The Fires That Blind
"Past performance does not guarantee future results." - Wall Street Mantra
While easily grasped, the above adage is not as easily respected. Rather, investors have a tendency to herd into what has performed well in the past. And in today's financial world where asset class correlations are tied remarkably tight and the monetary powers that be are remarkably loose, this is an ominous contradiction. In fact, the argument can be made that this contradiction threatens (and perhaps already has) to recast the liquidity driven mania days that coalesced with increasing intensity from 2003-2007. Buy equities, real estate, commodities, or art because their future fortunes are perpetually inevitably rosy!? The herd seems to think so...
Not exactly against the idea of asset classes rising in unison, central bankers have been playing the role of the insane plumber threatening to throw the kitchen sink onto the heads of those contemplating flushing their investment losses down the pipes. Willingly oblivious to the fact that excessive risk taking and regulatory neglect helped spawn the financial crisis, the contradictions astonish: In order to rectify the financial crisis central banks must adopt zero bound interest rates and quantitative easing policies, banks must lend money more freely, investors must take on more risk, and regulators must embark upon another prolonged period of nothingness. If fiction these events would make for an enthralling albeit utterly ridiculous read. But as reality, the acts of central bankers and policy makers are, well, just sad.
As for Mr. Central Banker - Ben Bernanke - rather than heap scorn on his many failings he has actually been heralded by many as a hero. So what if Bernanke missed forecasting any part of the crisis beforehand and he simply followed Greenspan's unsound post-bubble bailout script with unbridled fanaticism. We are told that because he was academically acquainted with the Great Depression Bernanke was best prepared to deal with the financial crisis and that his unique steps to unlock markets are the reason why economic 'recovery' is afoot. Bernanke has greeted his semi-hero status by offering a small nod, recently stating:
"History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation."
History is also replete with examples of how overzealous central bankers have printed their currency into oblivion and caused untold damage to the economy and financial markets, but we digress. Bernanke adds:
"Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk."
The very suggestion that the 'speedy and forceful' actions of central banks have detached 'serious risk' from the global financial system equation is, of course, amusing. After all, wasn't it the Fed's madly misguided [anti]regulatory approach and asset bubble [mis]management that created many of the 'serious risks' that sparked the crisis? Again, we digress.
Needless to say, the centerpiece of the Bernanke platform is that of speed and indoctrination. We have been incessantly reminded that Japan failed to purge the deflationary forces at work because policy makers were too slow to act, and that the Great Depression was caused by policy makers taking their foot off of the pedal. These simplistic comparisons to two very specific periods (while ignoring completely say Zimbabwe, 1970s stagflation, Weimar, Rome, etc.), neglects to shed light on exactly why the success/failure rate of monetary stimulus activities are lashed onto this particular historic comparison. To wit, could Japan's lost decade really have been avoided simply by the central bank hacking interest rates more aggressively? Could the bad loans weighing down Japan's institutions really have been remedied via a simple transfer to the BOJ's coffers? Similarly, would the Great Depression have simply been an ordinary downturn if Bernankism was in fashion? We have our doubts. Yet in the land where speed thrills and nearly all asset classes cast similar shadows, it is the banality of ungrounded speculations that makes good reading. In other words, the financial world didn't completely collapse so somebody must have done something right. And even though we know he did everything wrong leading into the crisis, why not simply shower praise on Mr. Bernanke?
Nothing Changes And No One Seems To Care
The financial press has interrogated Wall Street compensation levels, and the U.S. public - at least those not still overjoyed by the 'cash for clunkers' program - have quietly complained about the parade of bailouts over the last 18-months. These are two of the positives to be taken from the financial crisis. Unfortunately, with regards to the outrageous inconsistencies running wild in policy-land, an eerily widespread reticence still largely prevails. To use the most obvious example, politicians, Fed members, and countless regulators continue to vocally rage against the 'too-big to fail' philosophy that has come to dominate American capitalism, and yet at the same time nearly all of their policies continue to promote this very culture. Why the public and press are not incensed by this and other policy contradictions is not entirely understood. It can perhaps best be explained by the effects of effective spin - countless calls from policy makers to 'put the [financial crisis] fires out!' before any attempt is made to investigate the cause of the blaze. Keep the public's attention on the fire, not on the fuel.
For the record, the off balance sheet mess polluting corporate America persists, countless trillions still slosh around in dark marketplaces, hedge fund regulations are about as welcomed as a Pap smear, and the U.S. is basically taunting the world to challenge the U.S. dollar's reserve currency status. In a financial world whose fate is increasingly intertwined fear should indeed be on the rise. To be sure, there should be alarm bells ringing out that important regulatory changes must be undertaken, secretive marketplaces and market practices must be unveiled, fraud must be policed, and the nation's currency must be put on a stable path. Instead it is complacency that is rising, and in amusing fashion. For example, completely bereft of the concept of systemic change, the mob would like to see Wall Street compensation levels come down. The greatest financial crisis since the Great Depression and the sole unifying solution is to limit Wall Street pay? If only this was fiction...
"In a crisis you need to make a choice. You can choose to solve the problem and protect the innocent from the results of the firestorm. Or you can try to teach them a lesson. You can't solve the problem by teaching people a lesson. That's not a strategy for solving the crisis. It's a strategy for inflicting a lot of damage." - Treasury Secretary Tim Geithner
Arguably more outlandish than President Bush's "I've abandoned free-market principles to save the free-market system", Mr. Geithner's convolutions are truly impressive. The money of the 'innocent' has been stolen to prop up a financial system on fire; a system that has and continues to reward those guilty of allowing arsonists to run amuck! And in this system hard lessons are not learned and the damage is always contained because people like Tim Geithner are confident that even as they lay the groundwork for an even larger firestorm tomorrow some different outcome will mysteriously transpire? At risk of straying, let us hope that U.S. policy makers have drafted the appropriate contingency playbooks for when real change is voted in by foreign lenders, or the day when either the dollar is somehow stabilized, devalued, or completely obliterated. After all, the fable of omnipotent policymakers perpetually dictating safety and risk across marketplaces, while simplistically alluring, is a fable nonetheless. The real story remains that of an unsound, unregulated, and unsafe financial system that only remains vibrant due to the somewhat artificial mechanism of U.S. dollar hegemony.
In short, from the annals of Buffettology rests the adage 'buy when others are fearful'. If you believe fear still exists in any major asset class you have been conned; swindled into the newly indoctrinated mantra known as 'past performance may not guarantee future results but it sure as hell beats being in cash.' And while fear [of missing out on rising asset prices] can indeed make investors do incredibly dangerous things for extended periods of time, we should not lose sight of the fact that salvation today has perhaps only been temporarily realized. Quite frankly, there is but one question: How long can U.S. policymakers continue to spin U.S. paper into gold?
For the record, ultra-safe variants of 'cash' have outperformed risky U.S. equities over the last decade...and yet no one seems to care. Buy equities, real estate, commodities, or art because their future fortunes are perpetually intertwined!?