Juggling Dynamite

As pointed out by Zerohedge today and shown in their chart below, the equity market rout over the past 6 months has so far evaporated over $16 trillion in paper wealth and returned global equity market values to 10% below the November 2007 peak–8 long years ago.

This means that the rebound in stocks–that was purchased through the sacrifice of prudent fair value accounting standards (FASB 157 was set aside in March 2009) and trillions in tax dollars via bailouts, preferential treatment, and Central Bank injections since 2007– has been but a fleeting mirage.  A mirage that diverted money to financial markets rather than other critical needs like infrastructure, health, education, savings and long-term investment for the future.

In exchange the world has been left with trillions more in debt at every level from households, to corporations and governments.  A good deal of this debt will not be repaid and has yet to be marked down or written off to reflect this reality.

And that is to say nothing of the tens of trillions of dollars in commodity assets that have yet to be discounted on balance sheets all over the world.  As pointed out by John Mauldin this week, the world’s oil reserves in the ground have declined in market value by more than $100 trillion in just the past 18 months— See:  $100 Trillion up in smoke.

And that is not counting similar declines in other hard assets from copper to nickel, silver, coal, iron ore and more–all yet to be marked down.

The world is full of finance promoters who talked endlessly about the positive ‘wealth effect’ they expected from all the money flowing into financial markets over the past decade.  The same crowd is now conspicuously quiet about what the mean reversion of asset prices suggests in terms of negative ‘wealth effects’ for the world.

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An article in the Wall Street Journal this morning complains about the public scorn of bankers in the world today and blames increasing outrage on the “preaching class hatred to people besotted by the politics of envy”–and specifically as articulated in the 2016 presidential race by democratic candidate, Bernie Sanders.  See:  Bernie’s Wall Street Slander

As Deputy Editor of a preeminent publication serving the finance establishment, it is not surprising that Bret Stephens would argue this view.  Since the 2008 financial crisis of their making, bankers have enjoyed 7 years of extraordinary advantage, privilege and legal immunity worldwide.  This has enabled them to funnel public funds into their own coffers and extract some obscene riches for a few at the expense of the many.  In doing so, they have left the world more indebted than ever before and dangerously depleted and exposed coming into the next global recession.

Mr. Stephens points out that financial services employs some six million people in America, 900,000 in the securities and investment end of the business, and asks:

“Is Mr. Sanders suggesting that some large proportion of those 900,000 is in on the fraud; that every man among them is a Madoff?…Those are questions that ought to be put to Mr. Sanders, and ones his supporters might also want to ask themselves.”

I beg to differ.  It is not up to the public to determine good from bad actors in finance, it is up to people working in finance to distinguish themselves.  I speak from experience.

I began my career on the sell side of a major bank owned securities dealer in the 1990’s.  Once I realized (within 2 years) how harmful the business model was to the world, I did not close my eyes and continue.  I did not keep taking easy money.  I did not fight regulators for the right to continue a trust-abusing job. I did not decide to double-down on misleading advertising in order to attract a fresh crop of confused victims to feed on each market cycle.

My partner and I worked hard and devised a new business model.  We quit our jobs to found an independent, buy side, fiduciary investment counsel firm mandated to serve only the best interests of our clients.  We gave up income to do so.  We used up our savings to start.  We gave to get and gradually built self-respect and a valuable client service in the process.

Although many people in finance and other businesses hide their personal choices and deeds behind the facade of a corporation, the truth is we all must be accountable for how we chose to make money.  We are in the end, what we aid and abet through our personal acts and omissions.

Of course not everyone working in finance means to commit fraud or cause harm.  But the reality is that willful blindness is also a culpable mindset and the vast majority are working in models that do not put the best interests of their clients first.  This is as indefensible in finance as it is in medicine, law and other advising professions.  If individual actors do not chose to be part of a solution then they are the problem.

In finance as in all things, we must acknowledge the timeless truth:  “All that must happen for ‘evil’ to prevail, is for ‘good’ people to do nothing.”