Greg Norman: One for the Aged
Don’t know if you caught the British Open this month, but it certainly was one for the ages (and aged). The “ancient” Greg Norman (53) battled men twenty and thirty years younger through driving rain, and persistent winds gusting over forty miles per hour. He showed the same grit he did when he was dominating world golf for over half a decade. All of this while he was on his honeymoon!
I am nominating Greg Norman as a guest member of the Varicose Vigilantes.
Sport is one of our nation’s most uplifting and enjoyable passions. We pit ourselves against others, the elements, and ultimately ourselves, stretching ourselves like thoroughbreds to beat everyone else to the pole. If we don’t compete ourselves, we watch others do it for us, and revel in the “thrill of victory and the agony of defeat.” An athlete’s body gives out long before the will to compete is gone. For a runner or a tennis player, this is sometime around the age of 30. Ouch. The “senior” tour for these athletes begins around the age of 35. Golfers can go on into their 40s. Their senior tour doesn’t begin until the age of 50. A top football running back is wasted by the age of 32. But a quarterback can play at a high level until the age of 40, since one of the key ingredients to quarterbacking success is experience and mental acuity.
Greg Norman’s success was due to his extraordinary skill and muscle memory. But a good deal of it was due to his mental toughness. His creativity. His ability to weather the elements. Ultimately, Norman fell short of winning. But that is not unusual for a golfer, or Greg himself.
Older folks can take heart in Norman’s brilliant accomplishment, knowing that we are never too old to compete, particularly where experience is a factor. And who has more experience than seniors? Nobody. Seniors have the experience factor locked up. It just isn’t fair.
So, remember to take all of your experience and bring it to YOUR game, every time you get ready to compete in life.
www.lumbert.com
www.shaksperbooks.com
Saturday, July 26, 2008
Friday, July 25, 2008
The Varicose Vigilantes: On Aging and Driving
As I was driving the other day I came upon a police speed trap. Out of reflex I looked down to my speedometer, silently saying “Oh, *#+*.” Strangely, I saw that I was actually driving UNDER the speed limit.
How did this happen? Did I suddenly grow old?
You know what I mean. We spend our youth pushing the limits. We see elderly drivers moving at snail-speed and want to shake our fists and say, “Get off the road, Gramps!” Life is always up ahead of us, something to be chased and embraced, if we can ever catch it.
Inside I still feel the same “me” as I did when I was 18. I can strut my stuff with the best of them. Robert Redford’s got nothing on me. But, damn, Robert Redford looks OLD!
How did this happen? Am I like some old air mattress that has sprung a slow leak, until it lies limp on the floor, all hardness and usefulness gone? Hell, no. I’m still the same me. Yeah, I’ve got some wear on my tires. I might squeak and squeal a little as I round the corners. But I can still hold the road and there’s some wear left in these old wheels. I can see Robert Redford up ahead of me. From the back he looks okay, except for that little bald spot on the top of his head that he hides as best he can. And that little sag in the jeans, and that hitch in his step.
I remember when 40 was OLD. Now 40 is prime. 80 looks old, but not like it used to. In fact, 80 doesn’t seem so bad. I hope to get there some day. I suppose it is inevitable that someday, hopefully not too soon, some young kid is going to shake his fist as he drives past, saying, “Get off the road, Gramps!” Will that suck, or what?
Actually, I don’t think so. I think that I will have earned such praise. I will have passed beyond always looking ahead and never seeing the NOW. I’ll be driving to BE there, not GET there. I’ll be smelling the roses and relaxing back in my seat enjoying the ride. No, aging isn’t so bad, as long as we keep a young mind and don’t get stuck in place. They even have a lane on the highway just for us. We used to call it the “slow lane.” I think it should be called the “experienced lane,” or the “wise lane.” That’s what I think. Because I’ve got a lot of experience in this old body. It might take me a bit longer to get this old thing rolling. But once I am moving, look out ‘cause my foot is still pressed down. It just won’t reach the floor like it used to.
www.lumbert.com
www.shaksperbooks.com
How did this happen? Did I suddenly grow old?
You know what I mean. We spend our youth pushing the limits. We see elderly drivers moving at snail-speed and want to shake our fists and say, “Get off the road, Gramps!” Life is always up ahead of us, something to be chased and embraced, if we can ever catch it.
Inside I still feel the same “me” as I did when I was 18. I can strut my stuff with the best of them. Robert Redford’s got nothing on me. But, damn, Robert Redford looks OLD!
How did this happen? Am I like some old air mattress that has sprung a slow leak, until it lies limp on the floor, all hardness and usefulness gone? Hell, no. I’m still the same me. Yeah, I’ve got some wear on my tires. I might squeak and squeal a little as I round the corners. But I can still hold the road and there’s some wear left in these old wheels. I can see Robert Redford up ahead of me. From the back he looks okay, except for that little bald spot on the top of his head that he hides as best he can. And that little sag in the jeans, and that hitch in his step.
I remember when 40 was OLD. Now 40 is prime. 80 looks old, but not like it used to. In fact, 80 doesn’t seem so bad. I hope to get there some day. I suppose it is inevitable that someday, hopefully not too soon, some young kid is going to shake his fist as he drives past, saying, “Get off the road, Gramps!” Will that suck, or what?
Actually, I don’t think so. I think that I will have earned such praise. I will have passed beyond always looking ahead and never seeing the NOW. I’ll be driving to BE there, not GET there. I’ll be smelling the roses and relaxing back in my seat enjoying the ride. No, aging isn’t so bad, as long as we keep a young mind and don’t get stuck in place. They even have a lane on the highway just for us. We used to call it the “slow lane.” I think it should be called the “experienced lane,” or the “wise lane.” That’s what I think. Because I’ve got a lot of experience in this old body. It might take me a bit longer to get this old thing rolling. But once I am moving, look out ‘cause my foot is still pressed down. It just won’t reach the floor like it used to.
www.lumbert.com
www.shaksperbooks.com
Thursday, July 24, 2008
Now For The Financial Hangover
Ready For The Financial Hangover?
I wish I had better news. But the economy shows no signs of getting better, and the worst pain is yet to come. This is the last time I am going to write about his for a while, because it is so damn depressing! However, since I am working on a series of financial books, I need to write something about what is going on.
Those of you who know me understand that I am a pretty optimistic fellow. I’m always doing something fun and creative, and see the world as a glass that’s half full. But a good deal of my training is in economics and investing, and what I see is truly ugly.
This all began more than a decade ago. Alan Greenspan was at the help of the Federal Reserve. Al Gore had just “invented” the Internet, the “Information Superhighway,” that was supposed to make us all rich and cure cancer.
The stock market took off like the proverbial rocket. I could use a more graphic image here, but I refrain. Bill Clinton was in the Presidency and it was a “feel good” time, where America was king and the world was laying at our feet. I could get graphic here, too, but that is not my intention.
What we saw was an “irrational exuberance” (Greenspan’s word) that defied reality. People were thinking that the Internet was going to lead to enormous profits, while forgetting the fact that it would lead to cutthroat competition.
I realized this in 1999 when I decided to buy a high-end video camera. The Canon recorder that I wanted cost $3,800 at local retailers. This included the big box stores that usually sell things at reasonable prices. The list price was over $5,000. Being the hip consumer that I am, I logged onto the Internet and shopped at hundreds of stores with the click of my mouse. I was able to find the same recorder listed in Texas for $2,100. I could have bought it in Singapore for $30 more. But I was able to check the Houston store out in the online yellow pages and the BBB, so I was reasonably sure that my money was good if I sent it there (again over the Web).
A couple days later I had my super dandy, movie quality recorder. I had also learned a powerful lesson, that the stock market was in deep doo doo. With the S&P selling at more than 36 times earnings, more than twice its usual P/E ratio, all based upon the assumption that the Internet would lead to greater profits, I had learned the opposite, that it would lead to a consumer revolution of lower prices and greater competition among businesses.
In late 1999, I told any client that would listen that it would be a good thing to move a good deal of assets to cash. I did the same thing last September, when I issued my first blog warning on the impending bear market.
How are the two related?
In the year 2000, when reality set in, the market was more than 100% overvalued. A “normal” market would have been about 50% lower. Now, if the stock market drops 50%, we have another word for that. Depression. Maybe not a full-blown depression, but a severe recession that would cause a great deal of problems.
Alan Greenspan decided to soften this blow by creating the housing boom. American business had just gone through an enormous spending binge, updating to the new world of the Internet. So, the economy would have to be driven by consumers. This is usually the case, as about 70% of our economy is consumer driven. As business spending went into shut-down mode, it was up to you and me to keep the economy afloat. And we did. Each new interest rate drop brought greater real estate values. We took out new mortgages and spent our equity like never before. We bought new cars and new homes. We went on vacations. We had fun.
Well, all good parties come to an end. And this one was a grand party, one worthy of John Belushi and Jamie Widdoes. A real toga. Now the hangover begins.
While consumers had their mortgage party, Wall Street did the same. Few of you have (probably) ever been to a Wall Street party. Suffice it to say, the old adage that the “rich” don’t think like you and me is magnified on Wall Street. Guys were spending $100,000 per seat for the Victoria’s Secret show. They were spending millions of dollars on new cars and their weddings, and tens of millions on their homes. All of this was fueled with equity out of your home and mine, courtesy of big Al.
While this was going on, Wall Street got fooled again. They started to believe that all of the mortgages were real. I know that they believed this somehow, because so many of them got caught with their pants down on stage. They lost billions. No, hundreds of billions. No, maybe trillions. Most of the people that created this mess are still living in their Westport homes and driving their Porches. They may have sold their Ferraris and their third vacation homes, but they are still living well.
It is the American taxpayer that will pay for this toga party. We are going to have to clean the puke off the floor and pick up all the ash trays. That’s a nasty thought, hey?
The latest shoe to drop in this whole mess is the fact that Fannie Mae and Freddy Mac are in trouble. (Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). Well, duh. These names may or may not be familiar to you, but you better learn their names. Because you may own them soon.
Fannie Mae and Freddie Mac are quasi-government organizations that are publicly traded, like IBM and Microsoft. They exist to provide mortgage liquidity to the U.S. homeowner machine. They raise money by selling stock and bonds to the public. They also borrow money from the Federal Reserve. Remember big Al and his Internet party? These companies use their capital to buy mortgages from your local broker or bank. They package these mortgages and sell them to the public through agencies like the Government National Mortgage Association. If you own any “Ginnie Mae” securities, you own some of these. Many mutual funds own these as well, as do foreign investors and foreign governments. In order to keep mortgages competitive, and mortgage rates low, the U.S. government provides a guarantee on the securities issued by these public companies. Oh, oh.
These companies have issued more than $5 trillion in securities that have the backing of the U.S. government. So, when these things go in the “tank” it is the American taxpayer that will provide the mouth to mouth. Our nation currently has about $9 trillion in debt. We may be about to increase it by 50% through the mortgage crisis.
Hundreds of billions have been “lost” due to the ignorant and unscrupulous practices of the financial industry. In the end, I expect that the losses will total more than $1 trillion.
The Federal Reserve has been creating liquidity as fast as it can, by lending money against worthless securities, and giving it to foreign governments and companies by the boatload. They have dropped interest rates to Japan-like levels. This has caused the Dollar to continue its freefall against the world’s currencies. This week Saudi Arabia ended its long-standing link between its currency, the Riyal, and the dollar. They pegged it 30% higher. Does that mean that the U.S. has lost 30% of its value?
Consider this—if you add up the oil reserves of Saudi Arabia and Iran, they could buy the entire U.S. economy. Ouch.
Be prepared for more bad news as all of the Wall Street “dark matter” comes to light. Be prepared to face higher inflation in the upcoming years, as we pay the price for fixing this mess, again without a depression.
Our government is being run by taking out new credit cards to pay off the old ones. At some point, we are going to have to become responsible with America’s money. Otherwise, today’s youth will never hope to be able to achieve the kind of financial well-being we enjoy today. Their taxes will weigh them down like Marley’s chains.
Our Congress needs to restructure itself, so that spending more government money for the constituents at home is no longer the way to get re-elected. We need term limits and we need them soon.
We also need an energy policy that works. We need a Manhattan Project for clean energy. Windmills are fine. Solar is okay, if you like global warming. Ethanol is a cruel joke. Drilling offshore and in Alaska could help in the short run. I have faith that our oil companies will be cleaner in the Gulf of Mexico than the foreign oil companies that have been drilling there for the past 30 years. I really don’t think that the 2,000 acres of mosquitoes in Anwar will be disturbed much by the time drilling is completed up there. If you have ever seen how environmentally friendly major oil can be, (as I have) you know that the population of Alaskan wildlife, particularly the caribou, will only increase rather than decrease. This is no longer an issue of preserving the mosquito population of Alaska, it is a way of life issue for the American people. If you disagree with me here, let me know. I invite the discussion.
What we really need is to perfect the capacitor. (Remember the “Flux Capacitor” in “Back to the Future?”) The capacitor stores energy at virtually 100%. Energy in equals energy out. Compare this to the energy that is lost (about 70%) through batteries. We also need to pursue nuclear fusion on a massive scale. This is not dirty nuclear fission that leaves us with a thousand-year toxic storage problem. This is clean fuel that will last us for the next thousand years. Nuclear fusion occurs naturally in stars. We can do it on earth using heavy water as a main fuel. We can’t expect the oil companies to develop this kind of energy, as it would be 20 years away under the best of circumstances. It will take massive colliders and energy sources that will take hundreds of billions of dollars, perhaps even as much as the government has spent on the Iraq war or on the mortgage crisis.
I digress here from the purpose of this rant. I think my blood sugar has dropped.
When you see the media begin to panic and tell us that the financial world is about to come to an end, that is a sure sign that things are about to get better. I haven’t seen that yet, but I’ll watch for it.
Jay
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
I wish I had better news. But the economy shows no signs of getting better, and the worst pain is yet to come. This is the last time I am going to write about his for a while, because it is so damn depressing! However, since I am working on a series of financial books, I need to write something about what is going on.
Those of you who know me understand that I am a pretty optimistic fellow. I’m always doing something fun and creative, and see the world as a glass that’s half full. But a good deal of my training is in economics and investing, and what I see is truly ugly.
This all began more than a decade ago. Alan Greenspan was at the help of the Federal Reserve. Al Gore had just “invented” the Internet, the “Information Superhighway,” that was supposed to make us all rich and cure cancer.
The stock market took off like the proverbial rocket. I could use a more graphic image here, but I refrain. Bill Clinton was in the Presidency and it was a “feel good” time, where America was king and the world was laying at our feet. I could get graphic here, too, but that is not my intention.
What we saw was an “irrational exuberance” (Greenspan’s word) that defied reality. People were thinking that the Internet was going to lead to enormous profits, while forgetting the fact that it would lead to cutthroat competition.
I realized this in 1999 when I decided to buy a high-end video camera. The Canon recorder that I wanted cost $3,800 at local retailers. This included the big box stores that usually sell things at reasonable prices. The list price was over $5,000. Being the hip consumer that I am, I logged onto the Internet and shopped at hundreds of stores with the click of my mouse. I was able to find the same recorder listed in Texas for $2,100. I could have bought it in Singapore for $30 more. But I was able to check the Houston store out in the online yellow pages and the BBB, so I was reasonably sure that my money was good if I sent it there (again over the Web).
A couple days later I had my super dandy, movie quality recorder. I had also learned a powerful lesson, that the stock market was in deep doo doo. With the S&P selling at more than 36 times earnings, more than twice its usual P/E ratio, all based upon the assumption that the Internet would lead to greater profits, I had learned the opposite, that it would lead to a consumer revolution of lower prices and greater competition among businesses.
In late 1999, I told any client that would listen that it would be a good thing to move a good deal of assets to cash. I did the same thing last September, when I issued my first blog warning on the impending bear market.
How are the two related?
In the year 2000, when reality set in, the market was more than 100% overvalued. A “normal” market would have been about 50% lower. Now, if the stock market drops 50%, we have another word for that. Depression. Maybe not a full-blown depression, but a severe recession that would cause a great deal of problems.
Alan Greenspan decided to soften this blow by creating the housing boom. American business had just gone through an enormous spending binge, updating to the new world of the Internet. So, the economy would have to be driven by consumers. This is usually the case, as about 70% of our economy is consumer driven. As business spending went into shut-down mode, it was up to you and me to keep the economy afloat. And we did. Each new interest rate drop brought greater real estate values. We took out new mortgages and spent our equity like never before. We bought new cars and new homes. We went on vacations. We had fun.
Well, all good parties come to an end. And this one was a grand party, one worthy of John Belushi and Jamie Widdoes. A real toga. Now the hangover begins.
While consumers had their mortgage party, Wall Street did the same. Few of you have (probably) ever been to a Wall Street party. Suffice it to say, the old adage that the “rich” don’t think like you and me is magnified on Wall Street. Guys were spending $100,000 per seat for the Victoria’s Secret show. They were spending millions of dollars on new cars and their weddings, and tens of millions on their homes. All of this was fueled with equity out of your home and mine, courtesy of big Al.
While this was going on, Wall Street got fooled again. They started to believe that all of the mortgages were real. I know that they believed this somehow, because so many of them got caught with their pants down on stage. They lost billions. No, hundreds of billions. No, maybe trillions. Most of the people that created this mess are still living in their Westport homes and driving their Porches. They may have sold their Ferraris and their third vacation homes, but they are still living well.
It is the American taxpayer that will pay for this toga party. We are going to have to clean the puke off the floor and pick up all the ash trays. That’s a nasty thought, hey?
The latest shoe to drop in this whole mess is the fact that Fannie Mae and Freddy Mac are in trouble. (Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). Well, duh. These names may or may not be familiar to you, but you better learn their names. Because you may own them soon.
Fannie Mae and Freddie Mac are quasi-government organizations that are publicly traded, like IBM and Microsoft. They exist to provide mortgage liquidity to the U.S. homeowner machine. They raise money by selling stock and bonds to the public. They also borrow money from the Federal Reserve. Remember big Al and his Internet party? These companies use their capital to buy mortgages from your local broker or bank. They package these mortgages and sell them to the public through agencies like the Government National Mortgage Association. If you own any “Ginnie Mae” securities, you own some of these. Many mutual funds own these as well, as do foreign investors and foreign governments. In order to keep mortgages competitive, and mortgage rates low, the U.S. government provides a guarantee on the securities issued by these public companies. Oh, oh.
These companies have issued more than $5 trillion in securities that have the backing of the U.S. government. So, when these things go in the “tank” it is the American taxpayer that will provide the mouth to mouth. Our nation currently has about $9 trillion in debt. We may be about to increase it by 50% through the mortgage crisis.
Hundreds of billions have been “lost” due to the ignorant and unscrupulous practices of the financial industry. In the end, I expect that the losses will total more than $1 trillion.
The Federal Reserve has been creating liquidity as fast as it can, by lending money against worthless securities, and giving it to foreign governments and companies by the boatload. They have dropped interest rates to Japan-like levels. This has caused the Dollar to continue its freefall against the world’s currencies. This week Saudi Arabia ended its long-standing link between its currency, the Riyal, and the dollar. They pegged it 30% higher. Does that mean that the U.S. has lost 30% of its value?
Consider this—if you add up the oil reserves of Saudi Arabia and Iran, they could buy the entire U.S. economy. Ouch.
Be prepared for more bad news as all of the Wall Street “dark matter” comes to light. Be prepared to face higher inflation in the upcoming years, as we pay the price for fixing this mess, again without a depression.
Our government is being run by taking out new credit cards to pay off the old ones. At some point, we are going to have to become responsible with America’s money. Otherwise, today’s youth will never hope to be able to achieve the kind of financial well-being we enjoy today. Their taxes will weigh them down like Marley’s chains.
Our Congress needs to restructure itself, so that spending more government money for the constituents at home is no longer the way to get re-elected. We need term limits and we need them soon.
We also need an energy policy that works. We need a Manhattan Project for clean energy. Windmills are fine. Solar is okay, if you like global warming. Ethanol is a cruel joke. Drilling offshore and in Alaska could help in the short run. I have faith that our oil companies will be cleaner in the Gulf of Mexico than the foreign oil companies that have been drilling there for the past 30 years. I really don’t think that the 2,000 acres of mosquitoes in Anwar will be disturbed much by the time drilling is completed up there. If you have ever seen how environmentally friendly major oil can be, (as I have) you know that the population of Alaskan wildlife, particularly the caribou, will only increase rather than decrease. This is no longer an issue of preserving the mosquito population of Alaska, it is a way of life issue for the American people. If you disagree with me here, let me know. I invite the discussion.
What we really need is to perfect the capacitor. (Remember the “Flux Capacitor” in “Back to the Future?”) The capacitor stores energy at virtually 100%. Energy in equals energy out. Compare this to the energy that is lost (about 70%) through batteries. We also need to pursue nuclear fusion on a massive scale. This is not dirty nuclear fission that leaves us with a thousand-year toxic storage problem. This is clean fuel that will last us for the next thousand years. Nuclear fusion occurs naturally in stars. We can do it on earth using heavy water as a main fuel. We can’t expect the oil companies to develop this kind of energy, as it would be 20 years away under the best of circumstances. It will take massive colliders and energy sources that will take hundreds of billions of dollars, perhaps even as much as the government has spent on the Iraq war or on the mortgage crisis.
I digress here from the purpose of this rant. I think my blood sugar has dropped.
When you see the media begin to panic and tell us that the financial world is about to come to an end, that is a sure sign that things are about to get better. I haven’t seen that yet, but I’ll watch for it.
Jay
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Tuesday, July 1, 2008
Enough Blood on the Streets?
Enough Blood on the Streets?
Don’t say you weren’t warned about the problems in our wobbling economy.
Back on September 10, 2007 I issued a warning about the state of our economy, and the effect that the current mortgage crisis would have upon it. So far, my fears have only partially come to fruition. The S&P 500 has fallen 12.9% from when I blogged, and 19.11% from its high a month later. The DOW has fallen 21.42% from its high. And I am afraid that there will be more “blood on the streets.” (More about that later.)
When I entered the investment business (too many years ago) I did a lot of reading about the stock market. I studied the market’s behavior and its underlying fundamentals, and I saw that, oftentimes, the two did not match. Back in the days of J.P. Morgan and Jesse Livermore, Joe Kennedy and Jay Cooke, it was easy to understand how the “market” would behave in an inordinately insane manner. It was manipulated and there was no regulation. “Inside information” was a commodity that was freely traded for profit.
When FDR started the Securities Exchange Commission, he chose one of the most knowledgeable stock manipulators to be its first chairman. Who better to regulate them?
Today, we have a whole new breed of manipulators roaming the planet free from regulation. Now, manipulation is only part of our problem; the issues are far more endemic than this, and part of the blame must go to the Fed, particularly to Greenspan. But manipulation is an area that makes great fodder for a blog.
The manipulation is taking place on several levels. There is a whole new breed of unregulated fat cat on Wall Street—the Hedge Fund. With trillions of dollars under management, these financial behemoths can exert their financial will with little fear of reprisal. How can this be, you ask? Easy. The Securities Exchange Act of 1933, the Investment Company Act of 1940 and the Employee Retirement Income Security Act of 1974 (ERISA) were all put in place to protect the little guy. Exceptions to Investment Company Act were created for larger, “sophisticated” investors, with the expectation that these guys knew what they were doing. Voila! Regulation D. A safe-harbor loophole in protection from regulation big enough to fit a small planet.
To be fair, for many years this loophole was a welcome thing that allowed oil to be found, buildings to be constructed and companies to be started. I have been part of dozens of these arrangements, usually in the form of Limited Partnerships, which funded such things as genetic research, the musical “Les Miserable,” a new magazine, a beer company and buying a glitzy Palm Beach hotel (where they had to give me a tie at dinner when I was checking the place out). People would make and lose money, but few of the unsuspecting were ever hurt. And the economy didn’t suffer, at least too much. There were big repercussions in the early 1980s when Reagan created tax legislation that favored long-term investing over tax avoidance. This helped bring on the Savings and Loan crisis in the 80s, as much of the tax-driven real estate collapsed. But we got through it okay. Only about $500 million out of our pockets.
In the 1990s, we had the tech revolution and a booming stock market that grew wildly out of proportion. Money managers looked like geniuses. A few even did better than a chimp throwing darts. But, even if you did worse than a chimp, you still looked good.
Mutual funds have loose limitations on the compensation that can be paid to managers. Some of these limitations come from shareholder groups who act as fee watchdogs. So, it was hard to earn more than five or ten million a year, even as a star money manager. In the 1990s, institutional managers, who managed private money, were locked in a price war. This was driven by the big RIA firms like Callan, Wilshire, SEI, Russell and Cambridge who carefully analyzed fees and all sorts of voluminous stats that arise from Modern Portfolio Theory. Fees really do affect risk adjusted return, and the pros know this. So the firms kept the money managers honest.
But the 1990s spawned a new form of investor hunger. People left their jobs to become day traders. Old ladies (probably even some Varicose Vigilantes) cashed in their CDs and bought tech funds. I had a 73 year old client who threatened to fire me in late 1999 because I refused to put his portfolio entirely in technology stocks. I had him in a much more conservative portfolio (and rightfully so!).
With their gaudy returns, intrepid money managers discovered a new way to market their wares and earn billions in the process. The HEDGE FUND. Using use loophole like that discussed above, they went to big investors predicting huge returns. And, as an unregulated hedge fund, no longer would they be burdened by those silly limits that mutual funds have on borrowing money. With some capital in place, they planned to borrow large sums of money (at historically low interest rates) so that these gaudy returns would become magnified, even astronomical! 100% returns. 200% returns per year. Guaran-damn-teed. And the hedge fund manager earns just 25% of the profits. A small pittance for creating such riches. It all looked like a slam dunk. So the managers borrowed, and borrowed and borrowed. And they invested in things for high return, because they were still sure that they were brilliant. They invested in mortgages, using them as collateral for their loans, while making money on the interest rate “spread.”
With the mortgage industry manufacturing loans like a Detroit assembly line, the hedge fund managers built computer based algorithms that took supercomputers to analyze, “proving” that this was a golden goose with no downside. Awash in capital, with access to trillions more in borrowed funds, the hedge funds became willing accomplices in our next investment crisis.
Oops. The world doesn’t work this way that they thought it would. There is no golden goose. There is just a goose. And if you have ever been around geese, you know that they leave a lot of goop on the ground behind them. No, the stock market is a reflection of the human condition. And mankind doesn’t change very much over the years. Neither does the basic market. When you really break it down, the bottom line to the stock market is profits. And overall profits increase only as productivity increases. Let me explain:
When you strip away the rhetoric, there are three major components to the market. There are current earnings. There is inflation. There is productivity growth. Everything else is superfluous. If a stock is selling for $100 per share, and it is earning $5 per share, an investor is earning a 5% current return on his/her capital. If a CD is paying me 2%, stocks look like a pretty good deal. Now, with no real business change, “gross profits” will rise over time with inflation. If inflation is 3%, and my company remains just as productive, earnings will increase with inflation over time. I get a return on my stock of 5% ($5 per share) plus 3% growth in value with inflation.* Now, if my company enjoys a 2% long-term productivity growth, this will increase my earnings more than inflation. So, if we earn 5% within the company, get 3% inflation and have 2% long-term productivity growth, we come up with a long-term stock return of 10%. (5+3+2=10). Omigod! This happens to be right about the long-term return of the stock market! It is really that simple.
*I am simplifying things above to illustrate my point. This example assumes that the company keeps its same price to earnings ratio (P/E) and that other short-term factors are ignored. In the long-run, these things really are essentially ignored, so the longer the time frame, the less the short-term factors matter.)
What makes the market churn is all that happens in the short run. We have high and low inflation, wars, recessions, expansions and changes in politics. We have all sorts of things to worry about. Oh, and we have manipulation.
The bottom line is, except for some inflation and productivity growth, investing is a “zero sum game” where there is an equal loser for every winner. And leverage multiplies the gains and losses. It makes big losers, with blood pouring onto the streets.
Why do we have the blood today? And how much will there be?
We have had a stock and mortgage market that has been blown out of proportion by “external” and “unnatural” forces. (Remember, the stock market is a reflection of the human condition. Most of us in the human race still have one nose, two eyes and two ears.) We have had a confluence of forces that joined together to create a bubble that may pop with a very loud, sticky bang.
We had the Federal Reserve lowering interest rates to ease the pain of the tech bubble. We had the real estate bubble and mortgage refinance boom, prompted by the lower Fed rates. We had pension funds (explained in my earlier blog) who were willing buyers of riskier and riskier mortgage CDOs. We had hedge fund managers awash in unregulated investor money, who borrowed up to ten times that amount. We had investment companies (Citi, Countrywide, Bear Stearns, Lehman, etc.) who borrowed at low rates and purchased huge chunks of the “golden goose” to make money on the spread. Much of this money came from the Fed window, like a bartender selling too many drinks to a drunk.
This was a financial orgy, a toga party befitting John Belushi. And it is coming to the same end that he did. Certain collapse. We have seen some of our largest banks on the verge of collapse. Our government has stepped in with hundreds of billions in direct cash. I suspect that there is much more that that going on behind the scenes, were the Fed lends money against worthless securities at full value. Investment companies have already written down more than $300 billion. And there is more to come. This will range into the trillions when all is taken into account.
There is this weird thing known as “reality” setting in. It always seems to happen, like a hangover. And who pays the price? The little guy! The little guy is the one who has to pay more at the gas pump and at the supermarket. The little guy has to watch his/her 401(k) dwindle in value. The little guy will feel the pinch of higher inflation for the next decade.
I thought there were laws put in place to protect the little guy?
Granted, there is pain everywhere. More than a quarter of the hedge fund have closed shop in the past year. (Imagine if this happened to the mutual funds in your 401(k). Ouch.) A few of the thieves will go off to jail. But fewer will be forced to return their ill-gotten gains, much of it in paper gains that never even existed. No fire sale on Nantucket and the Hamptons in sight.
And we all will slip on the blood in the streets. We might even recognize some of it as our own. Get ready for more bloodletting, and don’t be surprised to see the stock market drop further.
Footnote: In 1923, seven of the country’s most powerful men met at the Edgewater Hotel in Chicago. One of these men, Jesse Livermore, was known for shorting stocks (and creating cabals and rumors to drive them down in price) and buying back when there was “blood on the streets.” (his words). The other men at this gathering were Charles Schwab (who controlled U.S. Steel), Albert Fall (a man with strong political ties to Harding and part of the Teapot Dome Scandal), Arthur Cutten (a commodities speculator), Richard Whitney (president of the New York Stock Exchange), Leon Fraser (president of International Bank Settlement), Ivan Kruegger (a big monopolist). At the time, these men controlled more money than the entire U.S. Treasury. They were wealthy beyond belief. And they were all highly engaged in practices that would be illegal today. Eventually, two of these men would die broke, two went to prison and three committed suicide. J.P. Morgan, another huge monopolist, also died penniless and alone. I am not saying that these were bad guys. They pretty much did what was legal, and they prospered. But when you live by the sword…
I wonder how many of today’s preying carnivores will enjoy the same dark end?
Don’t say you weren’t warned about the problems in our wobbling economy.
Back on September 10, 2007 I issued a warning about the state of our economy, and the effect that the current mortgage crisis would have upon it. So far, my fears have only partially come to fruition. The S&P 500 has fallen 12.9% from when I blogged, and 19.11% from its high a month later. The DOW has fallen 21.42% from its high. And I am afraid that there will be more “blood on the streets.” (More about that later.)
When I entered the investment business (too many years ago) I did a lot of reading about the stock market. I studied the market’s behavior and its underlying fundamentals, and I saw that, oftentimes, the two did not match. Back in the days of J.P. Morgan and Jesse Livermore, Joe Kennedy and Jay Cooke, it was easy to understand how the “market” would behave in an inordinately insane manner. It was manipulated and there was no regulation. “Inside information” was a commodity that was freely traded for profit.
When FDR started the Securities Exchange Commission, he chose one of the most knowledgeable stock manipulators to be its first chairman. Who better to regulate them?
Today, we have a whole new breed of manipulators roaming the planet free from regulation. Now, manipulation is only part of our problem; the issues are far more endemic than this, and part of the blame must go to the Fed, particularly to Greenspan. But manipulation is an area that makes great fodder for a blog.
The manipulation is taking place on several levels. There is a whole new breed of unregulated fat cat on Wall Street—the Hedge Fund. With trillions of dollars under management, these financial behemoths can exert their financial will with little fear of reprisal. How can this be, you ask? Easy. The Securities Exchange Act of 1933, the Investment Company Act of 1940 and the Employee Retirement Income Security Act of 1974 (ERISA) were all put in place to protect the little guy. Exceptions to Investment Company Act were created for larger, “sophisticated” investors, with the expectation that these guys knew what they were doing. Voila! Regulation D. A safe-harbor loophole in protection from regulation big enough to fit a small planet.
To be fair, for many years this loophole was a welcome thing that allowed oil to be found, buildings to be constructed and companies to be started. I have been part of dozens of these arrangements, usually in the form of Limited Partnerships, which funded such things as genetic research, the musical “Les Miserable,” a new magazine, a beer company and buying a glitzy Palm Beach hotel (where they had to give me a tie at dinner when I was checking the place out). People would make and lose money, but few of the unsuspecting were ever hurt. And the economy didn’t suffer, at least too much. There were big repercussions in the early 1980s when Reagan created tax legislation that favored long-term investing over tax avoidance. This helped bring on the Savings and Loan crisis in the 80s, as much of the tax-driven real estate collapsed. But we got through it okay. Only about $500 million out of our pockets.
In the 1990s, we had the tech revolution and a booming stock market that grew wildly out of proportion. Money managers looked like geniuses. A few even did better than a chimp throwing darts. But, even if you did worse than a chimp, you still looked good.
Mutual funds have loose limitations on the compensation that can be paid to managers. Some of these limitations come from shareholder groups who act as fee watchdogs. So, it was hard to earn more than five or ten million a year, even as a star money manager. In the 1990s, institutional managers, who managed private money, were locked in a price war. This was driven by the big RIA firms like Callan, Wilshire, SEI, Russell and Cambridge who carefully analyzed fees and all sorts of voluminous stats that arise from Modern Portfolio Theory. Fees really do affect risk adjusted return, and the pros know this. So the firms kept the money managers honest.
But the 1990s spawned a new form of investor hunger. People left their jobs to become day traders. Old ladies (probably even some Varicose Vigilantes) cashed in their CDs and bought tech funds. I had a 73 year old client who threatened to fire me in late 1999 because I refused to put his portfolio entirely in technology stocks. I had him in a much more conservative portfolio (and rightfully so!).
With their gaudy returns, intrepid money managers discovered a new way to market their wares and earn billions in the process. The HEDGE FUND. Using use loophole like that discussed above, they went to big investors predicting huge returns. And, as an unregulated hedge fund, no longer would they be burdened by those silly limits that mutual funds have on borrowing money. With some capital in place, they planned to borrow large sums of money (at historically low interest rates) so that these gaudy returns would become magnified, even astronomical! 100% returns. 200% returns per year. Guaran-damn-teed. And the hedge fund manager earns just 25% of the profits. A small pittance for creating such riches. It all looked like a slam dunk. So the managers borrowed, and borrowed and borrowed. And they invested in things for high return, because they were still sure that they were brilliant. They invested in mortgages, using them as collateral for their loans, while making money on the interest rate “spread.”
With the mortgage industry manufacturing loans like a Detroit assembly line, the hedge fund managers built computer based algorithms that took supercomputers to analyze, “proving” that this was a golden goose with no downside. Awash in capital, with access to trillions more in borrowed funds, the hedge funds became willing accomplices in our next investment crisis.
Oops. The world doesn’t work this way that they thought it would. There is no golden goose. There is just a goose. And if you have ever been around geese, you know that they leave a lot of goop on the ground behind them. No, the stock market is a reflection of the human condition. And mankind doesn’t change very much over the years. Neither does the basic market. When you really break it down, the bottom line to the stock market is profits. And overall profits increase only as productivity increases. Let me explain:
When you strip away the rhetoric, there are three major components to the market. There are current earnings. There is inflation. There is productivity growth. Everything else is superfluous. If a stock is selling for $100 per share, and it is earning $5 per share, an investor is earning a 5% current return on his/her capital. If a CD is paying me 2%, stocks look like a pretty good deal. Now, with no real business change, “gross profits” will rise over time with inflation. If inflation is 3%, and my company remains just as productive, earnings will increase with inflation over time. I get a return on my stock of 5% ($5 per share) plus 3% growth in value with inflation.* Now, if my company enjoys a 2% long-term productivity growth, this will increase my earnings more than inflation. So, if we earn 5% within the company, get 3% inflation and have 2% long-term productivity growth, we come up with a long-term stock return of 10%. (5+3+2=10). Omigod! This happens to be right about the long-term return of the stock market! It is really that simple.
*I am simplifying things above to illustrate my point. This example assumes that the company keeps its same price to earnings ratio (P/E) and that other short-term factors are ignored. In the long-run, these things really are essentially ignored, so the longer the time frame, the less the short-term factors matter.)
What makes the market churn is all that happens in the short run. We have high and low inflation, wars, recessions, expansions and changes in politics. We have all sorts of things to worry about. Oh, and we have manipulation.
The bottom line is, except for some inflation and productivity growth, investing is a “zero sum game” where there is an equal loser for every winner. And leverage multiplies the gains and losses. It makes big losers, with blood pouring onto the streets.
Why do we have the blood today? And how much will there be?
We have had a stock and mortgage market that has been blown out of proportion by “external” and “unnatural” forces. (Remember, the stock market is a reflection of the human condition. Most of us in the human race still have one nose, two eyes and two ears.) We have had a confluence of forces that joined together to create a bubble that may pop with a very loud, sticky bang.
We had the Federal Reserve lowering interest rates to ease the pain of the tech bubble. We had the real estate bubble and mortgage refinance boom, prompted by the lower Fed rates. We had pension funds (explained in my earlier blog) who were willing buyers of riskier and riskier mortgage CDOs. We had hedge fund managers awash in unregulated investor money, who borrowed up to ten times that amount. We had investment companies (Citi, Countrywide, Bear Stearns, Lehman, etc.) who borrowed at low rates and purchased huge chunks of the “golden goose” to make money on the spread. Much of this money came from the Fed window, like a bartender selling too many drinks to a drunk.
This was a financial orgy, a toga party befitting John Belushi. And it is coming to the same end that he did. Certain collapse. We have seen some of our largest banks on the verge of collapse. Our government has stepped in with hundreds of billions in direct cash. I suspect that there is much more that that going on behind the scenes, were the Fed lends money against worthless securities at full value. Investment companies have already written down more than $300 billion. And there is more to come. This will range into the trillions when all is taken into account.
There is this weird thing known as “reality” setting in. It always seems to happen, like a hangover. And who pays the price? The little guy! The little guy is the one who has to pay more at the gas pump and at the supermarket. The little guy has to watch his/her 401(k) dwindle in value. The little guy will feel the pinch of higher inflation for the next decade.
I thought there were laws put in place to protect the little guy?
Granted, there is pain everywhere. More than a quarter of the hedge fund have closed shop in the past year. (Imagine if this happened to the mutual funds in your 401(k). Ouch.) A few of the thieves will go off to jail. But fewer will be forced to return their ill-gotten gains, much of it in paper gains that never even existed. No fire sale on Nantucket and the Hamptons in sight.
And we all will slip on the blood in the streets. We might even recognize some of it as our own. Get ready for more bloodletting, and don’t be surprised to see the stock market drop further.
Footnote: In 1923, seven of the country’s most powerful men met at the Edgewater Hotel in Chicago. One of these men, Jesse Livermore, was known for shorting stocks (and creating cabals and rumors to drive them down in price) and buying back when there was “blood on the streets.” (his words). The other men at this gathering were Charles Schwab (who controlled U.S. Steel), Albert Fall (a man with strong political ties to Harding and part of the Teapot Dome Scandal), Arthur Cutten (a commodities speculator), Richard Whitney (president of the New York Stock Exchange), Leon Fraser (president of International Bank Settlement), Ivan Kruegger (a big monopolist). At the time, these men controlled more money than the entire U.S. Treasury. They were wealthy beyond belief. And they were all highly engaged in practices that would be illegal today. Eventually, two of these men would die broke, two went to prison and three committed suicide. J.P. Morgan, another huge monopolist, also died penniless and alone. I am not saying that these were bad guys. They pretty much did what was legal, and they prospered. But when you live by the sword…
I wonder how many of today’s preying carnivores will enjoy the same dark end?
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