Most investors have been lamenting the recent stock market swoon. The Dow Jones Industrial Average has given up all of the gains earned during 2012. The economic reports keep getting worse by the day. Yet, for some people all of this is good news . . .
You might find them scattered along the curbs of Wall Street . . . with glazed eyes . . . British teeth . . . and mysterious lesions on their skin. They approach Wall Street’s upscale-appearing pedestrians, making such requests as: “POMO?” . . . “Late-day rally?” . . . “Animal Spirits?” These desperate souls are the “POMO junkies”. Since the Federal Reserve concluded the last phase of quantitative easing in June of 2011, the POMO junkies have been hopeless. They can’t survive without those POMO auctions, wherein the New York Fed would purchase Treasury securities – worth billions of dollars – on a daily basis. After the auctions, the Primary Dealers would take the sales proceeds to their proprietary trading desks, where the funds would be leveraged and used to purchase high-beta, Russell 2000 stocks. You saw the results: A booming stock market – despite a stalled economy.
Since I first wrote about the POMO junkies last summer, they have resurfaced on a few occasions – only to slink back into the shadows as the rumors of an imminent Quantitative Easing 3 were debunked.
The recent spate of awful economic reports and the resulting stock market nosedive have rekindled hopes that the Federal Reserve will crank-up its printing press once again, for the long-awaited QE 3. Economist John Hussman discussed this situation on Monday:
At this point, the S&P 500 has achieved a cumulative total return of less than 10% since April 2010. Meanwhile, of course, there remains a great deal of faith in the “Bernanke put,” because even though it’s fairly obvious that QE has done nothing durable for the economy or the financial markets over the last couple of years, a hit of QE might at least be good for a few months of “risk on” delirium. If the American public can’t get thoughtful economic leadership, at least Wall Street’s speculative junkies can hope for a little taste of Q from Sugar Daddy.
One of the problems with QE here, however, is that it would essentially represent fiscal policy for the benefit of speculators, at taxpayer expense. To see this, note that the 10-year Treasury yield is now down to less than 1.5%. One wonders how Bernanke would be able to argue, with a straight face, that this is not low enough. Nevertheless, a 10-year bond has a duration of 8 years – meaning that each 100 basis point fluctuation in interest rates is associated with a change of about 8% in the price of the bond. So if you buy the bond and hold it for a full year, an interest rate change of of 1.5/8 = .1875, or less than 20 basis points, is enough to wipe out the annual interest and leave you with a negative total return.
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“QE3 – subsidizing banks and bond speculators at taxpayer expense” – there’s a pithy slogan. That doesn’t mean the Fed will refrain from more of its recklessness (which will be nearly impossible to reverse when it becomes necessary to do so), but does anyone actually believe by now that QE would improve the economy, durably elevate risky assets beyond a few months, or materially relieve global debt strains?
Obviously, the POMO junkies have no such concerns. Beyond that, the Federal Reserve’s “third mandate” – keeping the stock market bubble inflated – will be the primary factor motivating the decision, regardless of whether those asset prices hold for more than a few months.
The POMO junkies are finally going to score. As they do, a tragic number of retail investors will be led to believe that the stock market has “recovered”, only to learn – a few months down the road – that the latest bubble has popped.
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.
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.
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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.
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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.
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.
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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.
Robert Reich, former Secretary of Labor under President Clinton, has been hitting more than a few home runs lately. At a time when too many commentators remain in lock-step with their favorite political party, Reich pulls no punches when pointing out the flaws in the Obama administration’s agenda. I particularly enjoyed his reaction to the performance of Larry Summers on ABC television’s This Week on April 4:
I’m in the “green room” at ABC News, waiting to join a roundtable panel discussion on ABC’s weekly Sunday news program, This Week.
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Larry Summers was interviewed just before Greenspan. He said the economy is expanding, that the Administration is doing everything it can to bring jobs back, and that the regulatory reform bills moving on the Hill will prevent another financial crisis.
What?
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If any three people are most responsible for the failure of financial regulation, they are Greenspan, Larry Summers, and my former colleague, Bob Rubin.
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I dislike singling out individuals for blame or praise in a political system as complex as that of the United States but I worry the nation is not on the right economic road, and that these individuals — one of whom advises the President directly and the others who continue to exert substantial influence among policy makers — still don’t get it.
The direction financial reform is taking is not encouraging. Both the bill that emerged from the House and the one emerging from the Senate are filled with loopholes that continue to allow reckless trading of derivatives. Neither bill adequately prevents banks from becoming insolvent because of their reckless trades. Neither limits the size of banks or busts up the big ones. Neither resurrects the Glass-Steagall Act. Neither adequately regulates hedge funds.
More fundamentally, neither bill begins to rectify the basic distortion in the national economy whose rewards and incentives are grotesquely tipped toward Wall Street and financial entrepreneurialism, and away from Main Street and real entrepreneurialism.
Is it because our elected officials just don’t understand what needs to be done to prevent another repeat of the financial crisis – or is the unwillingness to take preventative action the result of pressure from lobbyists? I think they’re just playing dumb while they line their pockets with all of that legalized graft. Meanwhile, Professor Reich continued to function as the only adult in the room, with this follow-up piece:
Needless to say, the danger of an even bigger cost in coming years continues to grow because we still don’t have a new law to prevent what happened from happening again. In fact, now that they know for sure they’ll be bailed out, Wall Street banks – and those who lend to them or invest in them – have every incentive to take even bigger risks. In effect, taxpayers are implicitly subsidizing them to do so.
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But the only way to make sure no bank it too big to fail is to make sure no bank is too big. If Congress and the White House fail to do this, you have every reason to believe it’s because Wall Street has paid them not to.
Reich’s recent criticism of the Federal Reserve was another sorely-needed antidote to Ben Bernanke’s recent rise to media-designated sainthood. In an essay quoting Republican Senator Jim DeMint of South Carolina, Reich transcended the polarized political climate to focus on the fact that the mysterious Fed enjoys inappropriate authority:
The Fed has finally came clean. It now admits it bailed out Bear Stearns – taking on tens of billions of dollars of the bank’s bad loans – in order to smooth Bear Stearns’ takeover by JP Morgan Chase. The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed. The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout.
The losses from those deals still total tens of billions, and taxpayers are ultimately on the hook. But the public never knew. There was no congressional oversight. It was all done behind closed doors. And the New York Fed – then run by Tim Geithner – was very much in the center of the action.
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The Fed has a big problem. It acts in secret. That makes it an odd duck in a democracy. As long as it’s merely setting interest rates, its secrecy and political independence can be justified. But once it departs from that role and begins putting billions of dollars of taxpayer money at risk — choosing winners and losers in the capitalist system — its legitimacy is questionable.
You probably thought that Ron Paul was the only one who spoke that way about the Federal Reserve. Fortunately, when people such as Robert Reich speak out concerning the huge economic and financial dysfunction afflicting America, there is a greater likelihood that those with the authority to implement the necessary reforms will do the right thing. We can only hope.
This week’s decision by the United States Supreme Court, in the case of Jones v.Harris Associates received a good deal of attention because it increased hopes of a cut in the fees mutual funds charge to individual investors. The plaintiffs, Jerry Jones, Mary Jones and Arline Winerman, sued Harris Associates (which runs or “advises” the Oakmark mutual funds) for violating the Investment Company Act, by charging excessive fees. Harris was charging individual investors a .88 percent (88 basis points) management fee, compared to the 45-bps fee charged to its institutional clients.
In his article about the Jones v. Harris case, David Savage of the Los Angeles Times made a point that struck a chord with me:
Pay scales in the mutual fund industry, like those in banking and investment firms, are not strictly regulated by the government, and as the Wall Street collapse revealed, investment advisors and bankers sometimes can earn huge fees while losing money for their shareholders.
In 1970, however, Congress said mutual funds must operate with an independent board of directors. And it said the investment advisors for the funds have a “fiduciary duty,” or a duty of trust, to the investors when setting fees for their services. The law also allowed suits against those suspected of violating this duty.
But investors have rarely won such claims. In Tuesday’s decision, the Supreme Court gave new life to the law, ruling that investment advisors could be sued for charging excessive fees.
But the court’s opinion also said such suits should fail unless there was evidence that advisors hid information from the board or that their fees were “so disproportionately large” as to suggest a cozy deal between the advisors and the supposedly independent board.
The lousy job that boards of directors do in protecting the investors they supposedly represent has become a big issue since the financial crisis, as Mr. Savage explained. Think about it: How could the boards of directors for those too-big-to-fail institutions allow the payouts of obscene bonuses to the very people who devastated our economy and nearly destroyed (or may yet destroy) our financial system? The directors have a duty to the shareholders to make sure those investors obtain a decent dividend when the company does well. If the company does well only because of a government bailout, despite inept management by the executives, who should benefit – the execs or the shareholders?
Michael Brush wrote an interesting essay concerning bad corporate boards for MSN Money on Wednesday. His opining point was another reminder of how the financial crisis was facilitated by cozy relationships with bank boards:
Here’s a key take-away from the financial crisis that devastated our economy: Bad boards of directors played a big role in the mess.
Because bank boards were too close to the executives they were supposed to police, they did a lousy job of spotting excessive risk. They allowed short-term pay incentives such as huge options grants that encouraged bankers to roll the dice.
Michael Brush contacted The Corporate Library which used its Board Analyst screener to come up with a list of the five worst corporate boards. Here is how he explained that research:
The ratings are based on problems that can compromise boards, including:
Allowing directors to do too much business with the companies they are supposed to oversee.
Letting the CEO chair the board, which is supposed to oversee the CEO.
Overpaying board members and keeping them on too long.
Allowing directors to miss too many meetings to do an effective job.
These and other red flags signal that a board is entrenched — too close to management to do its job of overseeing the people in the corner offices.
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The big problem with bad boards is that they’re unlikely to ask CEOs tough questions, act swiftly when it is time to replace a CEO or tighten the reins on pay and perks. And bad boards hurt shareholders. Several studies have indicated that the stocks of companies with weak boards underperform.
I won’t spoil the surprise for you by identifying the companies with the bad boards. If you want that information you will have to read the full piece. Besides — you should read it anyway.
All of this raises the question (once again) of whether we will see any changes result in the aftermath of the financial crisis that will help protect the “little people” or the not-so-little “investor class”. I’m not betting on it.
As 2010 approaches, expect the usual bombardment of prognostications from the stars of the info-tainment industry, concerning everything from celebrity divorces to the nuclear ambitions of Iran. Meanwhile, those of us preferring quality news reporting must increasingly rely on internet-based venues to seek out the views of more trustworthy sources on the many serious subjects confronting the world. On October 29, I discussed the most recent GMO Quarterly Newsletterfrom financial wizard Jeremy Grantham and his expectation that the stock market will undergo a
“correction” or drop of approximately 20 percent next year. Grantham’s paper inspired others to ponder the future of the troubled American economy and the overheated stock market. Mark Hulbert, editor of The Hulbert Financial Digest, wrote a piece for the December 5 edition of The New York Times, picking up on Jeremy Grantham’s stock performance expectations. Hulbert noted Grantham’s continuing emphasis on “high-quality, blue chip” stocks as the most likely to perform well in the coming year. Grantham’s rationale is based on the fact that the recent stock market rally was excessively biased in favor of junk stocks, rather than the higher-quality “blue chips”, such as Wal-Mart. Hulbert noted how Wal-mart shares gained only 14 percent since March 9, while the shares of the debt-laden electronics services firm, Sanmina-SCI, have risen more than 600 percent during that same period. Hulbert pointed out that the conclusion to be reached from this information should be pretty obvious:
As an unintended consequence, Mr. Grantham said, high-quality stocks today are about as cheap as they have ever been relative to shares of firms with weaker finances.
It’s almost a certain bet that high-quality blue chips will outperform lower-quality stocks over the longer term,” he said.
My favorite reaction to Jeremy Grantham’s newsletter came from Paul Farrell of MarketWatch, who emphasized Grantham’s broader view for the economy as a whole, rather than taking a limited focus on stock performance. Farrell targeted President Obama’s “predictably irrational” economic policies by presenting us with a handy outline of Grantham’s criticism of those policies. Farrell prefaced his outline with this statement:
So please listen closely to his 14-point analysis of the rampant irrationality at the highest level of American government today, because what he is also predicting is another catastrophic meltdown dead ahead.
At the first point in the outline, Farrell made this observation:
If Grantham ever was a fan, he’s clearly disillusioned with the president. His 14 points expose the extremely irrational behavior of Obama breaking promises by turning Washington over to Wall Street, a blunder that will trigger the Great Depression 2.
Farrell’s discussion included a reference to the latest article by Matt Taibbi for Rolling Stone, entitled “Obama’s Big Sellout”. The Rolling Stone website described Taibbi’s latest essay in these terms:
In “Obama’s Big Sellout”, Matt Taibbi argues that President Obama has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway. Rather than keeping his progressive campaign advisers on board, Taibbi says Obama gave key economic positions in the White House to the very people who caused the economic crisis in the first place. Taibbi also points to the ties Obama’s appointees have to one main in particular: Bob Rubin, the former Goldman Sachs co-chairman who served as Treasury secretary under Bill Clinton.
Since the article is not available online yet, you will have to purchase the latest issue of Rolling Stone or wait patiently for the release of their next issue, at which time “Obama’s Big Sellout” should be online. In the mean time, they have provided this brief video of Matt Taibbi’s discussion of the piece.
The new year will also bring us a new book by Danny Schecter, entitled The Crime of Our Time. Mr. Schecter recently discussed this book in a live interview with Max Keiser. (The interview begins at 16:55 into the video.) In discussing the book, Schecter explained how “the financial industry essentially de-regulated its own marketplace. They got rid of the laws that required disclosure and accountability …” and created a “shadow banking system”. Shechter’s previous book, Plunder, has now become a film that will be released soon. In Plunder, he described how the subprime mortgage crisis nearly destroyed the American economy. The interview by Max Keiser contains a short clip from the upcoming film. Danny also directed the movie based on (and named after) his 2006 book, In Debt We Trust, wherein he predicted the bursting of the credit bubble.
It was right at this point last year when Danny’s father died. The event is easy for me to remember because my own father died one week later. At that time, I was comforted by reading Danny’s eloquent piece about his father’s death. Danny was kind enough to respond to the e-mail I had sent him since, as an old fan from his days at WBCN radio in Boston, during the early 1970s, my friends and I tried our best to provide Danny with any leads we came across. These days, it’s good to see that Danny Schechter “The News Dissector” is still at it with the same vigor he demonstrated more than thirty-five years ago. I look forward to his new book and the new film.
It seems as though once an individual rises to a significant level of influence and authority, that person becomes “too big for straight talk”. We’ve seen it happen with politicians, prominent business people and others caught-up in the “leadership” racket. Influential people are well aware of the unforeseen consequences resulting from a candid, direct response to a simple question. Mindful of those hazards, a rhetorical technique employing equivocation, qualification and obfuscation is cultivated in order to avoid responsibility for what could eventually become exposed as a brain fart.
Since last year’s financial crisis began, we have heard plenty of debate over the concept of “too big to fail” — the idea that a bank is so large and interconnected with other important financial institutions that its failure could pose a threat to the entire financial system. Recent efforts at financial reform have targeted the “too big to fail” (TBTF) concept, with differing approaches toward downsizing or breaking up those institutions with “systemic risk” potential. Treasury Secretary “Turbo” Tim Geithner was the first to use doublespeak as a weapon against those attempting to eliminate TBTF status. When he testified before the House Financial Services Committee on September 23 to explain his planned financial reform agenda, Geithner attempted to create the illusion that his plan would resolve the “too big to fail” problem:
First, we cannot allow firms to reap the benefits of explicit or implicit government subsidies without very strong government oversight. We must substantially reduce the moral hazard created by the perception that these subsidies exist; address their corrosive effects on market discipline; and minimize their encouragement of risk-taking.
So, in other words … the government subsidies to those institutions will continue, but only if the recipients get “very strong government oversight”. In his next sentence, Geithner expressed his belief that the moral hazard was created “by the perception that these subsidies exist” rather than the FACT that they exist. At a subsequent House Financial Services Committee hearing on October 29, Geithner again tried to trick his audience into believing that the administration’s latest reform plan was opposed to TBTF status. As Jim Kuhnhenn and Anne Flaherty reported for The Huffington Post, representatives from both sides of the isle saw right through Geithner’s smokescreen:
Others argue that by singling out financial firms important to the economy, the government could inevitably set itself up to bail them out, and that even dismantling rather than rescuing them would take taxpayer money.
“Apparently, the ‘too big to fail’ model is too hard to kill,” quipped Republican Rep. Ed Royce of California.
Rep. Brad Sherman, D-Calif., called the bill “TARP on steroids,” referring to the government’s $700 billion Wall Street rescue fund.
On Friday the 13th, Jamie Dimon, the CEO of JP Morgan Chase, stole the spotlight in this debate with an opinion piece published by The Washington Post. Dimon pretended to be opposed to the TBTF concept and quoted from his fellow double-talker, Turbo Tim. Dimon then made this assertion: “The term ‘too big to fail’ must be excised from our vocabulary.” He followed with the qualification that ending TBTF “does not mean that we must somehow cap the size of financial-services firms.” Dimon proceeded to argue against the creation of “artificial limits” on the size of financial institutions. In other words: Dimon would like to see Congress enact a law that could never be applied because it would contain no metric for its own applicability.
Criticism of Dimon’s Washington Post piece was immediate and widespread, especially considering the fact that his own JP Morgan is a TBTF All Star. David Weidner explained it for MarketWatch this way:
In other words, Dimon favors a regulatory system for unwinding failing institutions — he believes no bank should be too big to fail — but doesn’t seem to like the global effort, endorsed by the G-20, to encourage smaller, less-connected institutions. He wants to let big institutions be big.
The best criticism of Dimon’s article came from my blogging buddy, Adrienne Gonzalez, a/k/a Jr Deputy Accountant. She pointed out that the report for the first quarter of 2009 by the Office of the Currency Comptroller revealed that JP Morgan Chase holds 81 trillion dollars’ worth of derivatives contracts, putting it in first place on the OCC list of what she called “derivatives offenders”. After quoting the passage in Dimon’s piece concerning the procedure for winding-down “a large financial institution”, Adrienne made this point:
Interesting and a great read but useless in practical application. Does Dimon really believe this? With $81 TRILLION in notional derivatives exposure, I don’t see how an FDIC for investment banks could possibly unwind such a tangled mess in an orderly fashion. He’s joking, right?
For an interesting portrayal of The Dimon Dog, you might want to take a look at an article by Paul Barrett, entitled “I, Banker”. It was actually a book review Barrett wrote for The New York Times concerning a biography of Dimon by Duff McDonald, entitled The Last Man Standing. I haven’t read the book and after reading Barrett’s review, I have no intention of doing so — since Barrett made the book appear to be the work of a fawning sycophant in awe of Dimon. In criticizing the book, Paul Barrett gave us some of his own useful insights about Dimon:
The Dimon of “Last Man Standing” emerges as a brilliant but flawed winner, one whose long and psychologically tangled apprenticeship to another legendary money man, Sanford Weill, helped lay the groundwork for the crisis of 2008. In recent days, Dimon’s conduct suggests he is someone who puts the interests of his company ahead of those of society at large, which will be surprising only to those who naively look to modern Wall Street for statesmanship.
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JPMorgan under Dimon’s leadership allowed home buyers to borrow without having to prove their income. The bank did business with sleazy mortgage brokers who would lend to anyone with a heartbeat. These habits ended only in 2008, when it was too late. McDonald lauds Dimon for cleverly unloading huge volumes of the toxic subprime mortgages JPMorgan originated. But that’s like praising a corporate polluter for trucking his poisonous sludge into the next state. It doesn’t solve the problem; it merely moves it elsewhere.
Paul Barrett’s book review gave us a useful perspective on The Dimon Dog’s support of the administration’s financial reform agenda:
McDonald notes that the C.E.O. publicly endorses certain financial regulatory changes proposed by the Obama administration. But critics point out that lobbyists employed by “Dimon and his team are actually stonewalling derivatives reform in order to protect the outsize margins the business generates” for JPMorgan. The derivatives in question include “credit default swaps,” transactions akin to insurance policies that lenders can buy to buffer against loans that go bad. In the wrong hands, credit derivatives become a form of gambling that can lead to ruin. They need to be checked, and Dimon’s self-interested resistance isn’t helping matters.
Dimon may be the best of his breed, but when it comes to public-spirited leaders, today’s Wall Street isn’t a promising recruiting ground.
When I started this blog in April of 2008, my focus was on that year’s political campaigns and the exciting Presidential primary season. At the time, I expressed my concern that the most prominent centrist in the race, John McCain, would continue pandering to the televangelist lobby after winning the nomination, when those efforts were no longer necessary. He unfortunately followed that strategy and went on to say dumb things about the most pressing issue facing America in decades: the economy. During the Presidential campaign of Bill Clinton, James Carville was credited with writing this statement on a sign in front of Clinton’s campaign headquarters in Little Rock: “It’s the economy, stupid!” That phrase quickly became the mantra of most politicians until the attacks of September 11, 2001 revealed that our efforts at national security were inadequate. Since that time, we have over-compensated in that area. Nevertheless, with the demise of Rudy Giuliani’s political career, the American public is not as jumpy about terrorism as it had been — despite the suspicious connections of the deranged psychiatrist at Fort Hood. As the recent editorials by Steve Chapman of the Chicago Tribune and Vincent Carroll of The Denver Post demonstrate, the cerebral bat guano necessary to get the public fired-up for a vindictive rampage just isn’t there anymore.
President Obama’s failure to abide by the Carville maxim appears to be costing him points in the latest approval ratings. The fact that the new President has surrounded himself with the same characters who helped create the financial crisis, has become a subject of criticism by commentators from across the political spectrum. Since Obama’s Presidential campaign received nearly one million dollars in contributions from Goldman Sachs, he should have known we’d be watching. CNBC’s Charlie Gasparino was recently interviewed by Aaron Task. During that discussion, Gasparino explained that Jamie Dimon (the CEO of JP Morgan Chase and director of the New York Federal Reserve) has managed to dissuade the new President from paying serious attention to Paul Volcker (chairman of the Economic Recovery Advisory Board) whose ideas for financial reform would prove inconvenient for those “too big to fail” financial institutions. As long as JP Morgan’s “Dimon Dog” and Lloyd Bankfiend of Goldman Sachs have such firm control over the puppet strings of “Turbo” Tim Geithner, Larry Summers and Ben Bernanke, why pay attention to Paul Volcker? The voting public (as well as most politicians) can’t understand most of these economic problems, anyway. I seriously doubt that many of our elected officials could explain the difference between a credit default swap and a wife swap.
Once again, Dan Gerstein of Forbes.com has directed a water cannon of common sense on the malaise blaze that has been fueled by a plague of ignorance. In his latest piece, Gerstein tossed aside that tattered, obsolete handbook referred to as “conventional wisdom” to take a hard look at the reality facing all incumbent, national politicians:
It’s the stupidity about the economy in Washington and on Wall Street that’s driving most voters berserk. Indeed, the financial system is still out of whack and tens of millions of people are (or fear they soon could be) out of work, yet every day our political and economic leaders say and do knuckleheaded things that show they are unfailingly and imperviously out of touch with those realities.
Gerstein’s short essay is essential reading for a quick understanding of how and why America can’t seem to solve many of its pressing problems these days. Gerstein has identified the responsible culprits as three groups: the Democrats, the Republicans and the big banks — describing them as the “axis of cluelessness”:
We have gone long past “they don’t get it” territory. It’s now unavoidably clear that they won’t get it — and we won’t get the responsible leadership and honest capitalism we want–until (as I have suggested before) we demand it.
Surprisingly, public awareness concerning the root cause of both the financial crisis and our ongoing economic predicament has escalated to a startling degree in recent weeks. This past spring, if you wanted to find out about the nefarious activities transpiring at Goldman Sachs, you had to be familiar with Zero Hedge or GoldmanSachs666.com. Today, you need look no further than Maureen Dowd’s column or the most recent episode of Saturday Night Live. Everyone knows what the problem is. Gordon Gekko’s 1987 proclamation that “greed is good” has not only become an acceptable fact of life, it has infected our laws and the opinions rendered by our highest courts. We are now living with the consequences.
Fortunately, there are plenty of people in the American financial sector who are concerned about the well-being of our society. A recent study by David Weild and Edward Kim (Capital Markets Advisors at Grant Thornton LLP) entitled “A wake-up call for America” has revealed the tragic consequences resulting from the fact that the United States, when compared with other developed countries, has fallen seriously behind in the number of companies listed on our stock exchanges. Here’s some of what they had to say:
The United States has been engaged in a longstanding experiment to cut commission and trading costs. What is lacking in this process is the understanding that higher transaction costs actually subsidized services that supported investors. Lower transaction costs have ushered in the age of “Casino Capitalism” by accommodating trading interests and enabling the growth of day traders and high-frequency trading.
The Great Depression in Listings was caused by a confluence of technological, legislative and regulatory events — termed The Great Delisting Machine — that started in 1996, before the 1997 peak year for U.S. listings. We believe cost cutting advocates have gone overboard in a misguided attempt to benefit investors. The result — investors, issuers and the economy have all been harmed.
The Grant Thornton study illustrates how and why “as many as 22 million” jobs have been lost since 1997, not to mention the destruction of retirement savings, forcing many people to come out of retirement and back to work. Beyond that, smaller companies have found it more difficult to survive and business loans have become harder to obtain.
Aside from all the bad news, the report does offer solutions to this crisis:
The solutions offered will help get the U.S. back on track by creating high-quality jobs, driving economic growth, improving U.S. competitiveness, increasing the tax base, and decreasing the U.S. budget deficit — all while not costing the U.S. taxpayer a dime.
These solutions are easily adopted since they:
create new capital markets options while preserving current options,
expand choice for consumers and issuers,
preserve SEC oversight and disclosure, including Sarbanes-Oxley, in the public market solution, and
reserve private market participation only to “qualified” investors, thus protecting those investors that need protection.
These solutions would refocus a significant portion of Wall Street on rebuilding the U.S. economy.
The Grant Thornton website also has a page containing links to the appropriate legislators and a prepared message you can send, urging those legislators to take action to resolve this crisis.
Now is your chance to do something that can help address the many problems with our economy and our financial system. The people at Grant Thornton were thoughtful enough to facilitate your participation in the resolution of this crisis. Let the officials in Washington know what their bosses — the people — expect from them.
Meghan McCain’s recent lament in The Daily Beast struck me as rather strange. She really should know better. Ms. McCain expressed her frustration over mainstream media treatment of “two of the most prominent women in politics — Hillary Clinton and Sarah Palin”. Ms. McCain felt the coverage received by those two politicians has been so misogynistic that she has nearly given up on the possibility that she may ever see a woman get elected to the Presidency:
It seems to me the male-dominated media suffers from a Goldilocks Syndrome that keeps women from shattering the glass ceiling. Worse, I fear it will prevent tomorrow’s female leaders from even seeking office.
Of course, if one can see no further than Hillary Clinton or Sarah Palin when seeking female Presidential candidates, then despair is inevitable. In the summer of 2008, after Ms.Clinton faced up to the reality that Barack Obama had won the Democratic nomination, we heard similar doubts expressed by many despondent female supporters of Hillary Clinton — that they would never see a female elected President within their own lifetimes. At that point, I wrote apiece entitled “Women To Watch”, reminding readers that “there are a number of women presently in the Senate, who got there without having been married to a former President (whose surname could be relied upon for recognition purposes).” One of those women, whom I discussed at that time, was Senator Maria Cantwell of Washington. Maria Cantwell has been in the news quite a bit recently and the coverage has been favorable. As I said in June of 2008, those holding out hope for a female Presidential candidate should keep an eye on her.
In our highly-partisan political climate, one rarely hears a national politician break from “party line” rhetoric and talking points while being interviewed by the news media or when writing commentary pieces for news publications and blogs. Nevertheless, Senator Cantwell has taken the bold step of criticizing, not only the administration’s handling of the economic crisis, but the K Street payoff culture enlisting her fellow Democrats as enablers of the status quo.
On October 30, Senator Cantwell wrote a piece for The Huffington Post, decrying the fact that those financial institutions benefiting from the massive bailouts from TARP and the Federal Reserve “have resumed their old habit of using other people’s money to gamble with the same risky unregulated derivatives that led us into this crisis.” The reason for the failure at every level of the federal government to even consider appropriate legislation or regulations to rein-in continuing irresponsible behavior by those institutions was candidly discussed by the Senator:
Look no further than the powerful lobbying arm of the financial services sector, which has spent at least $220 million this year lobbying Congress to stave off new rules to prevent another collapse. That is over $500,000 in lobbying for every member of Congress, which might help explain why, to date, nothing has been fixed in our porous financial regulatory system. Americans want to know when Congress will put an end to the Wall Street’s secret off-book gambling schemes and restore our capitalist system by requiring real transparency and true competition.
Senator Cantwell’s essay is essential reading, coming on the heels of a rebuke, by her fellow Democrats, against efforts at requiring transparency in the trading of credit default swaps:
Imposing full transparency and true competition will require moving derivative trades onto regulated exchanges. That would mean full transparency of trading prices and volumes, reporting requirements for large trader positions, and adequate capital reserves to protect against a default. The government needs full anti-fraud and anti-manipulation authority. Giving regulators this power will ensure a transparent and competitive marketplace and will ensure that violators will go to jail.
On November 2, Senator Cantwell appeared on MSNBC’s Morning Meeting with Dylan Ratigan. At that time, Mr. Ratigan had just written a piece for The Business Insider, expressing his outrage about recent statements by Treasury Secretary “Turbo” Tim Geithner, supporting House bank reform legislation allowing credit default swaps to continue being traded in secret. Since Senator Cantwell had previously discussed that subject with him on October 16, Mr. Ratigan focused on Geithner. Ratigan noted Geithner’s endorsement of the proposed House “banking reform” legislation on the previous day’s broadcast of Meet The Press — despite the bill’s “massive exemptions” allowing opacity in the trading of credit default swaps. Ratigan then asked Senator Cantwell why Tim Geithner still has a job, to which she replied:
I’m not sure because David Gregory had him almost — trying to get a straight answer out of him. What the Treasury Secretary basically said was: yes, banks should take more risks and we should continue the loopholes — and that is really appalling because, right now, we know that lack of transparency has caused this problem with the U.S. economy and Wall Street is continuing, one year later, continuing the same kind of loopholes. And so if the Treasury Secretary doesn’t come down hard against these loopholes and advocate foreclosing them, then we’re going to have a tough time closing them in Congress. So the Treasury Secretary is dodging the issue.
Senator Cantwell sure isn’t dodging any issues. Beyond that, she is demonstrating that she has more cajones than any of her male counterparts in the Senate. So far, all of the publicity concerning her position on financial reform has been favorable. After all, she is boldly standing up to the lobbyists, the Congress they own and a White House that received nearly a million dollars in campaign contributions from Goldman Sachs.
Back in Senator Cantwell’s home state of Washington, The Seattle Times praised her co-sponsorship of Senate Bill 823, the Net Operating Loss Carryback Act, which has already been passed by both houses of Congress. This bill increases the corporate income tax refunds for businesses that were making money during the pre-2008 era but now operate at a loss. As the Seattle Times editorial explained:
The national unemployment rate is still rising. It has just gone double-digit for the first time in 26 years, and is at 10.2 percent.
This is not recovery.
The new law does not have taxpayers underwrite credit default swaps or any of the other alchemic creations of Wall Street investment banks. It is not more aid and comfort for the nationalized and quasi-nationalized corporate giants; it specifically exempts Fannie Mae, Freddie Mac and any company in which the Treasury has recently become an owner.
This law is for the businesses that suffer in the recession, not the ones that caused it. It is one of the few things Congress has done that reaches directly to Main Street America. It is a big deal to many local businesses, including businesses here.
Congratulations, Senator Cantwell!
To Meghan McCain and other women remaining in doubt as to whether they will ever see a female sworn in as President: Just keep watching Maria Cantwell as she continues to earn well-deserved respect.
Everything was supposed to be getting “back to normal” by now. Since late July, we’ve been hearing that the recession is over. When the Gross Domestic Product number for the third quarter was released on Thursday, we again heard the ejaculations of enthusiasm from those insisting that the recession has ended. Investors were willing to overlook the most recent estimate that another 531,000 jobs were lost during the month of October, so the stock market got a boost. Nevertheless, as was widely reported, the Cash for Clunkers program added 1.66 percent to the 3.5 percent Gross Domestic Product annualized rate increase. Since Cash for Clunkers was a short-lived event, something else will be necessary to fill its place, stimulating economic activity. Once that sobering aspect of the story was absorbed, Friday morning’s news informed us that consumer spending had dropped for the first time in five months. The Associated Press provided this report:
Economists worry that the recovery could falter in coming months if households cut back on spending to cope with rising unemployment, heavy debt loads and tight credit conditions.
“With incomes so soft, increased spending will be a struggle,” Ian Shepherdson, chief U.S.economist at High Frequency Economics, wrote in a note to clients.
The Commerce Department said Friday that spending dropped 0.5% in September, the first decline in five months. Personal incomes were unchanged as workers contend with rising unemployment. Wages and salaries fell 0.2%, erasing a 0.2% gain in August.
Another report showed that employers face little pressure to raise pay, even as the economy recovers. The weak labor market makes it difficult for people with jobs to demand higher pay and benefits.
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. . . some economists believe that consumer spending will slow sharply in the current quarter, lowering GDP growth to perhaps 1.5%. Analysts said the risk of a double-dip recession cannot be ruled out over the next year.
With unemployment as bad as it is, those who have jobs need to be mindful of the Sword of Damocles, as it hangs perilously over their heads. As the AP report indicated, employers are now in an ideal position to exploit their work force. Worse yet, as Mish pointed out:
Personal income decreased $15.5 billion (0.5 percent), while real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent last quarter. Those are horrible numbers.
The war on the American consumer finally bit Wall Street in the ass on Friday when the S&P 500 index took a 2.8 percent nosedive. When mass layoffs become the magic solution to make dismal corporate earnings reports appear positive, when the consumer is treated as a chump by regulatory agencies, lobbyists and government leaders, the consumer stops fulfilling the designated role of consuming. When that happens, the economy stands still. As Renae Merle reported for The Washington Post:
“The government handed the ball off to the consumer and the consumer fell on it,” said Robert G. Smith, chairman of Smith Affiliated Capital in New York. “This is a function of there being no jobs and wages going lower.”
The sell-off on the stock market also reflected a report released Friday showing a decline in consumer sentiment this month, analysts said. The Reuters/University of Michigan consumer sentiment index fell to 70.6 in October, compared with 73.5 in September.
Rich Miller of Bloomberg News discussed the resulting apprehension experienced by investors:
Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July. Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.
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Worldwide, investors and analysts now view the U.S. as the weak link in the global economy, with its markets seen as among the riskiest by a plurality of those surveyed. One in four respondents expects an unemployment rate of 11 percent or more a year from now, compared with a U.S. administration forecast of 9.7 percent. The jobless rate now is 9.8 percent, a 26-year high.
Even before the release of “good news” on Thursday followed by Friday’s bad news, stock analysts who base their trading decisions primarily on reading charts, could detect indications of continuing market decline, as Michael Kahn explained for Barron’s last Wednesday.
Meanwhile, the Obama administration’s response to the economic crisis continues to generate criticism from across the political spectrum while breeding dissent from within. As I said last month, the administration’s current strategy is a clear breach of candidate Obama’s campaign promise of “no more trickle-down economics”. The widespread opposition to the administration’s proposed legislation to regulate (read that: placate) large financial companies was discussed by Stephen Labaton for The New York Times:
Senior regulators and some lawmakers clashed once again with the Obama administration on Thursday, finding fault with central elements of the White House’s latest plan to unwind large financial companies when their troubles imperil the financial system.
The Times article focused on criticism of the administration’s plan, expressed by Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation. As Mr.Labaton noted, shortly after Mr. Obama was elected President, Turbo Tim Geithner began an unsuccessful campaign to have Ms. Bair replaced.
On Friday, economist James K. Galbraith was interviewed by Bill Moyers. Here’s what Professor Galbraith had to say about the Obama administration’s response to the economic crisis:
They made a start, and certainly in the stimulus package, there were important initiatives. But the stimulus package is framed as a stimulus, as something which is temporary, which will go away after a couple of years. And that is not the way to proceed here. The overwhelming emphasis, in the administration’s program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we’re back to a world in which Wall Street and the major banks are leading, and setting the path–
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. . . they’ve largely been preoccupied with keeping the existing system from collapsing. And the government is powerful. It has substantially succeeded at that, but you really have to think about, do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place.
BILL MOYERS: Well, that’s what we’re getting, because after all of the mergers, shakedowns, losses of the last year, you have five monster financial institutions really driving the system, right?
JAMES GALBRAITH: And they’re highly profitable, and they are already paying, in some cases, extraordinary bonuses. And you have an enormous problem, as the public sees very clearly that a very small number of people really have been kept afloat by public action . And yet there is no visible benefit to people who are looking for jobs or people who are looking to try and save their houses or to somehow get out of a catastrophic personal debt situation that they’re in.
This is just another illustration of how “trickle down economics” doesn’t work. President Obama knows better. He told us that he would not follow that path. Yet, here we are: a country viewed as the weak link in the global economy because the well-being of those institutions considered “too big to fail” is the paramount concern of this administration.
TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.