Juggling Dynamite

This week supporters of the Occupy movement submitted a very detailed, laser-sharp 325 page comment to the Securities and Exchange Commission on the topic of financial reforms set out in the Dodd Frank Bill and the embedded Volcker Rule.  In doing so, the Occupy movement has solidified itself as a serious and powerful voice ably equipped to stand up to the banking industry and lobbyists.  Here is Mother Jones:

Point by point, it methodically challenges the arguments of finance industry lobbyists who want to water down last year’s historic Dodd-Frank Wall Street reforms. The lobbyists have been using the law’s official public comment period to try to kneecap the reforms, and given how arcane financial regulation can be, they might get away with it. But Occupy the SEC is fighting fire with fire, and in so doing, defying stereotypes of the Occupy movement. Its letter explains:

Occupy the SEC is a group of concerned citizens, activists, and professionals with decades of collective experience working at many of the largest financial firms in the industry. Together we make up a vast array of specialists, including traders, quantitative analysts, compliance officers, and technology and risk analysts.

The letter, which has been in the works for months, passionately defends the Volcker Rule, a provision of the Dodd-Frank Wall Street reforms meant to prohibit consumer banks from engaging in risky and speculative “proprietary” trading. That barrier had collapsed in the 1990s with the gradual watering down, and eventual repeal, of the Glass-Steagall Act. Occupy the SEC explains why this became a problem:

Proprietary trading by large-scale banks was a principal cause of the recent financial crisis, and, if left unchecked, it has the potential to cause even worse crises in the future. In the words of a banking insider, Michael Madden, a former Lehman Brothers executive: “Proprietary trading played a big role in manufacturing the CDOs (collateralized debt obligations) and other instruments that were at the heart of the financial crisis. . . if firms weren’t able to buy up the parts of these deals that wouldn’t sell. . .the game would have stopped a lot sooner.”

The entire Occupy SEC submission can be found here.

Analyst and author of Grant’s Interest Rate Observer offers some historical trends on interest rates, monetary policy and what is still strong in America.  Here is the direct audio link.

This chart since 1790 ties in nicely with discussion of the generational cycles in interest rates and underlines just how insanely low rates are today.  Best advice to those still in debt:  don’t use current rates to borrow more–use them to become debt free. History assures us that this-low-rate-time too shall pass. I personally look forward to the next phase where Central Banks are taken out of the driver’s seat, budgets are balanced, and markets are left to freely find fair value again. It is not a question of if–centuries of history tells us this will happen. The question is just how much mess and pain must intervene before they do.

(via the Big Picture Blog)

Excellent article on JP Morgan and it’s serially criminal executives, courtesy of The Big Picture today by Professor William Black.  Some highlights:

“SEC investigations have found that JPMorganChase is a serial violator of the securities laws. The bank gets caught, promises to clean up its act, gets fined, signs a typically useless consent decree that has no admissions, creates no precedent, and undercuts deterrence, and gets waived out of the few detriments there are to banks with records of serial SEC staff findings of violations.

JPMorganChase exemplifies this pattern of the SEC winking at serial fraud by the systemically dangerous institutions (SDIs). The SEC routinely allows the SDIs to operate under Winter Rules and the SDIs routinely and repeatedly employ preferred lies…

Consider the chutzpah of JPMorganChase claiming “a strong record of compliance with securities laws” after SEC staff investigations found six violations in 13 years. But that kind of arrogance and indifference to complying with the law is inevitable under an SEC regime that allows the SDIs to play by Winter Rules. “Improved lies” captures perfectly the perverse incentives that the SEC has created.

The CEOs of SDIs who know that they can commit fraud with effective impunity (the SEC fines are typically chump change from the SDIs’ standpoint) develop a belief in their divine right to transcend the law and conventional morality. Jamie Dimon captures the mindset that Nietzche celebrated for the Superman. Dimon extends the logic of transcendence to its ultimate, absurd, extreme. He is enraged that the CEOs running the SDIs have been criticized. It turns out that the SDIs’ CEOs are sensitive types. Nobody exemplifies this Rich White Whine motif better than Dimon.”

And yet Dimon and his ilk continue to enjoy close counsel and privilege with the inner sanctum of Obama’s government.  Leaders who seek respect and trust from their constituents must distance themselves from the morally bankrupt if we are to ever heal this system.  Read the whole article here:  A Dimon Repeatedly in the Rough who Demands Winter Rules (aka Preferred Lies),

Bill Black is the author of The Best Way to Rob a Bank is to Own One and is an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog.

More shades of 2008 this morning, as S&P futures contracts jumped on a general assurance from China overnight that they will “help with the European crisis”. (The Chinese people with an average income of $7,000 a year would love to bail out one of the wealthiest, most over-paid regions in the world, no doubt). I understand the reason for such whimsical dreams of course. But banking life savings on them is surely just as misguided this time as it was coming into the last global recession when the then equally naive SWF (Sovereign Wealth Fund) rescue hopes were moving markets in big swings day-to-day. Meanwhile the Japanese economy contracted twice as much as expected last quarter and Italy is officially back in recession (4th largest economy in the Euro). No one is even talking about all the toxic waste in the Spanish banking system yet. But hey why look at relevant facts and figures when we can frolic another day in nonsense and denial. See more in this clip.

Five years into recession, with unemployment at 20.9% (as of November) and 48% of those under 25 unable to find work, the ongoing decimation of the Greek economy is agony to witness. Today, stocks rallied back from the lows of the day (same three guys trading no volume) in the final 30 minutes on rumors (again) that politicians have agreed to the next round of austerity. There is no way this new plan is going to last. All of this is a farce– math that doesn’t work, doesn’t work no matter who you threaten. The next general election is set for April. This is getting down right sadistic.

Woke up in a chilly Key West this morning.  Well chilly for here, at 58 F.  Some excellent articles have hit my inbox the past couple of days.  I thought I would share some of the not -to-be-missed ones here.  Enjoy.

• Why Wall Street should stop whining, by the always insightful and necessarily irreverent, Matt Taibbi
• Who is Buying This Market?
• The insiders are selling heavily
• The world’s losing its workers.  How will we compete?
• Europe is now deliberately trying to push Greece out
• Toronto real estate:  why home is where the hurt is
• Markets, Murmurations, and Machines
• Dividend stocks:   buyer beware

Apparently another year has expired.  Here I am back at the MoneyShow Orlando at the Gaylord Palms.  This is a big show with some good speakers in a lovely venue.  My talk is from 8:55am to 9:40am Saturday morning.  Here is the schedule. If you come down tomorrow do stop by and say hello.

Danielle was a guest on Talk Digital Network with Phil Mackesy yesterday, talking about recent developments in the world economy and markets. You can listen to the audio clip here.

Further to Larry Fink’s bold “100% equities” call to investors yesterday, we bring you the below picture of the S&P 500 as a reminder of another time Sir Larry broadcast his bullish insights–in March 2008, see Fink: BlackRock’s Bear starts to turn bullish. Deja vu? When the fee income starts to hurt, dedicated fund emperors get out front it seems.

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

This chart of the semiconductor sector says a lot about the strange, strained, stock market we have seen the past couple of years.

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

Over the past 3 months, stock markets have entered into another counter-cyclical rally up in the midst of an ongoing secular bear market that began in 2000.  In 3 months, markets have managed to regain just some of the losses they incurred in 2001, 2002, 2008, and 2011.  After years of happily sacrificing their clients’ capital to the ravages of a secular down trend, the money management business is actually itself starting to suffer from on-going capital outflows and client redemptions.  (Not suffering as much as their trusting clients though, who have faced years of white-knuckle risk and volatility for flat to negative gains.)

The vast majority of hedge funds and traditional management companies, including ETF and Index providers, all have a common flaw:  they sell people the idea of constant and perpetual allocations to stocks as the correct path to long-term gains and investment success.  They do this regardless of price, or cycle or relative valuations.  They do this regardless of the secular climate and even when it flies in the face on all historical evidence of similar credit deleveraging cycles over centuries.  They keep on saying this because it is the crux of their business model, and they are not paid to think, or doubt, or second guess.  They are paid to sell; to keep bringing capital into equities.

Rather than admit that they have an erroneous and harmful business model–admit that they screwed up–the sell-side is increasingly desperate to make up for 12 years of lost time by doubling down hard on risk–the same constant risk recommendations that have hurt their portfolios and clients since 2000.

This morning we have a fresh zenith in self-serving recklessness from Larry Fink, head of BlackRock Inc. declaring to the joy of financial media everywhere:  “investors should be 100% in equities”.

Lest anyone forget, Larry runs one of the largest fund companies on the planet, and made himself a billionaire by selling a big part of his company to the stock market near the peak in 1999.  They then bought State Street Research & Management Co., for $375 million, in 2004, merged with the $544 billion Merrill Lynch Investment Managers in 2006, purchased Quellos, a fund of funds, in 2007, and in its biggest deal, acquired Barclays’ global asset-management business in 2009.  Read more on him here if you like.

100% equities for everyone, everywhere Larry?  No matter what?  Really? No matter how little or much they have?  No matter what their time horizon, risk tolerance, liquidity needs, debt issues, income, health problems?  No matter that the economy is slowing and earnings are declining?  Not to worry, all in?

I have written in the past that being a participant in the money management business today is like living in a dysfunctional family of drug addicts where no one wants to admit that there is a problem and those around you keep insisting everything is great, and you are the problem, if you don’t see that.

Even Dr Doom Nouriel Roubini has recently tried to sex up his image a bit (there were reports in October, that his company was losing money and he is looking for a buyer). Time for a more market friendly message to attract industry interest? Watch this clip of his new media front woman on CNBC.  Worry later, tonight celebrating at the “Manhattan penthouse” is the new vibe.

Here is the thing.  None of these people will make us whole when we lose money.  Not Fink, not the Fed, not Roubini’s new PR team, not the European Central Bank.

Banks may well get a few more bail outs.  Bankers may be able to torture income statements to squeeze out a few more bonuses for themselves.  But no one is going to bail out individual investors.  We must never forget that the financial world (especially in the current carpe diem era)  is a virtual cesspool of the conflicted, desperate, sociopathic and reckless.

Whatever risk we may decide to take on in these crazy times, we must never let the masses and mayhem convince us that someone, somewhere has got our back. The risk of capital loss is ours and ours alone.

I have been writing about the freakish trends in High Frequency Trading (HFT) for a couple of years now. As our markets have become ever more manipulated, Fed juiced, over-valued, under-regulated and pathetically under-policed, the HFT crowd has taken over. Over the past 5 years as risk-concerned individuals and institutions have pulled back from risk markets that are increasingly unattractive and precarious, transaction volume and traditional participants have fallen off precipitously. Like gardens left to run wild, markets have become overgrown with highly levered weeds and high frequency traders, who have come to account for 70-80% of all volume over the past couple of years. See my previous posts on this, including here where I point out the danger inherent in millions of computer generated trades moving 300 times faster than the eye can blink, only to be largely cancelled again before they are settled.  Sounds stable doesn’t it?

Just to show that we aren’t imagining the increase in HFT activity,  Mish brings us this animated GIF that chronicles the rise of the HFT Algo Machines from January 2007 through January 2012 by clicking on the link.   In this environment, traditional investors trying to use capital markets for rational activities are like old folks trying to hobble across a 6 lane autobahn with a cane at night, while the cops are on espresso break.

John Hussman, manager of Hussman Funds writes a weekly letter that I enjoy reading. John is a rare breed in the money management business: bright and highly educated, but also ethical, humble and incredibly disciplined, pragmatic and conscientious in efforts to protect the capital he has been entrusted with. His letter this week is quite a gem.

Over many years, I have found that John does a better job than most in tracking the leading indicators for the economic cycle as distinguished from the lagging and coincident indicators that many market commentators focus on. Here he is on Friday’s ‘surprise’ jobs gains (a coincident economic indicator) where seasonal and BLS adjustments changed an actual loss of 2.7 million jobs into a reported gain of 243,000 jobs:

“With regard to recession risks, the January employment report increases the divergence between leading evidence on the one on the one hand, where the broad set of data remains in a conformation that is almost exclusively associated with oncoming recession, and the more favorable, if lukewarm, signs from coincident indicators (e.g. employment, purchasing managers index, weekly unemployment claims) and lagging indicators (e.g. unemployment rate…

One of the great challenges of investing is the distinction between hindsight and foresight. Hindsight treats each major advance, each market crash, each recession and each expansion as if they’re turning points were obvious, and extrapolate prevailing trends as if their continuation is equally obvious. Foresight is much messier, because it deals with unknowns and unobservables. It recognizes that major financial and economic events are often hidden from view when they are actually already in motion. Foresight requires the willingness to rely on data that tends to precede important outcomes (recessions, market crashes, durable long-term returns), even when those outcomes can’t be observed in recent economic and market behavior that we can see and touch. Most importantly, hindsight creates the illusion that uncertainty is never very great, and risk management is never very challenging. Foresight demands a much greater appreciation for randomness, noise, uncertainty, risk management, and stress-testing.

Presently, there seems to be an unusually wide gap between hindsight and foresight, both in the financial markets and in the economy. In both cases, forward-looking evidence suggests weak outcomes, but recent trends encourage optimism and risk-taking.”

On the plethora of perpetually bullish stock analysts, Hussman offers this valuable insight:

“As a side note, the most frequent “valuation” approach that we hear from Wall Street analysts amounts to what we call “forward operating earnings times arbitrary multiple” and is embodied in statements like “we expect forward operating earnings next year to be so-and-so, and we’re also expecting a very modest increase in the multiple of about 2 points, which gives us a price target of such-and-such.” While this sounds reassuringly analytical and conservative, that particular model has almost always implied a one-year price gain of about 15-18%, regardless of the circumstances (you’ll find many analysts who projected just that even at the 2007 market peak). Valuation “targets” of this kind should not be taken as useful information, but instead as red flags.”

So true I giggled (cue images of Abbey Joseph Cohen and her many cohorts).  But in the end, the present mess of world markets is not really a laughing matter.  Risk assets today offer mostly intolerable risk for those of us who care about avoiding losses, and yet artificially suppressed interest rates and yields on defensive positions are painfully low. Here’s Hussman:

“Unfortunately, it is both dangerous to speculate, and utterly frustrating to remain defensive, in richly overvalued markets coupled with significant economic risks or strenuously overbought conditions.  This is the environment we are presented with, and it is in no way typical of “standard” market conditions, despite its repetition in recent years.”

No truer words! And still adults must do the right thing and stay defensive here, or suffer the consequences of more losses that are all but certain to follow for the masses yet again!  You can read his whole letter here.

There is much more to do before we get to a sustainable recovery, says Mohamed El-Erian Pimco CEO/co-chief investment officer, “it’s too early to declare victory”. Here is the direct link.

This is a disturbing article on the watering down of organic into “natural” food marketing. Read your package ingredients carefully no matter what the advertising says.  The strongest vote we consumers can make is with our dollars and the products and producers we choose to support.

“In the wake of a 12-year battle to keep Monsanto’s Genetically Engineered (GE) crops from contaminating the nation’s 25,000 organic farms and ranches, America’s organic consumers and producers are facing betrayal. A self-appointed cabal of the Organic Elite, spearheaded by Whole Foods Market, Organic Valley, and Stonyfield Farm, has decided it’s time to surrender to Monsanto. Top executives from these companies have publicly admitted that they no longer oppose the mass commercialization of GE crops, such as Monsanto’s controversial Roundup Ready alfalfa, and are prepared to sit down and cut a deal for “coexistence” with Monsanto and USDA biotech cheerleader Tom Vilsack.”

See the whole article here.