Juggling Dynamite

Steve Kroft talks to the bank examiner whose investigation reveals the how and why of the spectacular financial collapse of Lehman Brothers, the bankruptcy that triggered the world financial crisis. Here is the direct video link.

The story is important to understand and shows another glaring example of financial executives and their accountants getting away with financial murder. They remain at large, unprosecuted and no doubt happily spending their millions. Probably making more big contributions to the upcoming presidential race. Hush money indeed.

One issue I take is with the presentation of Lehman’s collapse as the cause of the financial crisis. That is like saying the Great Depression was the fault of the Federal Reserve for not flooding the system with enough liquidity in the early 30’s (as Bernanke asserts). The Depression was caused by the 2 decades of greed, corruption, reckless behavior and leverage that built up in the financial system and firms leading up to the bubble bursting in 1929.

Similarly in our generation, Lehman was one of many symptoms, not the cause of the financial crisis. The cause of the crisis was and still is rot, greed and corruption, lack of ethics, lack of political leadership, lack of proper regulation and oversight in the global financial system. Remember we must recognize the truth about what happened and punish offenders in order to admit, repent, recover. Everything else is counter-productive.

Stephen Roach, former Morgan Stanley chief economist breaks down the risks facing the U.S. recovery; the cost of Fed policies; whether China’s economy is hitting a wall; and the race for the White House, with GOP presidential candidate, Rep. Ron Paul, (R-TX). Here is a direct link to the video.

The thing which is so often missed in these discussions is that nominal gains in the price of gold have come and gone over the centuries in the classic swings of human obsession. But gains not converted to other necessities are not retained by investors. In addition those who have the bulk of their wealth in currencies other than the US dollar have not “made” the increase in prices over the past decade. Canadians, Australians even Europeans have seen their currency appreciate against the US dollar. This means that those of them holding precious metals (priced in US dollars) have not netted the gains in the rocks. A falling US dollar has taken away a large part of any nominal gains in the price of precious metals. So many of those selling the commodities story the past 10 years have come from the US and far too many gullible followers gobble up the spiel without understanding this important distinction.

In any event, the global risk sky is falling again this morning, as the French and Dutch governments succumb as the next casualties in the world’s epic war with debt, and we have gold, silver, platinum all falling…much to the chagrin of those arguing that precious metals are safe havens. Let us get this straight: true safe havens are water, food, air and things that can be quickly converted in exchange for these essentials. The western population is so physically unfit today, they could not possibly lug around bags of metals to buy their necessities. Facts must be faced.

Good article this week on the sales pitch hogwash served by the long-always-stocks crowd urging equities are cheap and attractive today relative to bonds. (Actually they say this everyday at every price, since they are always in the business of selling people the dream of long-term equity returns.) Most often (and especially during secular bears) the dream proves a nightmare for gullible clients.  The much espoused “Fed model” is one of many misleading arguments used to herd clients into risk.

“Is it true that stocks are cheap “when compared with bonds”? That’s the line on Wall Street. If you haven’t heard it from your broker yet, you will. Indeed, in a recent report, some investment strategists from big brokerages, in their enthusiasm for stocks, argued that they were at record lows compared with bonds…

Consider what that means in practical terms. Bond yields are low today because the market is expecting very low growth and low inflation. But if that materializes, corporate earnings will rise more slowly than in the past, or may even fall. That’s grounds for caution, not optimism, about stocks. It’s also the case that today’s profit margins are near record highs. The only way earnings are likely to grow from here is if inflation picks up. If that happens, good luck with those bonds, whose prices would plummet.

When I heard someone pushing the Fed model recently, I started to think about overseas comparisons. By the model’s logic, in early 2008, both the Italian and Greek stock markets were an absolute bargain. Both sported earnings yields of about 10 percent, more than twice the yield on their country’s 10-year bonds. Oops…”

See: Stocks are cheap? Logic says otherwise