Juggling Dynamite

Jason Trennert, chief investment strategist at Strategas Research Partners, appeared on Bloomberg this morning explaining why he thinks the US is entering recession along with Europe, Japan and China in hard landing, and that this presents downside risk to earnings, GDP and global stock markets.

1:57 minutes into his cogent, well reasoned discussion, co-host shopaholic Sarah cuts to the chase: “but can you really afford to be out of the stock market?” This is where the discussion perfectly reveals the madness and futility of the mainstream money management business with its perpetual stock allocations and benchmarking. Trennert pauses: “ah…if you’re a professional investor…not really…hard to be out…but you can’t plant your feet…you can really get run over.” Later he goes on to explain that prices are too high given the economic reality and then again “if you’re a professional you have to be involved, clients are still going to hold you to the standard of what the actual market did.” (really? even when markets drop 20-50%?) He then repeats his view that central banks have unduly driven up stock prices which are not supported by fundamentals, and that a day of reckoning is inevitable. This logic equates to this: things are very dangerous, but then what is a poor perpetual allocator to do but to keep capital in harm’s way anyhow? Isn’t that what you hire a professional to do with your savings?

The capital-destructive thinking here is endemic to a business that is paid not to manage risk, but to throw capital blindly into slot machines. “Professionals” running money is actually a euphemism. In truth the money they are “running” is the savings of real life people. So if constant stock allocations are dangerous for individuals, why in the world is it prudent for the so called professionals managing the savings of those individuals to keep shoveling those savings into the market fire when the odds of significant loss heavily outweigh the prospects for lasting gains?

This would be like hiring an engineer to design and oversee the construction of a skyscraper and then the engineer not bothering with measurements or prudent practice, saying that they have no choice but to be reckless because the client does not want any pauses or delays–doesn’t want them to dwell on risks–just wants the engineer to keep taking their money and piling on the girders. If the engineers are all doing it this way and the buildings inevitably collapse, could they then take refuge in the fact that all the other buildings fell down too?

This is the kind of professional the world can do without and is the very reason that mutual funds and conventional managers have continued to see massive outflows and redemption’s by unit holders over the past 10 years as they have repeatedly risked and lost client capital. Clients that think they want returns “with the market benchmark” don’t understand that this also means following the indices down into the depths of bear markets. A “professional” that adds no care or expertise is not a service worth paying for. The truth is that it is easier to collect assets and constantly toss them in than to think, measure, worry, weigh probabilities and manage risk. Valuable leadership and expertise are not a popularity contest that seeks to look busy and happy-go-lucky. Valuable managers do the right thing for the client especially when it is unpopular because they know that over time this discipline and care will make the difference between those who thrive, and those who suffer repeated loss and hardship.

Here is a direct link.

Danielle was a guest today with Kerry Lutz on the Financial Survival Network, discussing recent trends in the economy and global markets. You can listen to an audio clip here.

Max Keiser and Stacy Herbert discuss David Cameron appointing former bankers to Treasury. We look at another former banker who became a Treasury Secretary only to become a bankster – Robert Rubin – and his role in Citigroup bilking Abu Dhabi of billions. In the second half of the show, Max Keiser talks to Reggie Middleton about Facebook, fraud and financialization.  Here is a direct link.

This clip marries nicely with some stand-out quotes from the Senate Report on banking and currency (dubbed the Pecora Commission Report, after lead prosecutor Ferdinand Pecora) from 1934. Here are a couple of the dozens of findings in the report that have proven timeless:

“During the speculative orgy of 1928-1929, stock exchanges made no adequate effort to curb activities on their exchanges. On the contrary they conceived it as no part of their function to discourage excessive speculation or to warn the public that security values were unduly inflated.” –p. 81, Senate banking and currency report, June 1934

“…banks found a fertile field among depositors for purchasers of security issues which their investment affiliates were sponsoring. These banks, violating their fiduciary duty to depositors seeking disinterested investment counsel from their bankers, referred them to their affiliates for advice…[and] were then sold securities in which the affiliates had a pecuniary interest.” –p. 163, Senate banking and currency report, June 1934

“The deplorable consequences to the investing public, with their misplaced confidence in the competency and integrity of purpose of the investment trustees, is woefully exemplified by the Goldman Sachs Trading Corporation.” –p. 339, Senate banking and currency report, June 1934

5 years after Congress enacted key reformation legislation like The Banking Act of 1933 (Glass-Steagall Act) and The Securities Act of 1933 (‘Truth in Securities’ bill), bankers were lobbying hard to have lax standards return. This prompted Ferdinand Pecora to write a book in 1939 called “Wall Street under oath” encapsulating and reminding of the scathing body of evidence which was proven against the Banksters over 2 years of public hearings. In the Preface, Pecora offers this now haunting caution which was soundly forgotten over the past 20 years:

“The case against the money-changers does not rest upon hearsay or surmise. It is based on a mass of evidence, given publicly and under oath before the US Senate in 1933-1934…After 5 short years, we may now need to be reminded what Wall Street was like before Uncle Sam stationed a policeman at its corner, lest, in time to come, some attempt be made to abolish that post.”

And abolish they did. Lobby by lobby, stroke by stroke, key guard-rails and controls were repealed all the way up to the 1999 repeal of Glass Steagall by Clinton, and the setting aside of fair accounting and disclosure rules by the FASB in 2009. Now we have the chaos we have earned through ignorance of history and human nature. Time to admit, repent, reform, recover, once more.