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.