs had on the U.S. housing market.  The fact is, we were not consistently or significantly net-short the market in residential mortgage-related products in 2007 and 2008.  We didn’t have a massive short against the housing market, and we certainly did not bet against our clients.”

As Tom Braithwaite explained in the Financial Times, Senator Levin expressed concern that Blankfein could defend a perjury charge, based on his use of the words “consistently or significantly” in the above-quoted response.  Levin’s concern is that those words could be deemed significantly equivocal as to prevent the characterization of Blankfein’s response as a denial that Goldman had such a short position.  Nevertheless, the last sentence of the response is an unqualified, compound statement, which could support a perjury charge:

We didn’t have a massive short against the housing market, and we certainly did not bet against our clients.

I would be very amused to watch someone make the specious argument that Goldman’s $13 billion short position was not “massive”.

Meanwhile, New York Attorney General Eric Schneiderman is moving ahead to pursue an investigation concerning the role of the Wall Street banks in causing the financial crisis.  Gretchen Morgenson of The New York Times provided this explanation of Schneiderman’s current effort:

The New York attorney general has requested information and documents in recent weeks from three major Wall Street banks about their mortgage securities operations during the credit boom, indicating the existence of a new investigation into practices that contributed to billions in mortgage losses.

*   *   *

It is unclear which parts of the byzantine securitization process Mr. Schneiderman is focusing on. His spokesman said the attorney general would not comment on the investigation, which is in its early stages.

*   *   *

The requests for information by Mr. Schneiderman’s office also seem to confirm that the New York attorney general is operating independently of peers from other states who are negotiating a broad settlement with large banks over foreclosure practices.

By opening a new inquiry into bank practices, Mr. Schneiderman has indicated his unwillingness to accept one of the settlement’s terms proposed by financial institutions – that is, a broad agreement by regulators not to conduct additional investigations into the banks’ activities during the mortgage crisis.  Mr. Schneiderman has said in recent weeks that signing such a release was unacceptable.

*   *   *

It is unclear whether Mr. Schneiderman’s investigation will be pursued as a criminal or civil matter.

Are the banksters running scared yet?  John Carney of CNBC’s NetNet blog, noted some developments, which could signal that some potential “persons of interest” might be seeking cover:

A Warning Sign:  CFOs Resigning

The chief financial officers of both Wells Fargo and Bank of America recently resigned.  JPMorgan Chase replaced its CFO last year.  While each of these moves has been spun as benign news by the banks, it could be a warning sign that something is deeply amiss.

Hope springs eternal!


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Those Smart Bond Traders

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There seems to be a consensus that bond traders are smarter than stock traders.  Consider this thought from Investopedia’s Financial Edge website:

Many investors believe bond traders understand the economy better than equity traders.  Bond traders pay very close attention to any economic factor that might affect interest rates.  Equity traders recognize that changes in bond prices provide a good indication of what bond traders think of the economy.

Widespread belief that Ben Bernanke’s Zero Interest Rate Policy (ZIRP) has created a stock market “bubble” has led to fear that the bubble may soon pop and cause the market to crash.  It was strange to see that subject discussed by John Melloy at CNBC, given the news outlet’s reputation for stock market cheerleading. Nevertheless, Mr. Melloy recently presented us with some ominous information:

The Yale School of Management since 1989 has asked wealthy individual investors monthly to give the “probability of a catastrophic stock market crash in the U.S. in the next six months.”

In the latest survey in December, almost 75 percent of respondents gave it at least a 10 percent chance of happening.  That’s up from 68 percent who gave it a 10 percent probability last April, just before the events of May 6, 2010.

*   *   *

The Flash Crash Commission – containing members of the CFTC and SEC – made a series of recommendations for improving market structure Friday, including single stock circuit breakers, a more reliable audit trail on trades, and curbing the use of cancelled trades by high-frequency traders.  They still don’t know what actually caused the nearly 1,000-point drop in the Dow Jones Industrial Average in a matter of minutes.

*   *   *

Overall volume has been very light in the market though, as the individual investor put more money into bonds last year than stocks in spite of the gains.  Strategists said this has been one of the longer bull markets (starting in March 2009) with barely any retail participation.  Flows into equity mutual funds did turn positive in January and have continued this month however, according to ICI and TrimTabs.com.  Yet the fear of a crash persists.

Whether or not one is concerned about the possibility of a market crash, consensual ambivalence toward equities is on the rise.  Felix Salmon recently wrote an article for The New York Times entitled, “Wall Street’s Dead End”, which began with the observation that the number of companies listed on the major domestic exchanges peaked in 1997 and has been declining ever since.  Mr. Salmon discussed the recent trend toward private financing of corporations, as opposed to the tradition of raising capital by offering shares for sale on the stock exchanges:

Only the biggest and oldest companies are happy being listed on public markets today.  As a result, the stock market as a whole increasingly fails to reflect the vibrancy and heterogeneity of the broader economy.  To invest in younger, smaller companies, you increasingly need to be a member of the ultra-rich elite.

At risk, then, is the shareholder democracy that America forged, slowly, over the past 50 years.  Civilians, rather than plutocrats, controlled corporate America, and that relationship improved standards of living and usually kept the worst of corporate abuses in check.  With America Inc. owned by its citizens, the success of American business translated into large gains in the stock portfolios of anybody who put his savings in the market over most of the postwar period.

Today, however, stock markets, once the bedrock of American capitalism, are slowly becoming a noisy sideshow that churns out increasingly meager returns.  The show still gets lots of attention, but the real business of the global economy is inexorably leaving the stock market — and the vast majority of us — behind.

Investors who decided to keep their money in bonds, heard some discouraging news from bond guru Bill Gross of PIMCO on February 2.   Gus Lubin of The Business Insider provided a good summary of what Bill Gross had to say:

His latest investment letter identifies four scenarios in which bondholders would get burned.  Basically these are sovereign default, currency devaluation, inflation, and poor returns relative to other asset classes.

In other words, you can’t win.  Gross compares Ben Bernanke to the devil and calls ZIRP a devil’s haircut:  “This is not God’s work – it has the unmistakable odor of Mammon.”

Gross recommends putting money in foreign bonds and other assets that yield more than Treasuries.

I was particularly impressed with what Bill Gross had to say about the necessary steps for making America more competitive in the global marketplace:

We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again.  We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship.  We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up.  America requires more than a makeover or a facelift.  It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system.  It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola.  Are record corporate profits a fair price for America’s soul?  A devil’s bargain more than likely.

You can’t discuss bond fund managers these days, without mentioning Jeffrey Gundlach, who recently founded DoubleLine Capital.  Jonathan Laing of Barron’s wrote a great article about Gundlach entitled “The King of Bonds”.  When I reached the third paragraph of that piece, I had to re-read this startling fact:

His DoubleLine Total Return Bond Fund (DBLTX), with $4.5 billion of assets as of Jan. 31, outperformed every one of the 91 bond funds in the Morningstar intermediate-bond-fund universe in 2010, despite launching only in April.  It notched a total return of 16.6%, compared with returns of 8.36% for the giant Pimco Total Return Fund (PTTAX), run by the redoubtable Bill Gross  . . .

The essay described how Gundlach’s former employer, TCW, feared that Gundlach was planning to leave the firm.  Accordingly, TCW made a pre-emptive strike and fired Gundlach.  From there, the story gets more interesting:

Five weeks after Gundlach’s dismissal, TCW sued the manager, four subordinates and DoubleLine for allegedly stealing trade secrets, including client lists, transaction information and proprietary security-valuation systems.  The suit also charged that a search of Gundlach’s offices had turned up a trove of porn magazines, X-rated DVDs and sexual devices, as well as marijuana.

*    *    *

He charges TCW with employing “smear tactics … to destroy our business.” As for “the sex tapes and such,” he says, they represented “a closed chapter in my life.”

That’s certainly easy to understand.  Porn just hasn’t been the same since Ginger Lynn retired.

Jeff Gundlach’s December webcast entitled, “Independence Day” can be found here.  Take a good look at the graph on page 16:  “Top 0.1% Income Earners Share of Total Income”.  It’s just one of many reminders that our country is headed in the wrong direction.


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