The Extinction of Ethics in Finance - The Fallout
October 13, 2009
I am writing this article for those of you who suffered losses due to the market meltdown of 2008. So I guess I'm writing this for pretty much - nearly everyone. It's my sincere hope that you've been able to recoup some of your losses considering we've just had the greatest bear market rally in history. My aim is to get anyone who will listen to take advantage of the breathing-room this rally has bought us and ask yourself a series of questions.
The two most important questions anyone with any money at risk in the US financial markets should ask themselves at this critical point in economic history are exceedingly simple. One, are you prepared for another market meltdown? And two, what is your new exit strategy when things do go wrong?
Another perplexing question you might ask yourself is this. How did my financial advisor not have a clue that history's most catastrophic economic storm was brewing in the credit markets? It was blatantly obvious. The canary in the coal mine fell off its perch, dead as a doornail, in February of 2008 when the 'auction rate preferred' paper froze (an instrument of 7 to 28 day maturity that the wealthy have historically kept their liquid cash in at 100 bps higher than money market funds) - a sign that anyone with any knowledge of the financial markets should have known was ominous and would precipitate other catastrophic events.
I wanted to begin this article with a few provocative questions to get you thinking, because most often it is combination of complacency and inertia that causes financial undoing. The inability to act as it were. Watching as Rome burns, hoping things will return to normal. Well there is no normal anymore. Normal only exists in hindsight.
By answering the questions above, among others, alarm bells should be going off in your head - remember that dead canary at the bottom of the cage.
Think about this for a moment. Why is it that your broker or financial advisor knows pretty much everything about your financial history but you know nothing about theirs other than what they've led you to believe? Sure they might look impressive in their designer suits and leased German sedan, but have you ever seen their tax returns? If you're broker or financial advisor can't prove they are immensely more successful than you, what good are they? As a matter of fact if these self-proclaimed experts of finance have a tax-loss carry forward, arguably making them lifetime losers, what makes you think they won't create the same losses for you and hence, the same financial hell?
Each of these are good questions in their own right but are unfortunately only the tip of what seems to be a sinking iceberg.
Speaking of icebergs, when the auction-rate-preferred paper seized in February of 2008 (foreshadowing seven months later the commercial paper market freeze - an instrument ironically created by none other than Goldman Sachs in 1868 and mostly used by the truly wealthy to park their liquid cash short-term in blocks of roughly ten million or more) anyone with any knowledge of how financial markets function should have stopped in their tracks and screamed at their clients to run for the exits. The freezing of the short-term paper markets was identical to the JP-Morgan-owned Titanic ramming into that fateful iceberg, its steel hull ripping open the sound so horrifying anyone within earshot should have known the end was near. Just ask Lehman. Instead, what we heard from most brokers and financial advisors was something completely different. The fundamentals are sound, they said. We're the largest economy in the world. We can't possibly fail.
Why CNBC, along with inept and proven-failed economic theorists who've won fake Nobel Prizes in economics, and retail stock brokers have this Svengali-like mojo over the public is beyond me! And why anyone would believe that a complete stranger would exercise more diligence over the management of your money is again, bewildering. If I were attempting to protect my capital base but had entrusted this task either in part or in whole to a broker or financial institution you better believe I'd be asking myself some very pointed questions right now.
- Have I made money in the stock market over the last decade, or perhaps the last two?
- If so, is it greater than the risk adjusted return I could have generated had I simply compounded interest in treasury bonds? Remember, treasuries were yielding approximately 9% in 1987. Imagine if you'd just bought 30 year bonds at 9%, compounded the interest, and woke up after being cryogenically frozen to witness the carnage that occurred during your peaceful slumber over the last two decades to the poor gullible investing public.
- Assuming I have made money over this period was my broker actually instrumental in achieving these gains and if not, isn't that exactly like hiring an obese personal trainer to help you shed those few extra pounds?
- What current exit strategy or hedge do you have to protect yourself from another market meltdown to avoid losing what remains of your wealth?
- If I've suffered net losses but am still in a liquid position and have assets at risk in the US capital markets what functionality does my broker/advisor serve?
- Is he simply an order-taker charging me fees for my ideas and strategies? Or, is he navigating me through these challenging times with any foresight and definable value?
- Or, is he simply a destroyer of what remains of my wealth?
- Can I through my own strategies, or based on outside advice, define the "exact edge" I have to make money in the markets on a risk adjusted basis going forward and can this "edge" be defined in writing?
- For those of you using brokers, financial advisors, or outside money managers, what due-diligence have you actually done on this den of thieves?
- Finally, am I not better off without a broker or financial advisor and the obvious conflicts of interest they represent?
The latter could be the most important question you ask. If your broker or financial advisor has NOT made you money why on earth are you still with them? At the onset of hiring them what did you actually know about them other than they dressed nice and had a low golf handicap? Maybe they had the appearance of wealth - the ultimate deception. Frankly, I've seen car salesman wearing Rolex watches and writing with Monte Blanc pens - it didn't make them wealthy. And let's not forget your broker or financial advisor most likely stood idly by while the biggest tectonic shift in economic history was unfolding before their unseeing eyes - and they probably did nothing to get you out of harm's way.
Wouldn't it make sense at this juncture after the markets have rallied back such a significant amount to not fall victim to "economic amnesia"? Wasn't it just six months ago that the world was coming to an end in the wake of Hank Paulson, on his way out the door no less, threatening congress with martial law and rich people and Wall Streeters alike committing suicide on a daily basis? How soon we forget that September of '08 led to Dow 6,469 in March of '09, hence me coining the aforementioned term "economic amnesia" to describe the public's short-term memory meltdown.
To revisit my original intention in writing this article, I cannot stress to you the importance of understanding exactly what is going on in the world. No one is to be trusted with your money. Not Wall Street, not the banks, not the government - nobody is to be trusted! Does the investing public not realize that Wall Street almost lost every penny of American wealth? Now we're supposed to believe they've saved the day? I beg to differ. Those parasitic liars nearly took us to zero. Who knows, they still might.
The grossly deluded public has been at the mercy of brokers, financial advisors, Wall Street, the Fed, congress, and the US Treasury far too long. This moral hazard and subsequent uneven playing-field created by the current financial structure (the trifecta of the Fed, Treasury, and the "Banksters") wherein the scales of balance tip only upward, hence siphoning this nation's wealth into the coffers of those that create such hazards. Their current solutions to this crisis, a crisis of their own making, is nothing more than a replication of the same idiotic practices that got us here in the first place; corporate bailouts, homebuyer tax-rebates, foreclosure moratoriums, cash-for-clunkers, all designed to forego the inevitable sanctification of sins past and deliver them on to the US taxpayer. The difference between the past and present is that now we have a government willing to set up shop and take over entire industries; mortgage lending, auto, banking, and who knows going into the future. Just wait, we'll be in the airline business in no time. I feel like I'm in a perpetual state of Déjà vu - with a repeat of September 2008 barreling headlong around the next bend.
That we exist in a quasi public-private financial system wherein the government in collusion with the Fed and the "Banksters" take your money essentially by force (specifically through the leverage of ZIRP) or otherwise and shove it into new toxic instruments, bailouts, and ill-conceived stimulus programs that even these so-called best-and-brightest have no concept of the inherent risks, or hazard of unintended consequences, is proof that the entire game is rigged against you.
It is time to take control of your money.
Now, with regard to the subject of managing one's own money, the rules of the game have officially changed. The EXTINCTION OF ETHICS in today's financial markets IS the new rule. You must take total responsibility for the management of your own money and you must do it now! I don't know how to make it any more clear. I could probably write an entire thesis about the utter abandonment of morality by today's so-called investment community. I mean, does everybody have to cheat each other to make a dollar? The subject literally brings into question the human thread that binds our social fabric together.
Given the dire state of the global economy and the fact our collective economic situation has gotten significantly worse, not better, creates an opportune time to shift any misplaced philosophy of trust in a corrupt system and recognize that we're in the middle of a COVER-UP, NOT A RECOVERY!
A comment I always appreciated and have tried to take credit for but know I plagiarized from somewhere is this; ANTICIPATING BAD LUCK IS GOOD LUCK; DEPENDING ON GOOD LUCK IS BAD LUCK. This so-called recovery is merely a papered-over facade made possible by trillions of newly created dollars. The time to prevent getting thrown back into the ditch is now. Remember, do not fall victim to the CNBC-induced epidemic of "economic amnesia".
When asking yourself the questions I have posed, be totally objective with respect to your gains and losses over time. Be dead truthful - because the margin for error has never been so razor thin.
(Forthcoming: Part Two - Managing Your Own Money - Take Action Now)