Shah Gilani
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The One Question We Must All Ask Ourselves
Rampant profiteering by Congress and greedy bankers is forcing us to weigh the slings and arrows of outrageous fortune against honesty and transparency – both of which are being trampled by crony capitalists in pursuit of the almighty dollar.
What's at stake is whether gross criminal activity and reckless disregard for the public will continue to be whitewashed by regulators like the Securities and Exchange Commission (SEC), the U.S. Federal Reserve, courts, and Congress, which encourage half-baked civil fraud charges followed by non-prosecution agreements and nickel-and-dime fines.
And even more galling, guilty parties end up neither admitting nor denying wrongdoing.
Let's face it, we have allowed the SEC, the Fed, and Congress to be corralled as a matter of regulatory and legislative capture by the very crooks they are responsible for policing and protecting us from.
We are lying to ourselves if we do not believe that we are all part of this problem. It's not that most of us aren't honest. It's that we venerate money and wealth too much.
Rather than being disgusted by dishonest manipulators, liars and cheats, we excuse the less-than-obvious perpetrators as if their example of cutting corners to get ahead, as far ahead as possible, might clear a path for some of our own pursuits.
What have we become? Are we a nation of people with liberty and justice for all, or just a bunch of money grabbers stepping on each other's liberties to pursue self-centered happiness by becoming filthy rich?
Don't get me wrong. There's nothing wrong with the profit motive driving business. And there's nothing wrong with working hard and trying to make a lot of money. Those are honorable pursuits.
President Calvin Coolidge said: "The chief business of the American people is business."
But in the same speech made on January 17, 1925 our 30th president went on to say: "Of course the accumulation of wealth cannot be justified as the chief end of existence."
Tragically, the fountainhead of greed in America emanates from our own Congress. It has become obvious that the accumulation of personal wealth is their primary civic duty.
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The Script for 2012 – And Your Part In It
Welcome to 2012, the third act of a tragic play. As an investor, you have a part in it.
So, if you haven't been paying attention to character development or lost sight of the plot, you're going to be frozen onstage when it's your turn to act.
Here's your script and some direction.
The set-up went like this: The audience walked into the world theater in September 2008. They took their seats and read the card left on their velvet chairs. It was short. It said:
Act I opens with the backdrop of mounting tension as insanely leveraged homeowners, consumers and banks scramble to make sense of declining home prices. The curtain lifted and the show began. The first act was dramatic, but ended in March 2009.
Act II began immediately without an intermission. Asset prices began to climb from their depths thanks to massive global stimulus.
But, Act II also revealed the tragic nature of this play. In spite of "green shoots" and rising commodity and stock prices promising a return to normalcy, the truth is that the world changed before the credit crisis and the Great Recession. There's a "new normal."
Globalization has increased labor pools, lowering costs and causing massive shifts in manufacturing realities, while productivity gains orphaned an army of white collar, middle-management sergeants, mostly in the developed world.
Seismic shifts in emerging markets were met with inflows of capital, while in developed countries, especially Europe and the United States, outflows of capital were offset by politicians borrowing more from future generations to promise retirees they would be able to retire.
As Act II comes to a conclusion at the end of this year, and Act III is going to look completely different. In fact, it might be titled … To continue reading, please click here…
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A Brave New (Broken) World
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I've said it before, and I'll say it again.
The markets are broken.
It's not that they're not functioning on a daily basis, pricing risk and assets and performing their price discovery duties. They are doing that – or at least trying to.
Those are the little, daily things that markets do, and there are things there that are broken. (I'll get to those things another time.) Think of those little things as the "hows" or the "mechanics" of buying and selling.
Think of the big things as the "whys" or the "psychology of investing."
Those are the things that are broken.
Until they are fixed, or "things" change, drastically, we are in for some really wild swings in the months, quarters, and years ahead.
I'm going to point out all of these big things to you, over time. But right now, I'm going to point to just two.
1) No More Buy-and-Hold Believers
First, there are two types of players in markets, investors and traders.
It used to be that investors dwarfed traders – by a huge margin.
Investors were the meat and potatoes and the vegetables, and traders were the gravy that made sure investors' plates were liquid enough so that they didn't choke when swallowing their meals.
But that's all changed.
There aren't that many truly long-term investors any more. It's too dangerous to be an investor in the traditional sense. That's why most investors, at least those that call themselves investors, are really all traders now.
I don't mean traders in the high frequency sense, or even in the day trading sense. I mean they are traders because they invest for the future but can't see beyond a few quarters, if that, so they have to get out of positions.
These traditional investors almost always have stop-loss orders down, or at least have stop-loss levels in mind as part of their investment "plans." A lot of them now use profit targets, too.
That hardly ever happened traditionally. Investors invested. They were buy-and-hold believers in a brighter future where, over time, assets appreciated, and they stuck with them.
Not any more.
Occupy Wall Street, Consider This My Gift to You…
Out of far left field, I see something coming that I never expected.
It's more like the coming together of pieces of a puzzle that have eluded us for too long.
By the way, Occupy Wall Street, if you're listening, and I hope you are, and you're still floundering (which I know you are) without a cause that anybody can really wrap their heads around, drop your drums, chants, and wanderings, and make the coming together of this puzzle what you're protesting.
And make what could result what you are demanding.
Because, really, this could be the mother lode.
The U.S. Securities and Exchange Commission (SEC) is accusing six former executives of Fannie Mae and Freddie Mac of playing down the risk to investors of their firms' aggressive fast-forward into subprime mortgages… which caused them to implode spectacularly.
Two separate civil suits, filed last Friday, allege that the executives "knowingly misled investors" who owned shares in the companies and were thus deprived of critical information against which meaningful investment decisions are generally made.
The two wards, currently under U.S. conservatorship (life support attended by a wet-nurse), were themselves spared being sued, on account of their signing civil non-prosecution agreements and promising to cooperate and not dispute allegations (and also not have to admit nor deny wrongdoing). Yet the SEC is seeking financial penalties, disgorgement, and an order barring guilty parties from serving as officers or directors of any public companies in the future against the implicated executives.
The SEC faces an uphill battle based on one word – "subprime."
The problem is, subprime has never been legally defined.
You know what it means, I know what it means, everybody knows what it means, without knowing its exact definition. But if there's no definition of subprime, defense lawyers will counter that it's not possible to sue based on a standard that has never been defined.
How about we compare mortgages to cars and subprime to clunkers. If you're on my used car lot and I offer you two cars at the same price and don't tell you one is a clunker, is that fair? You wouldn't need me to define "clunker." If I said one was a clunker, you would simply choose the other car; after all, it's the same price.
There is a difference, there's a big difference.
Over on the Fannie and Freddie lots between 2006 and 2007, they were loading up on clunkers and not telling anyone what they were stocking. In fact, they were saying things like, "basically (we) have no subprime exposure" in the single-family realm.
They lied.
One of the reasons they were loading up on subprime was because Wall Street banks were eating their lunch by buying up subprime loans, packaging them, and selling them to investors hand over fist, and Fannie and Freddie wanted in on that very lucrative business. It's not that they hadn't dabbled in subprime before; they had. But as they saw stresses in the marketplace on the better mortgages in their portfolios, they still loaded up on far weaker credits; also known in the business as SUBPRIME.
So what's next?
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Subject Banks to the Free Market or Turn Them into Utilities
Let's face it. Banking is a protected industry. It's a government-coddled industry.
The problem with that is, banks really aren't subject to free market forces that would naturally eliminate insolvent and inefficient institutions. The result is more bad banking.
If we ever want to free ourselves from the yoke of czarist money-changers and free up capital to flow into and throughout the economy, we must subject all banks, and all financial institutions, to free market forces so the weak ones fail and the strong survive.
How do we that?
It's easy. We remove the rocks under which banks hide by making all banks' (including the U.S. Federal Reserve) books and records transparent with a one-month lag. While we're at it, why not legislate the same rule for all regulatory bodies? They are supposed to be protecting us, after all, so what's there to hide?
(Speaking of transparency, it wouldn't be a bad idea to stop members of Congress from trading stocks that are directly affected by pending legislation. More on that here.)
And, if that's not a palatable option for bankers used to being sheltered, we should give them the ultimate protection they demand and simply turn them into utilities, along with the transparency that comes with it.
Let me make this simple.
If banks get into trouble and have to borrow huge amounts from each other, or have to borrow from the Federal Reserve – either from its discount window, through swap lines, or through any of the other central bank liquidity provision programs currently available – we should know about it. I suggest a one-month lag before that information is released because that's all the time they should be given to fix themselves.
If the banks are so important to the economy that they have to be given massive liquidity and regulatory cover to right themselves when they are in danger of sinking, then the financial system is nothing more than the clever rhetoric of an ensconced oligopoly manifesting its power.
If we had "one-month transparency," and faltering institutions were clearly identifiable, their stockholders would jump ship, their debt holders would man lifeboats, and unless the institution could be saved from free market destruction by the free market intervention of risk-takers willing to saddle themselves with personal exposure, they would fail.
Look through the bankers' rhetoric that they need protection and cover from public scrutiny, and what do you see? You see inefficient institutions that leverage themselves for profit, get bailed out, merged, and recapitalized by an unsuspecting public that's been duped into believing bank CEOs, regulators, and the Fed that everything is fine — or will be with time.
Who cares if banks fail before they get too big to have to be bailed out, or too big to be systemically threatening? We all should care. They should be allowed to fail.
And the sooner the better.
Those "New" E.U. Fiscal Rules Aren't
So New
Very soon we will see if the old market adage "Buy the rumor, sell the news" is true.
While rumors of Europe's impending demise were momentarily shot down by an array of silver bullets, the actual news out of Brussels of a grand bargain wasn't… exactly… honest.
Let's call the half-measures agreed to by European leaders "Brussels sprouts," because they're more like "green shoots" than a cabbage patch panacea.
The leaders agreed to agree that they needed an agreement on how to more closely integrate their fiscal and monetary interests.
Yeah, that's what they said. I say good luck with that.
Actually, they made some other moves, too.
They moved up the date for the European Stability Mechanism to get funded (yeah, right), and promised to revisit the European Financial Stability Facility's financing so they could have twin facility spigots.
And – this one's my personal favorite – they winked at having European central banks make bilateral loans up to $264 billion (€200 billion) to the International Monetary Fund so the IMF could back Europe's central banks and the European Central Bank.
You just can't make this stuff up.
Seriously, there's nothing like a crisis to consolidate your power – which is what the Northern Europeans are angling for.
But for the life of me, I can't imagine a bunch of sovereign nations subjecting themselves to forced austerity, being taxed by technocrats (who, of course, will be non-partisan, non-xenophobic, nonplussed objectivists), and dictated to as occupied territories by the machinery that ground them down in the first place… and wants to keep them there.
What… You don't get that?
Here's a newsflash for you: The "new" rules about maintaining strict debt to GDP ratios and other my-way-or-the-highway fiscal demands are not new at all.
The same metrics for fiscal discipline that were lauded last week were already in place – it's just that no one followed them.
Everybody cheated… starting with the Germans themselves.
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A Simple Solution to One of the World's Most Complicated Problems
Banks need fixing and capital markets need fixing. There's no debate about that.
Still, there's plenty of debate about what to do about it and too little agreement on exactly what to do about systemic issues, both in domestic and global markets.
But there is a solution – one so simple that if effectively implemented, market volatility will ease and investing will be more rewarding than day trading.
It could be dressed up in a lot of different ways, but ultimately it comes down to two things: transparency and uniformity.
We need transparency in the financial markets. After all, the murkiness of the derivatives market and other complex financial innovations played a crucial role in bringing down the entire global economy in the first place.
Nothing is workable if it's not transparent. Transparency has to be at the root of every resolution, of every solution, and in the construction of every fix to every issue.
Keep that in mind, because a lack of transparency is currently what's missing and what continues to hamper any workable solution to the problems we've been trying to tackle.
Specifically, when it comes to banks and capital markets, it's the lack of transparency that got us into the mess in the first place, and only by hammering ineluctable transparency back into our financial system can we ever climb out of our deepening hole.
We need transparent, globally agreed-to and enforced financial accounting standards and transparent, globally agreed-to and enforced bank capital requirements and regulations.
Transparency and Uniformity
The good news is we're already taking steps to fulfilling these two critical goals.
The Securities and Exchange Commission (SEC) has promised that by the end of this month it'll decide on whether U.S. companies will be able to abandon Generally Accepted Accounting Principles (GAAP) for International Financial Reporting Standards (IFRS).
Right now, most Group of 20 (G20) nations embrace IFRS, which are standards drawn up by the International Accounting Standards Board. But in the United States, most companies, including banks, use GAAP accounting mandated by the Financial Accounting Standards Board (FASB).
FASB rules have been the predominant set of standards adhered to in the United States since 1973. The FASB is overseen by the SEC, which has final authority over listed companies' accounting rules but defers to the FASB almost all the time.
It's not worth arguing about variations between the two sets of standards. All that matters is that we have one set of accounting rules for every person, every company — and especially every bank.
Of course, those rules should make transparency their number one goal. We need to agree on exactly how to account for derivatives and counterparty risk. We need to agree on how to risk-weight assets, and how to mark them and every other attendant accounting rule vital to transparency and gives regulators, analysts, and investors an apples to apples comparison of companies – especially banks.
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It's Time to Overhaul the Fed
The average American has no idea how protected the big banks in this country really are.
For the most part we don't even blink when we are lied to publicly by their CEOs.
Maybe that's because the biggest bank in the world, the U.S. Federal Reserve, which happens to be a creation of and 100% beholden to the banks that it is a master shill for, also lies to us and covers up Wall Street's misdeeds.
How else can you explain the Federal Reserve's practice of secretly feeding billions of dollars to big banks, and then looking the other way while those same banks lie to the public about their strength so they can raise desperately needed equity and borrow in the debt markets?
Why else would the Fed prop up Bear Stearns long enough for JPMorgan Chase & Co. (NYSE: JPM) to buy it, and then prop up JPMorgan? Why else would the Fed prop up Merrill Lynch for the benefit of Bank of America Corp. (NYSE: BAC), and then prop up Bank of America as Merrill dragged it down. And why else would the Fed prop up Wachovia just so it could be taken over by Wells Fargo & Co. (NYSE: WFC) – yet another bank that would come to need even more help?
Power and Ponzi Schemes
The pat answer from the Fed is that propping up failed banks long enough to be taken over by "healthy" institutions is better for the system than letting them fail. On the surface that's true, but it's what's under the surface that's destroying America's free market foundation.
Here's what's come as a result of the Fed's actions: The "Super-Six" – JPMorgan, Bank of America, Citigroup Inc. (NYSE: C), Wells Fargo, Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) – which held $6.8 trillion, or about half the industry's assets in 2006, had increased their holdings by 39% to $9.5 trillion as of September 2011.
So what's really going on is that the country's biggest banks, which weren't healthy when their CEOs lied to us (as they still do), have gotten even bigger.
With size comes power – the power to pay lobbyists, the power to pay for legislators, and the power to change regulations.
These banks don't always get what they want exactly when they want it, but they do eventually get what they need to make money hand over fist.
The whole thing reminds me of a Ponzi scheme.
The Federal Reserve might as well be Bernie Madoff and the banks "feeder funds" in this nationalized scheme to perpetuate the channeling of depositor money into banks and investor money into bank stocks and debt securities.
For the chain to be broken the Federal Reserve is going to have to be overhauled – seriously overhauled – and big banks are going to have to be broken up, once and for all.
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Are You Outraged Yet?
[Editor's Note: Shah Gilani really struck a chord with a special Thanksgiving edition of his Wall Street Insights & Indictments service. In fact, the response was so overwhelming we've decided to share the article with you. To be sure you're receiving all of Shah's Insights & Indictments, click here.]
Happy Thanksgiving, America!
If you're not feeling very "happy," remember, no matter how bad things are, they could always get worse (and we may be going there). So, whatever you have now, be thankful for that.
Speaking of thanks and of things getting worse, here's a shout out to the so-called "Super Committee":
What a bunch of losers.
Hmmm, speaking of losing… I wonder if anyone on the Supercilious Committee shorted the market before their announcement that they had nothing to announce. Hey, maybe they waited until the end of the day on Monday – when it was already known that they had sold America short – to break the news, so they could add to their shorts as stocks broke support levels.
No "maybe" about, it in my book.
Oh, you don't think they would do that – short the market? You think that would be unethical? You think that would be illegal? You think that's insider trading?
It's not any of those things, according to Congress.
If you're about to sit down to your big Thanksgiving dinner and are scared you'll eat too much, don't worry. You're about to lose your appetite, and probably get sick, too.
Honesty is the Best Policy…
I hate it when people ask me that. As if I’m going to respond, “No, lie to me.”
But the truth is, it’s usually a preface that suggests we’re not going to want to hear what we’re about to be told.
So… can I be honest with you?
I have no idea what’s going to happen in stock markets or bond markets this week.
We are at a critical juncture for both stocks and bonds, and this week might be huge.
This past week was ugly, as in really ugly. But, as ugly as it was, U.S. equities are hanging on (by a thread) to their upward bias. As far as the rest of the world, it’s pretty much the same; however, there are cracks everywhere.
From a technical perspective, we are in a very dangerous position. If we don’t see a good rally early in the week, we might be in trouble. If we see a hard sell-off before Thursday, we could be on our way to testing this year’s lows, or breaking them.
Sorry, but I feel I have to digress here for a moment. This is for all of you who just sighed when you read the word “technical” and thought “technical analysis, that’s like reading tea leaves.” Can I be honest? If you think that, you are an idiot. Sorry, just being honest.
Technical analysis is not a matter of random hash marks on a graph accompanied by lines with circles and arrows. Where do you think those marks on that graph came from?
Technical analysis is all about psychology. It’s a reflection of investor activity and the mindset that accompanies it.
The marks on a bar graph reflect the high and low prices of that day. There can also be little marks on each vertical line that show the opening price and the closing price, too. When you string a lot of daily prices together on a graph, it is exactly what happened when investors and traders (we’re all traders now, I’m just appeasing you out there who don’t know it, or are fighting it) bought and sold whatever instrument you’re looking at.
What you may not realize is that things like “support” and “resistance” (to name the most often cited technical analysis tools, though there are many other excellent ones) are places where traders made actual decisions with their money.
A support line, for example, reflects where a stock, an index, a commodity (it doesn’t matter) experienced buying interest. The instrument was going down and stopped declining, because buyers stepped in, and selling abated. A resistance line would reflect the opposite.
That means that people actually took a position at that juncture.
In the case of support, buyers stepped in and maybe short sellers stepped to the sidelines. Then the instrument rises in price. Maybe it comes back to that support level a few times (the more times an instrument touches its support or resistance levels, the more important those levels become) and each time buyers again step in the instrument goes higher, again.
If you think that technical analysis is mumbo-jumbo, think again.
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