Q&A: Shah Gilani on Financial Regulation, Central Banks and More…
I got hundreds of questions and comments this month from you about my stance on regulations. Let's see why.
Q: I agree with you on the need for financial regulation. However, they must be simple and clear… How would you write the regs? ~ Cory B.
A: Cory, all the regs I would write would be one-liners. That's no joke.
Q: What we need is a hammer. Not the kind carpenters use, but a judicial hammer which treats serious crime seriously. No more civil trials for criminal offenses, such as the debacle surrounding Richard Fuld. These thugs know how to weigh odds, and most of them will gladly risk 15 months in a white-collar prison at hard tennis for, say, a few million in ill-gotten gains. You can't fix fraud, but you should be able to make the punishment so severe that only the dumbest of the dumb would give it a try. ~ Ron S.
A: That's what I've been saying. How come so many of you say it so much better than me? I'm always learning from you all.
Q: To put faith in regulation and the regulators is to assume they can't be bought. They can always be bought. Whaddya gonna do? Reform the existing corrupted agencies? Get rid of the Gensler/Goldman-run CFTC and replace it with something else? And who would run that? Somebody from JPMorgan? ~ fallingman
A: I want teachers (grade school and junior and senior high school teachers) to be our regulators. They obviously aren't about the money and they obviously are civic and civil minded. Why not?
Q: Who is going to put the "black and white" rules in place, the regulators? lol! Regulators are currently paid by the banks they regulate, umm, but, isn't that a conflict of interest, or, am I just stupid?~ Domina L.
A: Stupid is as stupid does. If we go back to the way regulators regulate, we're all stupid. We need a new breed of regulators. Expecting that we'll ever get them to come down from Olympus is proof that I am stupid. But a boy can dream, can't he?
The Problem with Renewable Energy is the Price
I haven't written about renewable energy in recent months for a very specific reason.
The market for sources such as solar, wind, and biofuel has collapsed.
There are two reasons. Both involve price.
First, while crude oil is beginning to move upward, and natural gas prices have increased by about 57% over the past three months, both had fallen to unusually low levels.
That means the primary ally of alternative sourcing – the acceleration in the price of hydrocarbons – has been absent.
Of course, there are environmental, lifestyle, and social considerations that would benefit from renewable energy. Taken by themselves, however, these do not have more than a marginal impact on the energy balance.
Price remains the main ingredient.
Pension Schemes are The Latest Gigantic Rip-Off
You made me promises, promises,
Knowing I'd believe.
You knew you'd never keep.
Those lyrics are ripped from the early '80s band Naked Eyes' hit song "Promises, Promises."
I use the word ripped, not because it's a term used in the music business, but because of its more common meaning, as in ripped-off.
Because that's what we've been – ripped off.
This time, which has been going on for a long time, I'm talking about how grossly underfunded both private and public pension funds are, and how we'll all suffer the consequences.
I'm going to strip out the mumbo jumbo so you see the truth with your own naked eyes.
Retirement is getting further and further away for most Americans. And if they get there, they may not be reasonably compensated by the pension plans they thought they were paying into along with their co-payers, their private and public employers.
That's because a lot of those co-payers aren't paying up.
And that's only part of the problem…
Here's the other, even more insidious, naked truth.
The investment return assumptions inherent in pension plans' calculations are so unrealistically high that the chances of funds ever meeting future obligations, or "promises," is halfway between slim and none.
Don't worry, I'll come back to the co-payers not paying up. But first let's talk about assumptions (as in, making asses out of you and me).
Pension Plans are Based on Unrealistic Projections
The average assumption in the great majority of pension plans is that their assets will appreciate at 8% per year. Now, with compounding, that's a really great deal.
Too bad the actual hand we've been dealt, courtesy of a no-interest rate (actually its closer to zero) Federal Reserve policy, for years now (and rammed-down low rates for years prior, thank you Big Alan Greenspan, with his goofy Ayn Rand hat now sitting in a corner facing backwards somewhere; or at least he should be), makes fixed income returns impossibly low. Low to the point that the "bond" portion of plan asset portfolios are causing the hole they are all slipping into to get bigger and bigger.
Fascinating New Technology Trends Offer a Glimpse into a Wild Future
Call it the "Battle of the Jellyfish Breakthroughs".
You may remember this from an article I wrote two weeks ago. In it, I talked about a Pentagon-funded robotic jellyfish that uses hydrogen as its power source. It's a developmental robofish capable of helping in underwater rescues (or spy missions).
Turns out that wasn't the only big advance inspired by this primitive sea creature…
Just this week, we learned that a crack research team has created something incredible called Medusoid.
That's their nickname for an artificial jellyfish they made from rat heart cells and a silicone polymer. This bioengineered creature swims by squeezing its muscles, the same way a real jellyfish does.
More to the point, Medusoid could become a great model for testing new drugs. It also could lead the way to advances in artificial hearts and other human organs.
As I see it, these two breakthroughs coming so close together proves that the Era of Radical Change is here. Cutting-edge high tech really is moving at warp speed, with new advances coming faster than any one person can track.
Indeed, there was plenty of fodder for my fascinations of the month.
Take a look as these new technology trends…
Meet a Real-Life Asteroid Hunter
In May, I told you about a team of experts that has launched a new company to mine precious metals from asteroids near Earth. Planetary Resources plans to extract ore and other resources from orbiting space rocks.
Not long ago, of course, this was the stuff of sci-fi.
It smacks of the 1998 movie Armageddon, in which a team of roughnecks lands on an asteroid on a collision course with Earth in order to blow it out of the sky.
As it turns out, there is a real-life asteroid hunter doing something even more exciting.
Dr. Ed Lu is a former NASA astronaut and veteran of three space flights, and he has just announced a new mission – to find the asteroids that pose a threat to our planet and eradicate them. His work is more vital than you might think.
You see, near-Earth asteroids are a double-edged sword.
No doubt, thousands of them contain valuable metals and other physical assets that will open up a whole new paradigm of resource discovery and make some savvy investors rich.
On the other hand…
We're surrounded by a belt of them that could strike Earth. Under the worst-case scenario, a large rock traveling at high speeds could wipe out most of the life on our planet. That remains a remote chance. But this fact is clear: Even a small space rock could cause widespread damage. It could kill thousands, or perhaps millions, if it were to strike a heavily populated urban area.
This is not the stuff of theory.
Earth has been hit by asteroids before – big ones.
July Q&A: Shah Gilani on Too Big to Fail, Ron Paul and More…
It's time for our monthly Q&A session, so let's kick it off with your questions and comments about my June 14 article, "Why the Financial Industry is the Ultimate Liar's Club."
Q: Please talk more about the value of a Glass-Steagall-type "separation of powers," between banking, securities, mortgages (and insurance). Yesterday Jamie [Dimon] talked about how compartmentalized the functions are at JPMorgan, regardless of its gargantuan appetite for generating shareholder value. Not buying it… never did! But what is your view of the most efficient, and least corruptible, way to structure those activities? ~ P.
A: It's really, really, really simple. Only allow commercial banks to take in deposits and make loans and limit their size.
Where does it say that private enterprises have the God-given right to become so big (to make more and more money) that they threaten systems, the economy, and the nation? Nowhere. Let investment banks do what they do for the capital markets (keep ripping their clients off) but limit their size, too and require high capital standards.
Where does it say that private enterprises have the God-given right to become so leveraged that they risk blowing themselves up, contaminating counterparties and holding economies and nations hostage to their unmitigated greed? Nowhere. We need to keep it simple. Bankruptcy is the perfect antidote to stupidity and greed, but it only makes sense if enterprises aren't TOO BIG TO FAIL. This is not rocket science; this is A-B-C, easy as 1-2-3, do-re-me.
Q: I am about to move all my banking activities from Chase to a small regional bank. Are the smaller banks as bad? ~ Dennis B.
A: No, smaller banks these days are generally cleaner (they don't trade) and better in terms of transparency into their balance sheets and looking at their capital.
Do some homework. Ask for audited financials. If they balk at giving you any, then don't go there. Also make sure you're not putting more in any one bank than you're covered for under the FDIC. Plenty of smaller banks have commercial loans that may be problematic, but the crazy thing is that the regulators are far more "all over" those smaller banks than they are the big regionals and the universal banks.
Q: A very senior banker said to me recently [that] the JP Morgan thing was a storm in a teacup and that Jamie Dimon was a "good guy." I found that a depressing thought. Perhaps the loss is not large compared to the scale of their operations, but it does have a bad smell of market manipulation, which this time did not pay off as expected. I'd be interested in your thoughts on that … ~ Alex C.
A: Jamie Dimon has to go. Bob Diamond (Barclays) stepped down; why should Jamie be allowed to sit on top of his bully pulpit pontificating about what's wrong with everyone except himself and his bank? He was a good manager, but he got greedy; he forgot what Sandy Weill taught him. He wanted to get so big that he was the bank. No bank is the market, and no bank or banker should be allowed to lie to the public, apologize like he's not really sorry, only that his team blew his cover, and still be allowed to pull the strings in Washington.
Did you see some of our sycophant Senators and Representatives question Dimon? Looked like a high school dance to me.
Q: What nags me is that the level of corruption is so deep, or high, whichever way you look at it, that there appears to be no one of any clout that can amputate. Would Ron Paul be such a candidate? ~ Roger C.
A: I think Ron Paul would be fantastic. He's different. I trust him because he's different, as in, not a lying, pandering, and pimping you-know-what.
Next up, your reactions to "Our Capital Markets are Broken."
Germany, Greece and the Game of "Chicken"
Summer unofficially kicks off this weekend, at least here in the U.S., as we celebrate Memorial Day.
Before we even get to the "official" beginning of summer on June 21, sweat will be pouring from every banker's brow on June 17.
That's the day Greeks go back to the polls to basically determine whether or not they want to remain in the Eurozone.
The game of chicken is on.
Germany has basically said to Greece, we aren't going to ease up on the austerity requirements imposed on you so you could get more money from all of us, so, if you think that by electing a left-wing group of groupies who are campaigning on easing your burdens by leaning on us, your fed-up creditors, go lean on Atlantis instead, cause that's where you'll end up… underwater, and lost.
The Greek politicians – at least the lefties throwing curveballs – think there's no way the Germans will let them exit the currency zone, and of course don't want them to exit the European Union.
They are saying to the population, elect us, we'll spit on their boots and they'll bend over to shine them themselves. And, in the end, we the people will prevail.
Don't you just love democracy at work?
The End of the Beginning?
The energy sector's surge over the last two days may lead some to believe that the rush is now on.
Well, not so fast.
The markets pulled back this morning.
That's expected after a run up. But we need to understand the primary concerns moving forward.
Those are direction and conviction.
The energy sector got slammed worse than the overall market as a whole when it was going down, and it advanced quicker when it increased.
So, what will happen from this point onward?
The safe answer is to suggest mostly lateral movement over the next several months. And that is what most of the TV pundits are doing.
And as usual, they are going to miss another boat.
What has happened over the last two sessions, overlooking the anticipated pullback today, is the first wave in the next move up. It is, therefore, actually the end of a beginning cycle that will put both prices and volatility for energy in general – and for oil in particular – back on the radar.
No move up in oil is accomplished by regular, easy to calculate increments.
But one genuinely new factor has emerged.
And it will dictate more of our investment moves as we get further into this event-filled summer.
Riding the Wave of Anticipation
The return of instability, marked by price acceleration both up and down (but on aggregate leading to higher price levels), will be taking place over shorter periods.
This is an important new wrinkle to understand. It introduces a novel risk element into the equation while, at the same time, setting the stage for increasing profits. Those profits will develop over shorter time periods for the investor who is capable of riding ahead of this curve.
I call this development compression, and it has a pervasive impact on how you should approach to the market.
The Biggest Tech Breakthrough in 50 Years
There are somewhere between two and three billion computers in the world right now.
And every last one is about to become obsolete.
Sorry, but yes, that goes for the computer you're using to read this.
It's a fundamental redesign of computing power that has been 50 years in the making.
You could probably manage to hang on to your current computer for a year or two, if you're patient.
But once your friends and neighbors start showing off the incredible speed and power of their new gadgets, or it turns out that incredible new software you've been eyeing won't run on your current computer, well, it's only a matter of time until you'll sign up this game-changing upgrade.
And consumer upgrades are just the beginning.
I predict this key breakthrough technology will soon have a dramatic impact on everything from artificial intelligence and robotics to medical research to aerospace to gaming and beyond.
It's very rare that a new technology truly represents a "sea change" across so many industries and applications. The last one of this enormity was the advent of the transistor in the late 1950s – the basis of modern electronics and undoubtedly the greatest invention of the 20th century.
And when this next breakthrough makes its debut on April 29, 2012, I believe it will deliver a bonanza payday for two very savvy companies and their investors.
High Tech is About to Enter a Whole New Dimension
We're still waiting for atomic computing – computing technology in which devices are made up of just a few molecules – to enter the realm of possibility. But that's likely a decade or more off.
In the meantime, 3D computing is the breakthrough that will dominate the next decade, taking computing to a level almost unimaginable.
Now, you may already know that America's high-tech economy depends on devices – called microprocessors – that are about the size and shape of postage stamps. Ever since their invention, these chips have fueled huge growth in computing as electronics have gotten ever smaller.
Let me explain the importance of small scale.
It's thanks to the steadily shrinking size of these chips that your smart phone today packs more punch than the huge computers NASA had when it put Neil Armstrong on the moon. If they hadn't gotten smaller, cell phones would still be the size of bricks. And you could forget about having wireless Internet, built-in video cameras, or music players in your phone.
As it turns out, there's a principle that explains – or really predicts – this continued exponential growth in semiconductor speed and power.
It's called Moore's Law. A Silicon Valley legend, Gordon Moore predicted that processing power would double roughly every two years.
That doubling has come as engineers kept finding new ways to put more transistors on a single chip. Transistors are the tiny gizmos that move and store data. Today, semiconductors now boast more than one billion transistors – ones so small you can't see them without a microscope.
And therein lies the problem. Chip makers are simply running out of real estate.
Right now the physical limit of integrated circuits stems from their basic design. Since they're flat, they only work in two dimensions. And that's been standing in the way of Moore's prediction.
But what if you could stack transistors on top of each other? You would greatly increase computing capacity. Think of it this way. A file cabinet holds a lot more information than a single sheet of paper.
As basic as that sounds, engineers have only just now figured out to go 3D and add "drawers" filled with transistors.
And one company is debuting its new chips this summer.
The Markets Are About to Tell You Something
Most people seem to have a hard time understanding why the markets do what they do.
The only reason I don't is that I've been trading professionally for 30 years.
Not that I "got it" when I started out. I didn't. I had to learn. And I learned much of what I know the hard way. I made a lot of mistakes. I studied my mistakes, I still do, just as much as I study what moves markets and what I get right.
I'm always learning. That's because everything changes. You have to always take in new data, mesh it with recent data, layer it over the past, and not ever think you know for sure what's going to happen.
So, how do you do it? How do you understand what's going on with different markets?
Here's how I do it (and get it right a lot)…
It's First and Foremost About the "Big Picture"
I synthesize all the big goings-on, all the headline market-moving news and data points, and I watch and "listen" to how the markets react.
Money moves markets, but psychology moves money.
Markets are living things. They have feelings; their reactions are a direct reflection of the psychological impact reflected in the buying and selling of traders (first) and investors (distantly second) to the goings-on that participants believe will affect the decision-making of other market participants.