Shah Gilani
Premium
It's 2007.2, and Our Next "Lehman Moment' Is Coming Fast
[Editor's Note:Shah Gilani's free newsletter Wall Street Insights & Indictments has been an overnight success. This past weekend's edition was so powerful we decided to republish it. If you're not already signed up for Insights & Indictments, subscribe by clicking here.]
It seems that my Thursday edition of Wall Street Insights & Indictments was warmly received by the bullish crowd, many of whom reached out to me to thank me for my optimism.
I'm sorry to burst your bubbles, but I am not a raging bull (but thank you for asking).
In fact, I'm still bearish.
There's a big difference between being bullish and playing all stocks (and other asset classes) from the long (that means "buy") side, and judiciously buying select momentum stocks with fat dividend yields, which is what I was recommending on Thursday.
I was talking about taking the path of least resistance, which I identified as "upward," based on equity activity through year-end and so far in 2012. You've heard the old adage "the trend is your friend." Well, that's what I was talking about. The trend has been up.
I'm bearish because I'm afraid of a European meltdown and a "hard landing" in China.
But there's a huge danger in missing what could be the beginning of a real bull market.
So, it makes sense to start putting on solid positions and even speculating here and there. But I am not all in – not yet. However, the time is coming. But, that is also the problem.
I'm fearful that a crash is coming, and maybe soon. If we get one, and everything flushes out and we get a capitulation bottom amidst a global panic sell-off, then I'll be all in, all the way, for the long-term. I'm talking about loading the boat up with stocks and commodities and enjoying a generational ride that will last for maybe 10 years, or more.
These Four Investing Lessons Mean Everything Today
Talk about information overload…
There's so much news and data, so many opinions about events and data points, so many financial publications, so many shows, so many stocks, mutual funds, exchange-traded funds (ETFs), futures, options, derivatives, so many opposing points of views about everything, it's enough to make your head explode and your investing comfort level implode.
Most people tend towards like-minded analysts and economic analysis that confirms what they're seeing and thinking. There's a kind of comfort zone there, where "We're in this together and if we're wrong, well, I wasn't alone; but if we're right, boy am I smart."
Then there are the "skittish" investors who think they know what they're doing – that is, until they hear a different opinion from someone, anyone, they think has a leg up on them. And what do they do then? They usually ask, "Really?" Meaning, "Do you know something I don't know?" Chances are, at that point, they are going to panic.
And, of course, there are those investors who know they are right, and stick by their convictions and positions all the way to, well, you know where.
Maybe you've been there.
I was there myself when I started trading professionally on the floor of the Chicago Board of Options Exchange (CBOE) in 1982.
But I quickly distanced myself from all the noise that distracted me from being a successful trader.
There is no magic bullet to being a successful investor; that's the bad news. The good news is that it's a lot simpler that everyone makes it out to be.
Here are the four most important trading lessons I have learned:
Premium
Paul Krugman is Dead Wrong: Debt Matters
Paul Krugman, the Princeton University economics professor, Nobel Prize winner, and regular New York Times op-ed contributor says, "Debt matters, but not that much."
Not only is he off the reservation on this one, but he's completely fallen off his high horse.
In the real world, debt actually matters a lot.
In a Houston Chronicle opinion piece last week, Krugman, riding his horse – whose name might as well be Liberal Conscience – trampled conservatives under the guise of an economics lesson that derided "deficit-worriers" for wrongly seeing "America as being like a family that took out too large a mortgage, and will have a hard time making the monthly payments."
According to Krugman, that's a bad analogy and "the way our politicians think about debt is all wrong, and exaggerates the problem's size."
Decide for yourself. Either debt matters a lot, or not that much…
The World According to Paul Krugman
Professor Krugman calls all the conversation in Washington about debt and deficits a "misplaced focus" and says all of the economic experts "on whom much of Congress relies have been repeatedly wrong about the short-run effects of budget deficits."
He derides the fears that deficits will cause interest rates to soar by pointing out that they haven't moved.
What he doesn't say is that they haven't moved because they're not free to move.
The fact is that the U.S. Federal Reserve has corralled the free market in interest rates by knocking short-term rates to almost zero through successive open market operations and extraordinary quantitative easing measures.
Mr. Krugman mocks those waiting for rates to rise and notes that while they wait "rates have dropped to historical lows."
Maybe what he doesn't realize is that the Fed's actions themselves have been nothing short of historical.
The crux of Mr. Krugman's supposition that debt doesn't matter much is based on his bashing of the popular analogy comparing America's debt problems to those of a mortgaged homeowner.
All of which Krugman claims is "a really bad analogy in at least two ways."
He says, "First, families have to pay back their debt. Governments don't – all they need to do is ensure that debt grows more slowly than their tax base."
"Second," he says, "an over-borrowed family owes the money to someone else; U.S. debt is, to a large extent, money we owe ourselves."
He goes on to say that the debt from World War II was never repaid and didn't make postwar America poorer.
In fact, the Professor points out, "the debt didn't prevent the postwar generation from experiencing the biggest rise in incomes and living standards in our nation's history."
Krugman is Flat Out Wrong
First off, the homeowner analogy is excellent–not irrelevant.
Mr. Krugman is wrong when he says that homeowners have to pay back their debt. The truth is they don't have to.
Let's Play Insights &
Indictments Jeopardy!
Today I want to play a special game I call Insights & Indictments Jeopardy!
It's based on the classic T.V. game show where contestants vie to pose the correct "question" to the answers that are revealed in an array of categories.
For example, let's say the category is "Federal Agencies."
The first "answer" happens to be: "This new organization holds primary responsibility for regulating consumer protection in the United States."
If you ring your buzzer first and shout out the question, "What is the Consumer Financial Protection Bureau?" you would be right.
Got it?
Okay, let's play Jeopardy!
Today our category is actually going to be the Consumer Financial Protection Bureau (CFPB); see how many you can get right…
- The CFPB was founded as a result of this July 2010 Wall Street reform and consumer protection act, which was meant to save America from being used and abused by Wall Street crooks and bankers in the future.
- In a sign that the GOP mostly opposes new powers being granted to the CFPB, this is the number of Republican Senators who actually voted to enact the reform and consumer protection act.
- When the president nominates an appointee as director of the CFPB, the same act requires this kind of confirmation.
- This man's appointment yesterday as CFPB director is controversial because he is being seated without the above confirmation
- This CEO of the American Bankers Association said Obama's move to install the director without the required confirmation complicates efforts of banks, and puts the bureau's actions "in constitutional jeopardy."
- This Harvard law professor was the principal architect of the CFPB when she was an aide to President Obama and the Treasury Department.
- Interestingly, the director of the CFPB also gets a seat on the board of this powerful government-backed corporation.
- In the alarming situation I've just described, S.O.S. stands for this.
Got your answers? Let's see how you did…
Give yourself half credit if you got any part of the long explanation correct and 100% credit if you got most of it right. If you get most of these, but stumble on the last one, don't feel bad. (And you won't, when you find out what it is.) But if you did get the last one right, and even if you didn't get any of the other questions right, congratulations… you are the new champion.
Here are the correct "questions" (along with some explanations).
Premium
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.
Premium
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…
Premium
A Brave New (Broken) World
[Editor's Note: In just a few short months we've received more positive feedback about Shah Gilani's Wall Street Insights & Indictments than we have about any other free newsletter. If you're not already signed up, subscribe by clicking here.]
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?
Premium
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.
RSS
