Ramblings About Wall Street And The Economy
"It's interesting that the industry (Banks) has invented new ways to lose money when the old ways seemed to work just fine."
--Wells Fargo president John Stumpf
I have been quite critical of Wall Street on this blog. It is not without reason as we are now witnessing. Mind you, the party is just starting. But, no one who has read this blog should be surprised. I've probably written the words "risk management", "repricing of risk" and "risk" on this blog more than has been uttered on all of Wall Street in the last decade. And, when it was uttered, it was in the context of risk-based models that typically have major flaws as we are now witnessing. Amongst other critical factors, it is a nearly universal disregard for risk on Wall Street that has led us to this point. Although as we have discussed, the global economy is dealing with many more fundamental issues than Wall Street's foolishness. The very disconcerting fact is that all of the issues will come to fruition comparatively simultaneously. But, it couldn't be any other way because the entirety of most issues are a function of the same fundamentals. That may sound bizarre to the hopeful or bullish but I don't model hope. Nor do I care about opinions.
Let me digress a minute. I do realize the majority working in the financial industry are truly capable, brilliant and hard working people as is the case with most people everywhere. And, our capital markets are the envy of the world. Although it seems many believe the tail wags the dog when people lose site of the fact that the reasons for this statement are because of fundamentals associated with our society as opposed to Wall Street itself. I do realize there are many people on Wall Street able to think and act outside of the herd but because of many timeless dynamics associated with this industry, the herd has and always will rule on Wall Street. That is why I try to stay far away from the deafening roar of their mind altering messages. Because, I too am human and the propaganda is all consuming. This very fact is a major reason why most who work in the money machine and the media covering the machine have such a disconnected and false sense of reality. They have literally been brainwashed by the system in which they operate. And, because most people don't actively re-assess their belief system on a continual basis, the outcomes are consistent.
The very disturbing fact isn't that Wall Street is simply bullish on stocks this time around. It is that they are or were bullish on every investment imaginable: emerging markets, corporate bonds, all forms of debt, alternative investments, income producing investments, commodities, commercial real estate, dividend focused stocks, Brazil, China, India, Russia, energy, the Middle East, residential real estate (already cracked) and on and on and on. What have they not been bullish on? The dollar and yen. What are two of the investments I said I would own if forced to like something at this point in time? Dollars and yen. What went up yesterday when the market cracked? Dollars and Yen. The speculators are still trying to crack the dollar but I believe they will fail. More on the dollar in a later post.
When FrankenFinance creator and former head of Goldman, "Mr. Paulson goes to Washington", and the entire Presidential economic team gave an unprecedented live interview in late July of 2007 on CNBC just to hang ten and tell us everything was great, I knew it was likely because some institution(s) were insolvent or some equivalently ominous problem. I am quite confident Paulson and team's fabricated fun with Dick and Jane was meant to maintain confidence. Funny thing about fabrications. They also have unintended consequences. I wrote about the significance of that interview on July 3oth and the parallels to 1929 when Paulson's predecessor also attempted to maintain confidence. What was needed to maintain confidence isn't talk. And, that opportunity was lost long ago. Now, it seems everywhere I turn the President or Paulson is on television attempting to instill confidence. As I have said many times, while I don't like gold as an investment, it is telling us something. I still believe it is telling us to prepare for deflation and associated risks. We'll talk more quantitatively about deflation in early 2008 as well. That said, I still expect gold will collapse as money evaporates. But, it could then rise substantially again at some point. It depends on future events I am not comfortable anticipating right now. In other words, it is data dependent and I need to see the future data.
Back to today. While Wall Street was chattering about Pax Globalia and other deafeningly bullish messages, we were talking about this likely going down as the biggest asset bubble in history. And we wrote about moving our money out of unsafe banks in late 2006. Not banking stocks. Banks. And writing so in the face of the deafening roar of bullishness about the great global expansion seemingly guaranteed to last decades, bullishness about the unstoppable Asian century, bullishness about Wall Street's new genius of quantitative analysis, a booming stock market, massive profit growth and the biggest global economic boom in history. But whoever was actually recommending people own the underlying bank stocks at that time or any time since has fallen prey to the drone of Big Brother's indoctrination. Needless to say, that was nearly everyone.
In an incredibly unbelievable false reality, we see a money manager survey conducted by CNBC titled the "Trillion Dollar Survey" released last week. Amazingly in that survey only 9% of money managers believe the market will be lower in 2008. 98% saw the odds of a recession at less than 50% and zero, that's right, zero placed the odds of a recession at 100%. This at a time when my models were and are flashing the highest levels of risk at any time in modern history. As I've written many times, recession is a foregone conclusion. The only question is how these risks will resolve themselves. But, regardless, the complete lack of risk awareness by money managers surveyed shows an utter lack of appreciation for a topic they are paid very handsomely to understand in detail. Remember the Indiana Jones movie where they were searching for the Holy Grail? In his desirous moment of greed, a man believed the most beautiful grail must be the true Grail. He filled it with water and began to drink believing he would achieve immortality. And he died a violent death. Then Indiana drank from an imperfect, undesirable cup of a carpenter and it was indeed the Grail. The Knights Templar, who was there to protect the Grail, wryly said, "You have chosen wisely.". As it is this cycle. The greedy seeking riches have chosen to believe immortality lies in commodities, Chinese stocks and all of the other asset bubbles we have incessantly written of. But the Holy Grail could very well be undesirable Dollars and Yen. This very fact that money managers don't realize what is going on very likely means they too have not "chosen wisely".
This reminds me of the post I put up some time ago about a famous finance professor confidently telling us stocks were cheap and to buy dividend paying stocks. At that time we were talking about a bubble in dividend paying stocks. Given banks comprise the largest dividend paying category and most banks are down 40-50% and some up to 90% since that post, I guess the good professor might need a refresher course in risk management. REITs and dividend focused mutual funds have followed banks substantially lower as will other high yield investments. Given the macro factors developing, there is no reason to believe that won't include a current Wall Street favorite, utilities.
On July 10th before this crisis unfolded I wrote, "From what I model, we are at a very heightened risk of a credit crunch developing in many economies over the coming months. Actually, I expect there is a reasonable probability for some bizarre events to come to pass in the credit markets as I intimated last year.". Today, those models are deteriorating to levels that are very ominous. While that may change, I cannot conceive of any events rectifying what ails the global economy in the foreseeable future.
This confirms a major point that everyone must never forget. The world's greatest investors realize Wall Street is a mob and one can improve their investing prowess significantly by accepting this never ending truth. There are times to run with the bulls and feast with the bears. But, in any event, determining those times has nothing to do with the mood of Wall Street. Wall Street will do what Wall Street will do. And, in those times that they wake up to realize they've been completely wrong and underlying fundamentals don't support their beliefs, look out below. As I wrote last year, I believe the market is now acting rationally to underlying fundamentals that have been with us for many years. In a truth seldom understood by most on Wall Street, fundamentals do matter more than how they feel. While many on Wall Street are now panicked, as I wrote before this is not a contrary indication. It is a realization of the Frankenstein they have created and that fundamentals never supported their quantitative models of insanity and lack of disregard for risk. And just as the original Frankenstein went the way of the dodo bird, so will this incarnation of fright.
So, what about the star of Wall Street? How is it again that Goldman lost so much of investor's money but they have gained this aura of invincibility recently as many believe they have weathered the the mounting storm unscathed? Again, the charlatans and gorgons are luring fools to their death. This credit crunch was not caused by subprime and won't end with subprime. Economic vitality is not just around the corner with the recognition of subprime-related assets. Actually, Goldman's flagship hedge fund appears to have lost even more than the 60% quoted in the above article yet they recently reported strong earnings. Did Goldman miss the crisis? Not if their leading hedge fund returns are any indication of what we can expect in the future. Many cover stories have recently been written that Goldman brilliantly missed what now ails many banks. Not likely. Any ticking obligations outside of the company? Failing investments in hedge funds? Any other liabilities? Derivatives risk? Investments in China? The Middle East? Asset valuation risks? Caustic underwriting still left to shovel on an unsuspecting buyer? Investments in private equity? Commercial real estate? Acquisitions? Off balance sheet shenanigans? Goldman was an originator of modern FrankenFinance. The chance that they will navigate this storm given the investments they have made that I am aware of is almost an impossibility. But, let's let unfolding facts speak for themselves.
We already see the Goldman cracks starting to show. One of my favorite financial journalists, Paul Farrell wrote, "New York Attorney General Andrew Cuomo has already subpoenaed Wall Street. Next: Congress, the SEC and other state regulators will demand answers, such as why was Goldman shorting the SIVs they were selling, many of which quickly went into default? What did they fail to disclose? Sounds like a massive conflict of interest with major liabilities."
One thing is true of betting or gambling with other people's money. It's hard to beat the house (Mr. Market) on a consistent basis. And, when levered to the hilt as Goldman is, it is nearly impossible. Warren Buffett told us this a long time ago. Remember this fact. It is your opportunity to profit from Wall Street's foolishness.
When I read the following article, I thought of the above quote I had recently read from John Stumpf. Bloomberg's article is titled Arab Stocks Lure BlackRock, Goldman, Blair as Europe, U.S. Fall. The basis for Wall Street's enthusiasm in Middle Eastern markets is what? Their economies are booming while the U.S., Japan and Europe are faltering? These are the same companies that created the mess we are now witnessing and I believe this shines clearly of more Wall Street incompetence and complete disregard for risk. This at a time when these oil-based economies might be peaking not just for this cycle but could very well be in the process of peaking until substantial reforms are undertaken as discussed late in 2007. Psst, you might have considered investing in these countries ten years ago when oil was $12 a barrel and sell now after such a massive rise in perceived wealth and the associated economic benefits. This is yesterday's news and rear view mirror investing.
On this topic here's a question. What fundamentals create long term wealth in an economy or society? Wealth that gives an informed investor the confidence to make long term investments? And, by investor I'm not talking about stocks per se. I'm talking about investment. Real investment. Business investment. Economic investment. It isn't oil or being resource rich. There is an argument to be made that can have just the opposite impact. And, it isn't cheap labor or cheap currencies as in China. And, it surely isn't a large population as many are now convinced is a major driver in China's future. And, it isn't building booms that people have become so enamored with in this cycle. (Wow, look at those big buildings. Their economy is booming. Not!) Have any of these companies investing shareholder and investor money in China and OPEC countries ever thought through this simple question? It appears not. Why? I would guesstimate primarily because it isn't their money.
We talked a little about the Middle East stock market bubbles in 2006. And about their bubbles of magnificence they are building in booming real estate schemes. Many of these stock market bubbles popped a few years ago after running up 600-800% very rapidly. The same shenanigans about people day trading their grandmother's retirement were happening in these markets as was the case in the U.S. into 2000 and China and India today. To date, these markets have rallied somewhat to recapture some of their gains. But, are Goldman, Morgan and others buying near significant tops? And doing it with investor and shareholder money? More crises for the gristmill of mean Mr. Market (the house) to pulverize to shreds?
--Wells Fargo president John Stumpf
I have been quite critical of Wall Street on this blog. It is not without reason as we are now witnessing. Mind you, the party is just starting. But, no one who has read this blog should be surprised. I've probably written the words "risk management", "repricing of risk" and "risk" on this blog more than has been uttered on all of Wall Street in the last decade. And, when it was uttered, it was in the context of risk-based models that typically have major flaws as we are now witnessing. Amongst other critical factors, it is a nearly universal disregard for risk on Wall Street that has led us to this point. Although as we have discussed, the global economy is dealing with many more fundamental issues than Wall Street's foolishness. The very disconcerting fact is that all of the issues will come to fruition comparatively simultaneously. But, it couldn't be any other way because the entirety of most issues are a function of the same fundamentals. That may sound bizarre to the hopeful or bullish but I don't model hope. Nor do I care about opinions.
Let me digress a minute. I do realize the majority working in the financial industry are truly capable, brilliant and hard working people as is the case with most people everywhere. And, our capital markets are the envy of the world. Although it seems many believe the tail wags the dog when people lose site of the fact that the reasons for this statement are because of fundamentals associated with our society as opposed to Wall Street itself. I do realize there are many people on Wall Street able to think and act outside of the herd but because of many timeless dynamics associated with this industry, the herd has and always will rule on Wall Street. That is why I try to stay far away from the deafening roar of their mind altering messages. Because, I too am human and the propaganda is all consuming. This very fact is a major reason why most who work in the money machine and the media covering the machine have such a disconnected and false sense of reality. They have literally been brainwashed by the system in which they operate. And, because most people don't actively re-assess their belief system on a continual basis, the outcomes are consistent.
The very disturbing fact isn't that Wall Street is simply bullish on stocks this time around. It is that they are or were bullish on every investment imaginable: emerging markets, corporate bonds, all forms of debt, alternative investments, income producing investments, commodities, commercial real estate, dividend focused stocks, Brazil, China, India, Russia, energy, the Middle East, residential real estate (already cracked) and on and on and on. What have they not been bullish on? The dollar and yen. What are two of the investments I said I would own if forced to like something at this point in time? Dollars and yen. What went up yesterday when the market cracked? Dollars and Yen. The speculators are still trying to crack the dollar but I believe they will fail. More on the dollar in a later post.
When FrankenFinance creator and former head of Goldman, "Mr. Paulson goes to Washington", and the entire Presidential economic team gave an unprecedented live interview in late July of 2007 on CNBC just to hang ten and tell us everything was great, I knew it was likely because some institution(s) were insolvent or some equivalently ominous problem. I am quite confident Paulson and team's fabricated fun with Dick and Jane was meant to maintain confidence. Funny thing about fabrications. They also have unintended consequences. I wrote about the significance of that interview on July 3oth and the parallels to 1929 when Paulson's predecessor also attempted to maintain confidence. What was needed to maintain confidence isn't talk. And, that opportunity was lost long ago. Now, it seems everywhere I turn the President or Paulson is on television attempting to instill confidence. As I have said many times, while I don't like gold as an investment, it is telling us something. I still believe it is telling us to prepare for deflation and associated risks. We'll talk more quantitatively about deflation in early 2008 as well. That said, I still expect gold will collapse as money evaporates. But, it could then rise substantially again at some point. It depends on future events I am not comfortable anticipating right now. In other words, it is data dependent and I need to see the future data.
Back to today. While Wall Street was chattering about Pax Globalia and other deafeningly bullish messages, we were talking about this likely going down as the biggest asset bubble in history. And we wrote about moving our money out of unsafe banks in late 2006. Not banking stocks. Banks. And writing so in the face of the deafening roar of bullishness about the great global expansion seemingly guaranteed to last decades, bullishness about the unstoppable Asian century, bullishness about Wall Street's new genius of quantitative analysis, a booming stock market, massive profit growth and the biggest global economic boom in history. But whoever was actually recommending people own the underlying bank stocks at that time or any time since has fallen prey to the drone of Big Brother's indoctrination. Needless to say, that was nearly everyone.
In an incredibly unbelievable false reality, we see a money manager survey conducted by CNBC titled the "Trillion Dollar Survey" released last week. Amazingly in that survey only 9% of money managers believe the market will be lower in 2008. 98% saw the odds of a recession at less than 50% and zero, that's right, zero placed the odds of a recession at 100%. This at a time when my models were and are flashing the highest levels of risk at any time in modern history. As I've written many times, recession is a foregone conclusion. The only question is how these risks will resolve themselves. But, regardless, the complete lack of risk awareness by money managers surveyed shows an utter lack of appreciation for a topic they are paid very handsomely to understand in detail. Remember the Indiana Jones movie where they were searching for the Holy Grail? In his desirous moment of greed, a man believed the most beautiful grail must be the true Grail. He filled it with water and began to drink believing he would achieve immortality. And he died a violent death. Then Indiana drank from an imperfect, undesirable cup of a carpenter and it was indeed the Grail. The Knights Templar, who was there to protect the Grail, wryly said, "You have chosen wisely.". As it is this cycle. The greedy seeking riches have chosen to believe immortality lies in commodities, Chinese stocks and all of the other asset bubbles we have incessantly written of. But the Holy Grail could very well be undesirable Dollars and Yen. This very fact that money managers don't realize what is going on very likely means they too have not "chosen wisely".
This reminds me of the post I put up some time ago about a famous finance professor confidently telling us stocks were cheap and to buy dividend paying stocks. At that time we were talking about a bubble in dividend paying stocks. Given banks comprise the largest dividend paying category and most banks are down 40-50% and some up to 90% since that post, I guess the good professor might need a refresher course in risk management. REITs and dividend focused mutual funds have followed banks substantially lower as will other high yield investments. Given the macro factors developing, there is no reason to believe that won't include a current Wall Street favorite, utilities.
On July 10th before this crisis unfolded I wrote, "From what I model, we are at a very heightened risk of a credit crunch developing in many economies over the coming months. Actually, I expect there is a reasonable probability for some bizarre events to come to pass in the credit markets as I intimated last year.". Today, those models are deteriorating to levels that are very ominous. While that may change, I cannot conceive of any events rectifying what ails the global economy in the foreseeable future.
This confirms a major point that everyone must never forget. The world's greatest investors realize Wall Street is a mob and one can improve their investing prowess significantly by accepting this never ending truth. There are times to run with the bulls and feast with the bears. But, in any event, determining those times has nothing to do with the mood of Wall Street. Wall Street will do what Wall Street will do. And, in those times that they wake up to realize they've been completely wrong and underlying fundamentals don't support their beliefs, look out below. As I wrote last year, I believe the market is now acting rationally to underlying fundamentals that have been with us for many years. In a truth seldom understood by most on Wall Street, fundamentals do matter more than how they feel. While many on Wall Street are now panicked, as I wrote before this is not a contrary indication. It is a realization of the Frankenstein they have created and that fundamentals never supported their quantitative models of insanity and lack of disregard for risk. And just as the original Frankenstein went the way of the dodo bird, so will this incarnation of fright.
So, what about the star of Wall Street? How is it again that Goldman lost so much of investor's money but they have gained this aura of invincibility recently as many believe they have weathered the the mounting storm unscathed? Again, the charlatans and gorgons are luring fools to their death. This credit crunch was not caused by subprime and won't end with subprime. Economic vitality is not just around the corner with the recognition of subprime-related assets. Actually, Goldman's flagship hedge fund appears to have lost even more than the 60% quoted in the above article yet they recently reported strong earnings. Did Goldman miss the crisis? Not if their leading hedge fund returns are any indication of what we can expect in the future. Many cover stories have recently been written that Goldman brilliantly missed what now ails many banks. Not likely. Any ticking obligations outside of the company? Failing investments in hedge funds? Any other liabilities? Derivatives risk? Investments in China? The Middle East? Asset valuation risks? Caustic underwriting still left to shovel on an unsuspecting buyer? Investments in private equity? Commercial real estate? Acquisitions? Off balance sheet shenanigans? Goldman was an originator of modern FrankenFinance. The chance that they will navigate this storm given the investments they have made that I am aware of is almost an impossibility. But, let's let unfolding facts speak for themselves.
We already see the Goldman cracks starting to show. One of my favorite financial journalists, Paul Farrell wrote, "New York Attorney General Andrew Cuomo has already subpoenaed Wall Street. Next: Congress, the SEC and other state regulators will demand answers, such as why was Goldman shorting the SIVs they were selling, many of which quickly went into default? What did they fail to disclose? Sounds like a massive conflict of interest with major liabilities."
One thing is true of betting or gambling with other people's money. It's hard to beat the house (Mr. Market) on a consistent basis. And, when levered to the hilt as Goldman is, it is nearly impossible. Warren Buffett told us this a long time ago. Remember this fact. It is your opportunity to profit from Wall Street's foolishness.
When I read the following article, I thought of the above quote I had recently read from John Stumpf. Bloomberg's article is titled Arab Stocks Lure BlackRock, Goldman, Blair as Europe, U.S. Fall. The basis for Wall Street's enthusiasm in Middle Eastern markets is what? Their economies are booming while the U.S., Japan and Europe are faltering? These are the same companies that created the mess we are now witnessing and I believe this shines clearly of more Wall Street incompetence and complete disregard for risk. This at a time when these oil-based economies might be peaking not just for this cycle but could very well be in the process of peaking until substantial reforms are undertaken as discussed late in 2007. Psst, you might have considered investing in these countries ten years ago when oil was $12 a barrel and sell now after such a massive rise in perceived wealth and the associated economic benefits. This is yesterday's news and rear view mirror investing.
On this topic here's a question. What fundamentals create long term wealth in an economy or society? Wealth that gives an informed investor the confidence to make long term investments? And, by investor I'm not talking about stocks per se. I'm talking about investment. Real investment. Business investment. Economic investment. It isn't oil or being resource rich. There is an argument to be made that can have just the opposite impact. And, it isn't cheap labor or cheap currencies as in China. And, it surely isn't a large population as many are now convinced is a major driver in China's future. And, it isn't building booms that people have become so enamored with in this cycle. (Wow, look at those big buildings. Their economy is booming. Not!) Have any of these companies investing shareholder and investor money in China and OPEC countries ever thought through this simple question? It appears not. Why? I would guesstimate primarily because it isn't their money.
We talked a little about the Middle East stock market bubbles in 2006. And about their bubbles of magnificence they are building in booming real estate schemes. Many of these stock market bubbles popped a few years ago after running up 600-800% very rapidly. The same shenanigans about people day trading their grandmother's retirement were happening in these markets as was the case in the U.S. into 2000 and China and India today. To date, these markets have rallied somewhat to recapture some of their gains. But, are Goldman, Morgan and others buying near significant tops? And doing it with investor and shareholder money? More crises for the gristmill of mean Mr. Market (the house) to pulverize to shreds?
<< Home