Posts filed under ‘Banking’
Do you love working 40-50+ hour weeks? Do you want to be a Wal-Mart (WMT) greeter after you get laid off from your longstanding corporate job? Do you love relying on underfunded government entitlements that you hope won’t be insolvent 10, 20, or 30 years from now? Are you banking on winning the lottery to fund your retirement? Do you enjoy eating cat food?
If you answered “Yes” to one or all of these questions, then do I have a sure-fire investment program for you that will make your dreams of retiring at age 90 a reality! Just follow these three simple rules:
- Buy Low Yielding, Long-Term Bonds: There are approximately $7 trillion in negative yielding government bonds outstanding (see chart below), which as you may understand means investors are paying to give someone else money – insanity. Bank of America recently completed a study showing about two-thirds of the $26 trillion government bond market was yielding less than 1%. Not only are investors opening themselves up to interest rate risk and credit risk, if they sell before maturity, but they are also susceptible to the evil forces of inflation, which will destroy the paltry yield. If you don’t like this strategy of investing near 0% securities, getting a match and gasoline to burn your money has about the same effect.
Source: Financial Times
- Speculate on the Timing of Future Fed Rate Hikes/Cuts: When the economy is improving, talking heads and so-called pundits try to guess the precise timing of the next rate hike. When the economy is deteriorating, aimless speculation swirls around the timing of interest rate cuts. Unfortunately, the smartest economists, strategists, and media mavens have no consistent predicting abilities. For example, in 1998 Nobel Prize winning economists Robert Merton and Myron Scholes toppled Long Term Capital Management. Similarly, in 1996 Federal Reserve Chairman Alan Greenspan noted the presence of “irrational exuberance” in the stock market when the NASDAQ was trading at 1,350. The tech bubble eventually burst, but not before the NASDAQ tripled to over 5,000. More recently, during 2005-2007, Fed Chairman Ben Bernanke whiffed on the housing bubble – he repeatedly denied the existence of a housing problem until it was too late. These examples, and many others show that if the smartest financial minds in the room (or planet) miserably fail at predicting the direction of financial markets, then you too should not attempt this speculative feat.
- Trade on Rumors, Headlines & Opinions: Wall Street analysts, proprietary software with squiggly lines, and your hot shot day-trader neighbor (see Thank You Volatility) all promise the Holy Grail of outsized financial returns, but regrettably there is no easy path to consistent, long-term outperformance. The recipe for success requires patience, discipline, and the emotional wherewithal to filter out the endless streams of financial noise. Continually chasing or reacting to opinions, headlines, or guaranteed software trading programs will only earn you taxes, transaction costs, bid-ask spread costs, impact costs, high frequency trading manipulation and underperformance.
Saving for your future is no easy task, but there are plenty of easy ways to destroy your savings. If you want to retire at age 90, just follow my three simple rules.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in WMT or any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 1, 2015). Subscribe on the right side of the page for the complete text.
Watching Greece fall apart over the last five years has been like watching a slow motion train wreck. To many, this small country of 11 million people that borders the Mediterranean, Aegean, and Ionian Seas is known more for its Greek culture (including Zeus, Parthenon, Olympics) and its food (calamari, gyros, and Ouzo) than it is known for financial bailouts. Nevertheless, ever since the financial crisis of 2008-2009, observers have repeatedly predicted the debt-laden country will default on its €323 billion mountain of obligations (see chart below – approximately $350 billion in dollars) and subsequently exit the 19-member eurozone currency membership (a.k.a.,”Grexit”).
Now that Greece has failed to repay less than 1% of its full €240 billion bailout obligation – the €1.5 billion payment due to the IMF (International Monetary Fund) by June 30th – the default train is coming closer to falling off the tracks. Whether Greece will ultimately crash itself out of the eurozone will be dependent on the outcome of this week’s surprise Greek referendum (general vote by citizens) mandated by Prime Minister Alexis Tsipras, the leader of Greece’s left-wing Syriza party. By voting “No” on further bailout austerity measures recommended by the European Union Commission, including deeper tax increases and pension cuts, the Greek people would effectively be choosing a Grexit over additional painful tax increases and deeper pension cuts.
And who can blame the Greeks for being a little grouchy? You might not be too happy either if you witnessed your country experience an economic decline of greater than 25% (see Greece Gross Domestic Product chart below); 25% overall unemployment (and 50% youth unemployment); government worker cuts of greater than 20%; and stifling taxes to boot. Sure, Greeks should still shoulder much of the blame. After all, they are the ones who piled on $100s of billions of debt and overspent on the pensions of a bloated public workforce, and ran unsustainable fiscal deficits.
For any casual history observers, the current Greek financial crisis should come as no surprise, especially if you consider the Greeks have a longstanding habit of not paying their bills. Over the last two centuries or so, since the country became independent, the Greek government has spent about 90 years in default (almost 50% of the time). More specifically, the Greeks defaulted on external sovereign debt in 1826, 1843, 1860, 1894 and 1932.
The difference between now and past years can be explained by Greece now being a part of the European Union and the euro currency, which means the Greeks actually do have to pay their bills…if they want to remain a part of the common currency. During past defaults, the Greek central bank could easily devalue their currency (the drachma) and fire up the printing presses to create as much currency as needed to pay down debts. If the planned Greek referendum this week results in a “No” vote, there is a much higher probability that the Greek government will need to dust off those drachma printing presses.
Protest, riots, defaults, changing governments, and new currencies make for entertaining television viewing, but these events probably don’t hold much significance as it relates to the long-term outlook of your investments and the financial markets. In the case of Greece, I believe it is safe to say the economic bark is much worse than the bite. For starters, Greece accounts for less than 2% of Europe’s overall economy, and about 0.3% of the global economy.
Since I live out on the West Coast, the chart below caught my fancy because it also places the current Greek situation into proper proportion. Take the city of L.A. (Los Angeles – red bar) for example…this single city alone accounts for almost 3x the size of Greece’s total economy (far right on chart – blue bar).
Give Me My Money!
It hasn’t been a fun year for Greek banks. Depositors, who have been flocking to the banks, withdrew about $45 billion in cash from their accounts, over an eight month period (see chart below). Before the Greek government decided to mandatorily close the banks in recent days and implement capital controls limiting depositors to daily ATM withdrawals of only $66.
But once again, let’s put the situation into context. From an overall Greek banking sector perspective, the four largest Greek Banks (Bank of Greece, Piraeus Bank, Eurobank Ergasias, Alpha Bank) account for about 90% of all Greek banking assets. Combined, these banks currently have an equity market value of about $14 billion and assets on the balance sheets of $400 billion – these numbers are obviously in flux. For comparison purposes, Bank of America Corp. (BAC) alone has an equity market value of $179 billion and $2.1 trillion in assets.
Anxiety Remains High
Skeptical bears will occasionally acknowledge the miniscule-ness of Greece, but then quickly follow up with their conspiracy theory or domino effect hypothesis. In other words, the skeptics believe a contagion effect of an impending Grexit will ripple through larger economies, such as Italy and Spain, with crippling force. Thus far, as you can see from the chart below, Greece’s financial problems have been largely contained within its borders. In fact, weaker economies such as Spain, Portugal, Ireland, and Italy have fared much better – and actually improving in most cases. In recent days, 10-year yields on government bonds in countries like Portugal, Italy, and Spain have hovered around or below 3% – nowhere near the peak levels seen during 2008 – 2011.
Other doubting Thomases compare Greece to situations like Lehman Brothers, Long Term Capital Management, and the subprime housing market, in which underestimated situations snowballed into much worse outcomes. As I explain in one of my newer articles (see Missing the Forest for the Trees), the difference between Greece and the other financial collapses is the duration of this situation. The Greek circumstance has been a 5-year long train wreck that has allowed everyone to prepare for a possible Grexit. Rather than agonize over every news headline, if you are committed to the practice of worrying, I would recommend you focus on an alternative disaster that cannot be found on the front page of all newspapers.
There is bound to be more volatility ahead for investors, and the referendum vote later this week could provide that volatility spark. Regardless of the news story du jour, any of your concerns should be occupied by other more important worrisome issues. So, unless you are an investor in a Greek bank or a gyro restaurant in Athens, you should focus your efforts on long-term financial goals and objectives. Ignoring the noisy news flow and constructing a diversified investment portfolio across a range of asset classes will allow you to avoid the harmful consequences of the slow motion, multi-year Greek train wreck.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) and BAC, but at the time of publishing, SCM had no direct position in Bank of Greece, Piraeus Bank, Eurobank Ergasias, Alpha Bank or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on ICContact page.
Central banks around the globe are choking on low-yielding bonds, and as result are now expanding their investment menu beyond Treasuries into equities. Expansionary monetary policies purchasing short-term, low-rate bonds means that central banks have been gobbling up securities on their balance sheets that are earning next to nothing. To counteract the bond-induced indigestion of the central banks, many of them are considering increasing their equity purchasing strategies. How can you blame them? With the 10-year U.S. Treasury notes yielding 1.66%; 10-year German bonds eking out 1.21%; and 10-year Japanese Government Bonds (JGBs) paying a paltry 0.59%, it’s no wonder central banks are looking for better alternatives.
More specifically, the Bank of Japan (BOJ) is planning to pump $1.4 trillion into its economy over the next two years to encourage some inflation through open-ended asset purchases. Earlier this month, the BOJ said it has a goal of more than doubling equity related exchange traded funds (ETFs) by the end of 2014. According to Business Insider, the BOJ is currently holding $14.1 billion in equity ETFs with an objective to reach $35.3 billion in 2014.
I can only imagine how stock market bears feel about this developing trend when they have already blamed central banks’ quantitative easing initiatives as the artificial support mechanism for stock prices (see also The Central Bank Dog Ate my Homework).
While expanded equity purchases could break the backs of bond bulls and stock naysayers, some smart people agree that this strategy makes sense. Take Jim O’Neill, the chairman of Goldman Sachs Asset Management, who is retiring next week. Here’s what he has to say about expanded central bank stock purchases:
“Frankly, it makes a huge amount of sense in a world of floating exchange rates and such incredible opportunity, why should central banks keep so much money in very short term, liquid things when they’re not going to ever need it? To help their future returns for their citizens, why would they not invest in equity?”
How big is this shift towards equities? The Royal Bank of Scotland conducted a survey of 60 central banks that have about $6.7 trillion in reserves. There were 13% of the central banks already invested in equities, and almost 25% of them said they are or will be invested in equities within the next five years.
While I may agree that stocks generally are a more attractive asset class than bubblicious bonds right now, I may draw the line once the Fed starts buying houses, gasoline, and groceries for all Americans. Until then, dividend yields remain higher than Treasury yields, and the earnings yields (earnings/price) on stocks will remain more attractive than bond yields. Once stocks gain more in price and/or bonds sell off significantly, it will be a more appropriate time to reassess the investment opportunity set. A further stock rise or bond selloff are both possible scenarios, but until then, central banks will continue to look to place its money where it is treated best.
The central bank menu has been largely limited to low-yielding, overpriced government bonds, but the appetite for new menu items has heightened. Stocks may be an enticing new option for central banks, but let’s hope they delay buying houses, gasoline, and groceries.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
In the world of modern finance, there has always been the search for the Holy Grail. Ever since the advent of computers, practitioners have looked to harness the power of computing and direct it towards the goal of producing endless profits. Regrettably, nobody has found the silver bullet, but that hasn’t slowed down people from trying. Wall Street has an innate desire to try to turn the ultra-complex field of finance into a science, just as they do in the field of physics. Even JPMorgan Chase (JPM) and its CEO Jamie Dimon are already on their way to suffering more than $2 billion in losses in the quest for infinite income, due in large part to their over-reliance on pseudo-science trading models.
James Montier of Grantham Mayo van Otterloo’s asset allocation team was recently a keynote speaker at the CFA Institute Annual Conference in Chicago. His prescient talk, which preceded JP Morgan’s recent speculative trading loss announcement, explained why bad models were the root cause of the financial crisis. Essentially these computer algorithms under-appreciate the number and severity of Black Swans (low probability negative outcomes) and the models’ inability to accurately identify predictable surprises.
What are predictable surprises? Here’s what Montier had to say on the topic:
“Predictable surprises are really about situations where some people are aware of the problem. The problem gets worse over time and eventually explodes into crisis.”
Just a month ago, when Dimon was made aware of the rogue trading activities, the CEO strenuously denied the problem before reversing course and admitting the dilemma last week. Unfortunately, many of these Wall Street firms and financial institutions use value-at-risk (VaR) models that are falsely based on the belief that past results will repeat themselves, and financial market returns are normally distributed. Those suppositions are not always true.
Another perfect example of a Black Swan created by a bad financial model is Long Term Capital Management (LTCM). Robert Merton and Myron Scholes were world renowned Nobel Prize winners who single handedly brought the global financial market to its knees in 1998 when LTCM lost $500 million in one day and required a $3.6 billion bailout from a consortium of banks. Their mathematical models worked for a while but did not fully account for trading environments with low liquidity (i.e., traders fleeing in panic) and outcomes that defied the historical correlations embedded in their computer algorithms. The “Flash Crash” of 2010, in which liquidity evaporated due to high frequency traders temporarily jumping ship, is another illustration of computers wreaking havoc on the financial markets.
The problem with many of these models, even for the ones that work in the short-run, is that behavior and correlations are constantly changing. Therefore any strategy successfully reaping outsized profits in the near-term will eventually be discovered by other financial vultures and exploited away.
Another pundit with a firm hold on Wall Street financial models is David Leinweber, author of Nerds on Wall Street. As Leinweber points out, financial models become meaningless if the data is sliced and diced to form manipulated and nonsensical relationships. The data coming out can only be as good as the data going in – “garbage in, garbage out.”
In searching for the most absurd data possible to explain the returns of the S&P 500 index, Leinweiber discovered that butter production in Bangladesh was an excellent predictor of stock market returns, explaining 75% of the variation of historical returns. By tossing in U.S. cheese production and the total population of sheep in Bangladesh, Leinweber was able to mathematically “predict” past U.S. stock returns with 99% accuracy. To read more about other financial modeling absurdities, check out a previous Investing Caffeine article, Butter in Bangladesh.
Generally, investors want precision through math, but as famed investor Benjamin Graham noted more than 50 years ago, “Mathematics is ordinarily considered as producing precise, dependable results. But in the stock market, the more elaborate and obtuse the mathematics, the more uncertain and speculative the conclusions we draw therefrom. Whenever calculus is brought in, or higher algebra, you can take it as a warning signal that the operator is trying to substitute theory for experience.”
If these models are so bad, then why do so many people use them? Montier points to “intentional blindness,” the tendency to see what one expects to see, and “distorted incentives” (i.e., compensation structures rewarding improper or risky behavior).
Montier’s solution to dealing with these models is not to completely eradicate them, but rather recognize the numerous shortcomings of them and instead focus on the robustness of these models. Or in other words, be skeptical, know the limits of the models, and build portfolios to survive multiple different environments.
Investors seem to be discovering more financial Black Swans over the last few years in the form of events like the Lehman Brothers bankruptcy, Flash Crash, and Greek sovereign debt default. Rather than putting too much faith or dependence on bad financial models to identify or exploit Black Swan events, the over-reliance on these models may turn this rare breed of swans into a large bevy.
See Full Article on Montier: Failures of Modern Finance
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in JPM, Lehman Brothers, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
In a recent New York Times op-ed, Greg Smith, former Goldman Sachs Group Inc. (GS) employee and ping pong medalist at the Jewish Olympics, came out with an earth-shattering revelation… he discovered and revealed that Goldman Sachs was not looking out for the best interests of its clients. I was floored to discover that a Wall Street bank valued at $60 billion would value profits more than clients’ needs.
Hmmm, I wonder what new eye-opening breakthrough he will unveil next? Perhaps Smith will get a job at Las Vegas Sands Corp. (LVS) for 12 years and then enlighten the public that casinos are in the business of making money at the expense of their customers. I can’t wait to learn about that breaking news.
But really, with all sarcasm aside, any objective observer understands that Goldman Sachs and any other Wall Street firm are simply middlemen operating at the center of capitalism – matching buyers and sellers (lenders and borrowers) and providing advice on both sides of a transaction. As a supposed trusted intermediary, these financial institutions often hold privileged information that can be used to the firms’ (not clients) benefit.
Most industry veterans like me understand how rife with conflicts the industry operates under, but very few insiders publicly speak out about these “dirty little secrets.” Readers of Investing Caffeine know I am not bashful about speaking my mind. In fact, I have tackled this subject in numerous articles, including Wall Street Meets Greed Street written a few months ago. Here’s an excerpt**:
“Wall Street and large financial institutions, however, are driven by one single mode…and that is greed. This is nothing new and has been going on for generations. Over the last few decades, cheap money, loose regulation, and a relatively healthy economy have given Wall Street and financial institutions free rein to take advantage of the system.”
As with any investment, clients and investors should understand the risks and inherent conflicts of interest associated with a financial relationship before engaging into business. While certain disclosures are sorely lacking, it behooves investors and clients to ask tough questions of bankers and advisors – questions apparently Mr. Smith did not ask his employer over his 12 year professional career at Goldman Sachs.
Reputational Risk Playing Larger Role
Even though Goldman called some clients “muppets,” Smith states there was no illegal activity going on. Regardless of whether the banks have gotten caught conducting explicit law-breaking behavior, the public and politicians love scapegoats, and what better target than the “fat-cat” bankers. With a financial crisis behind us, along with a multi-decade banking bull market of declining interest rates, the culture, profitability-model, and regulations in the financial industry are all in the midst of massive changes. As client awareness and frustration continue to rise, reputational risk will slowly become a larger concern for Wall Street banks.
Could the Goldman glow as the leading Wall Street investment bank finally be getting tarnished? Well, besides their earnings collapsing by about 2/3rds in 2011, the selection of Morgan Stanley (MS) and JPMorgan Chase (JPM) ahead of Goldman Sachs as the lead underwriters in the Facebook (FB) initial public offering (IPO) could be a sign that reputational risk is playing a larger role in investment banking market share shifts.
The public and corporate America may be slow in recognizing the shady behavior practiced on Wall Street, but eventually, the excesses become noticed. Congress eventually implements new regulations (Dodd-Frank) and customers vote with their dollars by moving to banks and institutions they trust more.
I commend Mr. Smith for speaking out about the corrupt conflicts of interest and lack of fiduciary duty at Goldman Sachs, but let’s call a spade a spade and not mischaracterize a situation as suddenly shifting when the practices have been going on forever. Either he is naïve or dishonest (I hope the former rather than the latter), but regardless, finding a new job on Wall Street may be challenging for him. Fortunately for Mr. Smith, he has something to fall back on…the professional ping-pong circuit.
***Other Relevant Articles and Video:
- Goldman Gambling Prosperity at Client Expense
- Goldman Cheat? Really?
- Stephen Colbert: Breaking the Sacred Trust
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in FB, GS, MS, JPM, LVS, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
ECB (European Central Bank) President Mario Draghi made it clear with his most recent monetary banking announcements that he is perfectly willing to shovel the sovereign debt trash around the financial system, but he just doesn’t want the ECB to gobble up heaps of the smelly debt.
On the same day that Draghi lowered the key benchmark interest rate by -0.25% to 1.00%, he also reduced the lending credit rating threshold for acceptable banking collateral to “single-A” and offered banks endless three-year loans with . But wait…there’s more! In typical infomercial fashion, Draghi had an additional stimulative gift offering – he halved the reserve requirement ratios for European banks.
Although Draghi is handing out lots of hugs and kisses to the banks, including infinite amounts of three-year loans, he is also providing very little direct love to European debt-laden governments. In other words, Draghi isn’t ready to pull out the printing press bazooka to sop up mounds of trashy sovereign debt (i.e., Greece, Italy, and Spain). Draghi may be willing to make the ECB the lender of last resort for the banks, but he is not signaling the same lender of last resort commitment for careless governments.
Despite Draghi’s public aversion to bond buying (a.k.a. QE or quantitative easing), he indirectly is funding quantitative easing anyway. Rather than having the ECB accelerate the direct purchase of besieged sovereign debt, he indirectly is giving money to the banks to purchase the same struggling bonds. Sneaky, but clever…I like it.
Eat Your Brussels Sprouts!
Draghi in his new role as ECB President is clearly trying to be a responsible parent to the Euro leaders, but as a result, he could be placing himself in trouble with the law. I haven’t contacted my attorneys yet, however Mario Draghi is blatantly infringing on my patented “Brussels sprouts mandate” that I regularly use at the dinner table with my children. On any given night, by 6:30 p.m. my kids are practically frothing at the mouth for some unhealthy dessert delight. The problem with the situation is unfinished Brussels sprouts sitting on their plates, so with respected authority I command, “If you want dessert tonight, you better eat your Brussels sprouts!” Normally this is not a bad strategy because my plea usually results in an extra consumed sprout or two. Ultimately, given the softy that I am, all parties involved know that dessert will be served regardless of the number of sprouts consumed.
Draghi, in dealing with the irresponsible fiscal actions of the sovereigns, is using the same precise “sprout mandate.” In a recent press conference, here’s how Draghi delivered his tough talk:
“All euro-area governments urgently need to do their utmost” for fiscal sustainability. “Policy makers need to correct excessive deficits and move to balanced budgets in the coming years. This will strengthen overall economic sentiment. To accompany fiscal consolidation, the governing council has called for bold and ambitious structural reforms.”
Just as it makes sense for me not to say, “Hey kids, don’t worry about eating your vegetables, save room for the ice cream sundae buffet,” it probably doesn’t make sense for Draghi to inform European leaders, “Hey kids, don’t worry about those massive debts and deficits, the ECB will give you plenty of money to buy up all that trashy sovereign debt of yours.”
Hypocritical Or Shrewd?
I applaud Signore Draghi for implementing his bold actions as lender of last resort for European Banks, but isn’t it a tad bit hypocritical? The ECB President talks seriously about Basel III capital requirements, yet he is easing rules on collateral and reserves. Why is it OK for the ECB to condone reckless behavior and introduce moral hazards for the banks (i.e., limitless ECB backstop), but not for irresponsible governments too? If I am a European bank with continuous access to ECB loans, why not roll the dice and risk shareholder capital in hopes of a big risky payoff? I’m sure Jon Corzine at MF Global (MFGLQ.PK) would appreciate similar financial backing. What’s more, how credible can Draghi be about his tough fiscal love and anti-quantitative easing stances when he is currently offering never-ending amounts of money to the banks and already buying collapsing sovereign bonds as we speak?
No matter the view you hold, the ECB is openly demonstrating it will not sit idle watching the banking system collapse under its own watch, much like the Federal Reserve and Ben Bernanke did not sit idle in 2008-2009. Perhaps Draghi isn’t being hypocritical, but is rather being shrewd? Although Draghi wants governments to eat their fiscal Brussels sprouts, let’s not kid ourselves. Just as Draghi is willing to pass the trash and appease the banking system, if the eurozone sovereign debt crisis continues worsening, don’t be surprised to see Draghi roll out his ice cream sundae buffet of aggressive bond buying. That will taste much better than Brussels sprouts.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in MF Global (MFGLQ.PK), or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
For investors, the emotional pendulum swings back and forth between fear and greed. Wall Street and large financial institutions, however, are driven by one single mode…and that is greed. This is nothing new and has been going on for generations. Over the last few decades, cheap money, loose regulation, and a relatively healthy economy have given Wall Street and financial institutions free rein to take advantage of the system.
Not only did the financial industry explode, but the large got much larger. The FCIC (Financial Crisis Inquiry Commission), a government appointed commission, highlighted the following:
“By 2005, the 10 largest U.S. commercial banks held 55% of the industry’s assets, more than double the level held in 1990. On the eve of the crisis in 2006, financial sector profits constituted 27% of all corporate profits in the United States, up from 15% in 1980.”
What’s more, the obscene profits were achieved with obscene amounts of debt:
“From 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product.”
Times have changed, and financial institutions have gone from victors to villains. Sluggish economic growth in developed countries and choking levels of debt have transitioned political policies from stimulus to austerity. This in turn has created social unrest. Who’s to blame for all of this? Well if you watch the evening news and Occupy Wall Street movement, it becomes very easy to blame Wall Street. Certainly, fat cat bankers deserve a portion of the blame. As one can see from the following list, over the last few years, the financial industry has paid for its sins with the help of a checkbook:
The disgusting amount of inequitable excess is smeared across the whole industry in this tiny, partial list. Billions of dollars in penalties and disgorged assets isn’t insignificant, but besides Bernie Madoff and Raj Rajaratnam, very little time has been scheduled behind bars for the perpetrators.
Whom Else to Blame?
Are the greedy bankers and financial institution operators the only ones to blame? Without doubt, lack of government enforcement and adequate regulation, coupled with a complacent, debt-loving public, contributed to the creation of this financial crisis monster. When the economy was rolling along, there was no problem in turning a blind-eye to subversive activity. Now, the greed cannot be ignored.
At the end of the day, voters have to correct this ugly situation. The general public and Occupy Wall Street-ers need to boycott corrupt institutions and vote in politicians who will institute fair and productive regulations (NOT more regulations). Sure corporate financial lobbyists will try to tip the scales to their advantage, but a vote from a lobbyist attending a $10,000 black-tie dinner carries the same weight as a vote coming from a Occupy Wall Street-er paying $5 for a foot-long sandwich at Subway. As Thomas Jefferson stated, “A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine.”
Besides boycotting greedy institutions and using the voting booth, what else should individuals do with their investments in this structurally flawed system? First of all, find independent firms with a fiduciary duty to act in your best interest, like an RIA firm (Registered Investment Advisor). Brokers, financial consultants, financial advisors, or whatever euphemism-of-the-day is being used for an investment product pusher, may not be evil, but their incentives typically are not aligned to protect and grow your financial future (see Fees, Exploitation, and Confusion and Letter Shell Game).
There is a lot of blame to be spread around for the financial crisis, and the intersection of Wall Street and Greed Street is a major contributing factor. However, investors and voters need to wake up to the brutal realities of our structurally flawed system and take matters into their own hands. Only then can Main Street and Wall Street peacefully coexist.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in MS, UBS, C, JPM, WFC, SCHW, AMTD, BAC, GS, STT, Galleon, RBC, Subway, Amer Home, Brookside Captl, Morgan Keegan, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.