We Have Lost Our Human Center
As I watched the stock market plunge this afternoon I though of the Wizard of Oz. I feel like I have been transported to some foreign country, where good and evil do battle before my eyes. Where life is magnified, and the colors of our lives are intensified beyond reason.
There’s the Good Wall Street and the Evil Wall Street. It’s the grease that lubricates the world’s financial engine, but also the thief that steals your life’s savings.
There’s the Good Congressman and the Bad Congressman, and they can be one in the same. Barney Frank, Christopher Dodd and Nancy Pelosi are working yeoman’s hours trying to hammer out a deal. But it was Dodd and Frank that blocked an investigation in Fannie Mae back as far as 2002, when it became apparent that our government oversight wasn’t strong enough. Dodd has received the greatest payoffs from Fannie Mae, totaling more than $100,000. Now he’s helping to lead the charge in the solution. Something is strangely warped here.
Republicans have to shoulder a big chunk of the blame on this one, too. They have been champions of fewer regulations in the financial world. In theory, less regulation means more efficiency. I have been in the financial services industry, and I know this to be true. Advisors can spend (literally) half their time filling out forms. Greater regulations mean greater inefficiencies and less profitability. Less profitability means fewer jobs and less tax revenue.
The problem is this: Crooks always find a way around regulations. And when you make it as easy as we did, they have a license to steal. Yes, we made if far too easy this time. And we allowed a single “product” to permeate the entire fabric of our economy, seeping into it like blood. It is like we went on vacation and left the door wide open.
As the man opens up the door to his house, he says, “Damn, Martha, I thought I might have left that back door ajar when we went away on that hard-earned vacation. Someone’s done backed up a U-Haul to our place and stolen every damn thing we had.”
Martha looks inside and says, “At least they cleaned up and closed the door behind them, George. And we got off easy. I hear that the Stewarts had their whole house stolen.”
“Their whole house?”
“From the foundation up.”
“That sucks.”
“Uh, huh.”
“And they are good people, too.”
Well-mannered crooks are crooks will take anything and everything they can. Including your house.
I have always been a champion of Wall Street and of business. Business provides jobs and produces the things that improve our lives. Wall Street helps provide the capital needed for businesses to grow and thrive. My experience (in business and in economics) has led me to believe that a dollar in the hands of a productive person produces far more than a dollar in someone’s mattress.
This time though, the “big game” wasn’t producing much beyond phantom profits. It was a shell game. Now, I don’t blame Wall Street for playing the game; that’s their job. They are in business to make money, for themselves and their clients.
But this whole shell game trickled from Wall Street to Main Street, becoming so large that it spread like the Asian flu. Wall Street got greedy. And they allowed themselves to become ignorant to reality. They refused to look beyond the money machine to its inner workings.
AIG (among others) marketed their services to unsophisticated bankers who thought that the word “guarantee” actually meant something. They showed bankers how they could borrow from others (depositors and the Fed) and invest in CDOs (mortgage backed securities), with AIG guaranteeing the interest and make a “guaranteed” profit. That is, until the mortgage holders default.
All of this mess might have been manageable, except that it became like a drug habit. Everyone needed more and more. Underwriting standards grew lax. And FRAUD prevailed.
Wall Street quants had created beautiful (and complicated) algorithms that dealt with every conceivable market scenario, showing that these things were “rock solid.” The thing that the quants couldn’t predict was true human behavior.
Humans are a complex animal. Our emotions have not been able to keep up with our intellectual development. So, while our intellect is in the 21st century, our emotions are barely out of the Middle Ages.
Look at the world and try to tell me that we aren’t in some emotional time warp. We’ve got suicide bombers igniting themselves every day, with thoughts of 70 virgins. We’ve got genocide occurring in dozens of countries today, as I write this. We’ve got a Congress that is playing politics as our economy bleeds to death.
I have watched our great nation take several steps toward becoming a second-tier nation in the past few weeks. Our national debt has nearly doubled. We are preparing a $700 billion bailout package that will be only a band-aid that might stop some of the bleeding. Healing will take far more. Far more.
I am beginning to wonder if we are reaching the limits of our emotional capacity to handle the complexity and change in our lives.
I am beginning to wonder if we must develop some new paradigm for living, something that will allow us to cope with the multiple facets of government, of business and of juggling far too many things in our personal lives.
For example: Texting while driving is becoming a hot topic. People are crashing trains and cars because they are texting friends while they steer. While driving in cars, people are texting while listening to the radio, taking drags of the morning cigarette, drinking coffee and reading the paper in stop and go traffic. We talk on the phone while cooking. We text on the PDA while talking on the phone. We jab at our Blackberry’s between quarters at our kid’s football games. We never stop.
Maybe we need a new law from Congress, one that mandates solitude and rest.
If our government can start nationalizing businesses…If they can create new regulations that make it more and more impossible to succeed…If they can tax business so much that a national treasure like Budweiser (the Great American Beer) is better off being foreign owned because taxes are far lower overseas…If they can halt the sale of junk food…If they can ban smoking in privately-owned condos (I am not a smoker, but smokers have rights, too)…If they can force us to drive certain cars…Or carry our own bags into the supermarket…Then, certainly government can come up with a law that makes us better and better adjusted people.
I say that we have a mandated day where we have to do little, except spend time with our families. It should be a time for reflection, a time without multi-tasking and stretching our limits of sleep. We used to have this day. Sunday. It was a day of rest and reflection. But that was before the days of multi-tasking, playdates and soccer moms.
Religion is a flash topic, and this is not about religion. It is about the human condition.
Let’s make our day Thursday. I’m always a little tired by Thursday, so that would be good. Maybe business can’t start until after two p.m. Families must eat breakfast together and then have quiet time for an hour. Maybe take a walk, and think about the great things we have in life, not all the things we don’t have. Then they should sit down for lunch, and talk, air thing out, laugh a bit. That sure would be nice. Fat chance.
Maybe all of these global problems we are facing should be seen as a wakeup call. Maybe we need to slow things down. I’m going to think about this tonight after dinner is over and homework is under control. I will sit down in my living room, with Monday Night Football on softly, my next novel on my lap for editing, my PDA on my belt and a family member or two sitting close by. Or, maybe I’ll try just one thing. Probably not. I’ve got too many things to do, can’t just do one thing at a time. Won’t work anymore. Unless it was law…I don’t like to break the law. If there was this law that said I had to relax and reflect…Would that be Utopia?
I better go back and read Utopia. I’ll put it next to “The Rise and Fall of the Roman Empire.” Somewhere in there I might find an answer to this mess, where we are heading in this chaos we call life.
Tuesday, September 30, 2008
Friday, September 26, 2008
Are Politicians a Different Species?
I am beginning to think that politicians are an entirely different species than the average American. There is some genetic misprint in their DNA, something that causes them to create chaos out of order. Something beyond the natural order (or disorder).
Simplified, the second law of thermodynamics is that “Entropy Increases.” Nothing takes place with 100% efficiency, causing disorder in the universe to increase. When a china cup falls to the floor, it breaks into disordered pieces. Disordered pieces do not drop to the floor and emerge as a whole cup. Increasing disorder is natural and normal.
In Congress, we’ve got hundreds of men and women bouncing around like excited molecules inside a glass of water, all waiting to spill out and create CHAOS. They are not satisfied by making simple choices and creating simple solutions to problems we face. It’s like they have some genetic predisposition for making things so convoluted that Einstein would be no match.
Right now, our nation is facing a financial crisis. The availability of credit has vanished, just like it did before the Great Depression. If something isn’t done immediately, and I mean now, we will be facing much the same problem. Just today, Washington Mutual went into receivership, a $300 billion behemoth bank. It had been teetering, waiting for the “bailout” to occur. But it took longer than it should have for Congress to act, so the plug was pulled. This will be happening daily until something is done.
I know that Congress does not always attract our best and brightest. Some might even say that they lack the required alphas to lead the pack. But they are people who (usually) care about their constituents. They just have this genetic defect (maybe it is just that this gene is more dominant) that causes them to make trapezoids and mazes out of circles.
I am not normally a bail-out kind of guy. If you screw up, you pay the consequences, learn from your mistakes and do it better next time. This time it is different. The level of fraud and greed has taken everyone by surprise. If we had endured just fraud or just greed, the nation would have been okay. But when the greed is based upon fraud (like Fannie Mae dramatically relaxing its standards without telling anyone and cooking its books for stock bonuses and option conversions), and excessive leverage is used, we have a calamity in waiting.
The proposed government bailout was not the Fed’s (or the administration’s) first choice. It is a last-ditch effort to put on a tourniquet before death occurs. Unfortunately, its passage is put into the hands of a breed of human that can do nothing but complicate things. Our leaders are manipulating the agreement to score political points and point fingers.
I assure you, for most members of Congress, actually understanding this bailout plan would be like understanding Chinese the first time you look at it. It cannot be done by the normal human brain, let alone one of a politician. So, Congress retreats to a place where it is comfortable, making everything so complicated that no one understands it.
Restricting golden parachutes was a good addition to this plan. But adding condition after condition, and setting limits upon when cash can be made available, is like telling a Triage Nurse that a patient cannot have a new IV bag, or a blood transfusion until a week has passed. The patient needs it now. The doctor agrees. But the kitchen workers have decided that it isn’t fair for someone to get care that fast and efficiently.
What does a kitchen worker know about trauma? What does a member of Congress know about finance? I would say that they are relatively equivalent. Congress needs to let experts do their jobs, and go complicate something else, like health care. (Just joking, but that is next.)
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Simplified, the second law of thermodynamics is that “Entropy Increases.” Nothing takes place with 100% efficiency, causing disorder in the universe to increase. When a china cup falls to the floor, it breaks into disordered pieces. Disordered pieces do not drop to the floor and emerge as a whole cup. Increasing disorder is natural and normal.
In Congress, we’ve got hundreds of men and women bouncing around like excited molecules inside a glass of water, all waiting to spill out and create CHAOS. They are not satisfied by making simple choices and creating simple solutions to problems we face. It’s like they have some genetic predisposition for making things so convoluted that Einstein would be no match.
Right now, our nation is facing a financial crisis. The availability of credit has vanished, just like it did before the Great Depression. If something isn’t done immediately, and I mean now, we will be facing much the same problem. Just today, Washington Mutual went into receivership, a $300 billion behemoth bank. It had been teetering, waiting for the “bailout” to occur. But it took longer than it should have for Congress to act, so the plug was pulled. This will be happening daily until something is done.
I know that Congress does not always attract our best and brightest. Some might even say that they lack the required alphas to lead the pack. But they are people who (usually) care about their constituents. They just have this genetic defect (maybe it is just that this gene is more dominant) that causes them to make trapezoids and mazes out of circles.
I am not normally a bail-out kind of guy. If you screw up, you pay the consequences, learn from your mistakes and do it better next time. This time it is different. The level of fraud and greed has taken everyone by surprise. If we had endured just fraud or just greed, the nation would have been okay. But when the greed is based upon fraud (like Fannie Mae dramatically relaxing its standards without telling anyone and cooking its books for stock bonuses and option conversions), and excessive leverage is used, we have a calamity in waiting.
The proposed government bailout was not the Fed’s (or the administration’s) first choice. It is a last-ditch effort to put on a tourniquet before death occurs. Unfortunately, its passage is put into the hands of a breed of human that can do nothing but complicate things. Our leaders are manipulating the agreement to score political points and point fingers.
I assure you, for most members of Congress, actually understanding this bailout plan would be like understanding Chinese the first time you look at it. It cannot be done by the normal human brain, let alone one of a politician. So, Congress retreats to a place where it is comfortable, making everything so complicated that no one understands it.
Restricting golden parachutes was a good addition to this plan. But adding condition after condition, and setting limits upon when cash can be made available, is like telling a Triage Nurse that a patient cannot have a new IV bag, or a blood transfusion until a week has passed. The patient needs it now. The doctor agrees. But the kitchen workers have decided that it isn’t fair for someone to get care that fast and efficiently.
What does a kitchen worker know about trauma? What does a member of Congress know about finance? I would say that they are relatively equivalent. Congress needs to let experts do their jobs, and go complicate something else, like health care. (Just joking, but that is next.)
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Thursday, September 25, 2008
This Crisis Beyond Politics
This is not a “Political” Crisis. It is very real, and it is at your back door.
When the president of the United States goes on national television to talk about a financial crisis, we should pay attention. Rather than seeing it as just another “political” move with no more sincerity than Cruella DeVil petting a Dalmatian puppy, we should see it for what it is: a desperate cry of “Look out!” before we drive over a cliff.
I know that Congress is not filled with leaders that can process information quickly and then make rational, informed decisions. No, politics tends to attract a different kind of human (some might call them subhuman) who often sees life as a series of maneuvers and negotiations. For them, nothing is black and white, good or bad, but different shades of gray that spill across the aisles in the form of legislation.
This is a time when politicians must shed their skin and, for once, do something that is not politically motivated, but people motivated, nation motivated. Millions of human lives are teetering on the brink of ruin, unless Congress takes swift and decisive action. A small or “gradual” fix will do nothing but delay disaster. Doing nothing will send the planet into an economic freeze that could cure global warming. It is this bad.
Our banking system works on money (financial ratios) and faith. A banker must have faith that the money they loan will be repaid. Otherwise, the bank goes out of business. Depositors must have faith that a bank will survive, and that their money is safe. Otherwise they withdraw their money. If depositors withdraw their money, the bank must call in loans immediately (remember those ratios). In a time of crisis, there is often no other place that businesses or individuals can replace their loans, so they default. This causes a further erosion in capital and the cycle continues.
There are organizations whose job is to audit and regulate financial institutions. The Federal Reserve is one of these, so I will use them in my example. The Fed regularly goes into banks and looks at their books. They make sure that the bank has the assets they claim to. They make sure that they remain financially strong, so that a business downturn, or a small crisis in confidence won’t put the bank out of business, or lose depositors’ money.
For years, many banks have been purchasing CDO’s (mortgage backed securities) as a way to invest, hedge and bring profits. Until recently, these CDOs were considered valuable, and were seen by regulators (hence the general public) as being safe. Now that many of these securities have proven to be worthless, banks must assign them a much smaller value.
Banks are allowed to lend money based upon their asset (and deposit) base. The more money they have in reserve, the more they can lend. They must adhere to certain “ratios.” For example, let’s assume for every dollar of deposits, I can lend out fifteen. Using this example, if I have $1 million on deposit, I can lend out $15 million. If these assets (deposits plus securities) decrease in value, a bank must reduce its loan portfolio to stay within the financial regulations (laws). If one of my depositors withdraws $500,000, this means that my bank must either replace that money, or call in $7.5 million in loans.
If I am a bank that owns $1 billion in mortgage backed securities, I might have lent out $15 billion using them as security. If these securities drop in value to $500 million, my bank must either replace it, or call in $7.5 billion in loans. This would cause big problems in the business community and many jobs would be lost.
By my math, our nation’s banks (both commercial and investment) own trillions of dollars worth of CDOs (mortgage backed securities). Until recently, the Federal Reserve has been lending money against these securities at something approaching (if not meeting) their face value. This has allowed the financial system to proceed as usual. The problem is, the Fed is not allowed to do this forever. At some point (that means now) the Fed (and other regulators) have to recognize the true value of a bank’s deposits and securities, and force them to adhere to the lending ratios that will keep them solvent.
Here is the problem: our financial institutions are holding hundreds of billions in worthless “assets” that must be accounted for. These securities must be assigned their true value, and loans must be reduced to reflect this capital base. If this happens, businesses and individuals with the highest credit ratings will have loans called in. New loans will virtually cease, and our economy will drive off that cliff, or come to a grinding halt. This is monumental.
The president is proposing a bridge that will allow the Federal Government to purchase these deflated securities at full or near-full value. This will allow banks to avoid calling in trillions of dollars in loans. It might help avoid putting millions of people out of work. I might help us avoid a global recession, or worse.
If this plan does not get passed, look for a friendly call from your banker explaining that, despite your AAA credit, despite your 780 FICO score, you can’t buy that home or finance that business, because the money just isn’t there.
This is not a cry of Wolf. It is not a political ploy. This is the guillotine resting above our nation’s neck, preparing to fall. Congress can stop it, or they can stand idly by as millions of Americans get the “axe,” through no fault of their own.
If banks begin to fail, depositors will grow scared and lose faith in the banking system. We have already seen this, where three month T-Bills were purchased last week with a negative return. Investors accepted a guaranteed loss for the safety of T-Bills. Imagine what might happen when banks begin to fail and depositors begin withdrawing money from banks. This would exacerbate the problem. Bank reserves are being artificially propped by the Fed. This can't go on forever unless the law is changed. This is the task our Congress faces this week. I believe they must fix this. They must fix this fast. They must fix this decisively. If they don't, it will be hard for us to say, "Forgive them, for they know not what they do." Congress has been educated. They have been warned. If they put politics above our nation's safety and survival, they are doing it with full knowledge of the possible consequences.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
When the president of the United States goes on national television to talk about a financial crisis, we should pay attention. Rather than seeing it as just another “political” move with no more sincerity than Cruella DeVil petting a Dalmatian puppy, we should see it for what it is: a desperate cry of “Look out!” before we drive over a cliff.
I know that Congress is not filled with leaders that can process information quickly and then make rational, informed decisions. No, politics tends to attract a different kind of human (some might call them subhuman) who often sees life as a series of maneuvers and negotiations. For them, nothing is black and white, good or bad, but different shades of gray that spill across the aisles in the form of legislation.
This is a time when politicians must shed their skin and, for once, do something that is not politically motivated, but people motivated, nation motivated. Millions of human lives are teetering on the brink of ruin, unless Congress takes swift and decisive action. A small or “gradual” fix will do nothing but delay disaster. Doing nothing will send the planet into an economic freeze that could cure global warming. It is this bad.
Our banking system works on money (financial ratios) and faith. A banker must have faith that the money they loan will be repaid. Otherwise, the bank goes out of business. Depositors must have faith that a bank will survive, and that their money is safe. Otherwise they withdraw their money. If depositors withdraw their money, the bank must call in loans immediately (remember those ratios). In a time of crisis, there is often no other place that businesses or individuals can replace their loans, so they default. This causes a further erosion in capital and the cycle continues.
There are organizations whose job is to audit and regulate financial institutions. The Federal Reserve is one of these, so I will use them in my example. The Fed regularly goes into banks and looks at their books. They make sure that the bank has the assets they claim to. They make sure that they remain financially strong, so that a business downturn, or a small crisis in confidence won’t put the bank out of business, or lose depositors’ money.
For years, many banks have been purchasing CDO’s (mortgage backed securities) as a way to invest, hedge and bring profits. Until recently, these CDOs were considered valuable, and were seen by regulators (hence the general public) as being safe. Now that many of these securities have proven to be worthless, banks must assign them a much smaller value.
Banks are allowed to lend money based upon their asset (and deposit) base. The more money they have in reserve, the more they can lend. They must adhere to certain “ratios.” For example, let’s assume for every dollar of deposits, I can lend out fifteen. Using this example, if I have $1 million on deposit, I can lend out $15 million. If these assets (deposits plus securities) decrease in value, a bank must reduce its loan portfolio to stay within the financial regulations (laws). If one of my depositors withdraws $500,000, this means that my bank must either replace that money, or call in $7.5 million in loans.
If I am a bank that owns $1 billion in mortgage backed securities, I might have lent out $15 billion using them as security. If these securities drop in value to $500 million, my bank must either replace it, or call in $7.5 billion in loans. This would cause big problems in the business community and many jobs would be lost.
By my math, our nation’s banks (both commercial and investment) own trillions of dollars worth of CDOs (mortgage backed securities). Until recently, the Federal Reserve has been lending money against these securities at something approaching (if not meeting) their face value. This has allowed the financial system to proceed as usual. The problem is, the Fed is not allowed to do this forever. At some point (that means now) the Fed (and other regulators) have to recognize the true value of a bank’s deposits and securities, and force them to adhere to the lending ratios that will keep them solvent.
Here is the problem: our financial institutions are holding hundreds of billions in worthless “assets” that must be accounted for. These securities must be assigned their true value, and loans must be reduced to reflect this capital base. If this happens, businesses and individuals with the highest credit ratings will have loans called in. New loans will virtually cease, and our economy will drive off that cliff, or come to a grinding halt. This is monumental.
The president is proposing a bridge that will allow the Federal Government to purchase these deflated securities at full or near-full value. This will allow banks to avoid calling in trillions of dollars in loans. It might help avoid putting millions of people out of work. I might help us avoid a global recession, or worse.
If this plan does not get passed, look for a friendly call from your banker explaining that, despite your AAA credit, despite your 780 FICO score, you can’t buy that home or finance that business, because the money just isn’t there.
This is not a cry of Wolf. It is not a political ploy. This is the guillotine resting above our nation’s neck, preparing to fall. Congress can stop it, or they can stand idly by as millions of Americans get the “axe,” through no fault of their own.
If banks begin to fail, depositors will grow scared and lose faith in the banking system. We have already seen this, where three month T-Bills were purchased last week with a negative return. Investors accepted a guaranteed loss for the safety of T-Bills. Imagine what might happen when banks begin to fail and depositors begin withdrawing money from banks. This would exacerbate the problem. Bank reserves are being artificially propped by the Fed. This can't go on forever unless the law is changed. This is the task our Congress faces this week. I believe they must fix this. They must fix this fast. They must fix this decisively. If they don't, it will be hard for us to say, "Forgive them, for they know not what they do." Congress has been educated. They have been warned. If they put politics above our nation's safety and survival, they are doing it with full knowledge of the possible consequences.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Wednesday, September 24, 2008
Bernanke Translation
As Bernanke briefs Congress for a second day, it is obvious that Congress speaks a different language than the Fed Chairman. They simply do not appear to hear what he is saying, so I will translate.
“The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant drag on growth.”
Translation: The economy will come to a screeching halt within days if you don’t do something NOW. Banks will hoard their cash, because they can see that businesses everywhere might start to fail like Wall Street giants. People could begin losing jobs in a manner approaching the Great Depression, unless you guys act NOW. People will stop spending and the situation will get worse and worse, until we are in a major recession. This will spread across the globe like a financial red tide. People will line the streets like a lynch mob, calling for the people responsible to be punished. Eventually, the punishment will spread to the members of Congress who blocked government oversight into Fannie Mae and Freddie Mac. This will spill over to the heads of financial committees, such as the ones that are hearing me now, and I will not lift a finger to save your sorry asses if we all go down. You need to act NOW.
“The downside risks to the outlook thus remain a significant concern.”
Translation: We are standing on the brink of a financial disaster unless you mover your butts to quell the liquidity crunch. I have done all I can to fix this thing, but I am hampered by laws that only you can fix. You need to fix this NOW.
“Economic activity appears to have decelerated broadly.”
Translation: We are in deep crap and it is going to pile so high that we might all get smothered. Recession is the least of my worries. I worry that this thing will snowball so out of control that our nation will look like an old Steel Mill or Dustbowl town. We need to act NOW.
“Stabilization of our financial system is an essential precondition for economic recovery.”
Translation: Until Congress does something to break the credit gridlock, our economy will sink deeper and deeper into a recession, until this Congress will go down as the most inept in history. People in your hometown will be using newspapers with your face on dartboards and to wipe their butts. The only monument to your handling of this situation will be a Great Wall of Shame, written in textbooks saying that “you had the chance to fix this,” but you tried to swing it to your advantage, forsaking the nation in favor of your own political and personal EGO. You need to fix this NOW.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
“The intensification of financial stress in recent weeks, which will make lenders still more cautious about extending credit to households and business, could prove a significant drag on growth.”
Translation: The economy will come to a screeching halt within days if you don’t do something NOW. Banks will hoard their cash, because they can see that businesses everywhere might start to fail like Wall Street giants. People could begin losing jobs in a manner approaching the Great Depression, unless you guys act NOW. People will stop spending and the situation will get worse and worse, until we are in a major recession. This will spread across the globe like a financial red tide. People will line the streets like a lynch mob, calling for the people responsible to be punished. Eventually, the punishment will spread to the members of Congress who blocked government oversight into Fannie Mae and Freddie Mac. This will spill over to the heads of financial committees, such as the ones that are hearing me now, and I will not lift a finger to save your sorry asses if we all go down. You need to act NOW.
“The downside risks to the outlook thus remain a significant concern.”
Translation: We are standing on the brink of a financial disaster unless you mover your butts to quell the liquidity crunch. I have done all I can to fix this thing, but I am hampered by laws that only you can fix. You need to fix this NOW.
“Economic activity appears to have decelerated broadly.”
Translation: We are in deep crap and it is going to pile so high that we might all get smothered. Recession is the least of my worries. I worry that this thing will snowball so out of control that our nation will look like an old Steel Mill or Dustbowl town. We need to act NOW.
“Stabilization of our financial system is an essential precondition for economic recovery.”
Translation: Until Congress does something to break the credit gridlock, our economy will sink deeper and deeper into a recession, until this Congress will go down as the most inept in history. People in your hometown will be using newspapers with your face on dartboards and to wipe their butts. The only monument to your handling of this situation will be a Great Wall of Shame, written in textbooks saying that “you had the chance to fix this,” but you tried to swing it to your advantage, forsaking the nation in favor of your own political and personal EGO. You need to fix this NOW.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Tuesday, September 23, 2008
"Quite Fragile" means Crashing
The Federal Reserve Chairman must always try to stay above politics. They must be careful in what they say, so that they don’t spook the markets needlessly. A misplaced word can (literally) move markets.
Although his words will sail harmlessly over most people’s heads, today’s words by Ben Bernanke were astounding.
I quote: “The financial markets are in quite fragile condition and I think absent a plan they will get worse…I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.”
“Quite fragile.” Quite fragile? We are talking about the most powerful nation on earth, with (by far) the largest GDP, a nation that is often accused of bullying our way around the globe.
When the Fed Chairman says “quite fragile,” what he is doing is this: He is standing on the top of the Empire State Building with a megaphone more powerful than speakers at a ZZ Top concert. He is yelling at the top of his lungs, “Look Out Below! Our entire country is about to fall on your sorry asses! If you thought 9/11 brought you pain, just wait until you see what this one brings you. If your stupid Congress doesn’t act within the next few days, all hell is going to break loose! Can you hear me? Can you hear me! I am talking to you. I am screaming in your frigging ears! Will you listen?”
That’s what Bernanke said today. Nothing less. Congress better listen, and listen fast.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Although his words will sail harmlessly over most people’s heads, today’s words by Ben Bernanke were astounding.
I quote: “The financial markets are in quite fragile condition and I think absent a plan they will get worse…I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.”
“Quite fragile.” Quite fragile? We are talking about the most powerful nation on earth, with (by far) the largest GDP, a nation that is often accused of bullying our way around the globe.
When the Fed Chairman says “quite fragile,” what he is doing is this: He is standing on the top of the Empire State Building with a megaphone more powerful than speakers at a ZZ Top concert. He is yelling at the top of his lungs, “Look Out Below! Our entire country is about to fall on your sorry asses! If you thought 9/11 brought you pain, just wait until you see what this one brings you. If your stupid Congress doesn’t act within the next few days, all hell is going to break loose! Can you hear me? Can you hear me! I am talking to you. I am screaming in your frigging ears! Will you listen?”
That’s what Bernanke said today. Nothing less. Congress better listen, and listen fast.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
One Third Rule
While watching our local July 4th parade, I began to think about the dreamers who convinced our nation to fight for its freedom.
Before the Revolution, we really didn’t have it so bad. Yeah, we had a little tax on tea. But, other than that, we were pretty much free to go our own ways. We could own property and companies. We had some religious freedom. No, life was pretty good. And we were taxed a heck of a lot less than we are today.
Back then, about a third of our population was firmly in the Tory camp. They supported the monarchy and favored British rule and protection. One third of our population was firmly against British rule. And the middle third? They didn’t really care.
Government is still that way today. On one side, we have conservatives, primarily by the (right wing) Republican Party. Liberals tend to rule the Democratic Party (left wing). Caught in the middle, we find those with no strong ideology that gravitates them to one side or the other. Whichever side (right or left) is able to convince more of the middle to come there way, will generally win an election.
Prior to the convention, John McCain’s campaign was floundering, as those who would normally be solidly in his camp (the conservatives) were not excited by his candidacy. It was only after he chose Sarah Palin (a classic conservative) that he energized his party and pulled up in the polls.
Barack Obama is squarely entrenched with liberals (with one of the most liberal voting records in the Senate) and he has truly energized his third of the populace.
As we close in on election day, it will be curious to see how both candidates maneuver to the center. McCain appears more main stream than Obama, as he is to the left center of his party. So he might normally have an easier time appealing to the middle. But Obama’s followers are so enthusiastic in their support that they may be powerful persuaders toward his cause.
Such was the case during the American Revolution. The revolutionists were far more passionate and more vocal than their counterparts. In this manner, they were able to sway the middle toward their side, and launch the country into war. Will Obama’s champions be as successful? Or, will McCain’s natural inclination to the middle win him the day?
Only time will tell.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Before the Revolution, we really didn’t have it so bad. Yeah, we had a little tax on tea. But, other than that, we were pretty much free to go our own ways. We could own property and companies. We had some religious freedom. No, life was pretty good. And we were taxed a heck of a lot less than we are today.
Back then, about a third of our population was firmly in the Tory camp. They supported the monarchy and favored British rule and protection. One third of our population was firmly against British rule. And the middle third? They didn’t really care.
Government is still that way today. On one side, we have conservatives, primarily by the (right wing) Republican Party. Liberals tend to rule the Democratic Party (left wing). Caught in the middle, we find those with no strong ideology that gravitates them to one side or the other. Whichever side (right or left) is able to convince more of the middle to come there way, will generally win an election.
Prior to the convention, John McCain’s campaign was floundering, as those who would normally be solidly in his camp (the conservatives) were not excited by his candidacy. It was only after he chose Sarah Palin (a classic conservative) that he energized his party and pulled up in the polls.
Barack Obama is squarely entrenched with liberals (with one of the most liberal voting records in the Senate) and he has truly energized his third of the populace.
As we close in on election day, it will be curious to see how both candidates maneuver to the center. McCain appears more main stream than Obama, as he is to the left center of his party. So he might normally have an easier time appealing to the middle. But Obama’s followers are so enthusiastic in their support that they may be powerful persuaders toward his cause.
Such was the case during the American Revolution. The revolutionists were far more passionate and more vocal than their counterparts. In this manner, they were able to sway the middle toward their side, and launch the country into war. Will Obama’s champions be as successful? Or, will McCain’s natural inclination to the middle win him the day?
Only time will tell.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Monday, September 22, 2008
Back To The Future Financial System
For the past few months, the world’s financial system has been (literally) teetering on the brink of collapse.
This weekend the Fed took a final step in bringing this crisis off the cliff. The Fed allowed the two remaining investment banks (Morgan Stanley and Goldman Sachs) to become holding companies, effectively eliminating this separation, and returning us to the pre-1929 banking rules. This is being allowed so Morgan and Goldman will have better access to Fed bailout money. This will help keep them afloat, so that the crisis in the confidence continues its abatement.
The U.S. Congress passed the Glass-Steagall Act to create separation between commercial and investment banks. The 1929 Stock Market Crash, and the ensuing Great Depression, were largely attributed to banks that created stock pools, used excessive leverage, participated in “insider trading” and drove investor savings into their own shaky banking institution.
I find it curious that the issues that created our current financial crisis are virtually the same ones that this law was designed to guard against. Investment Banks moved in lock-step (along with commercial banks) to create a demand for certain financial products, they used leverage of 30-1 (the 1920s leverage was capped at 10-1), they traded algorithms like insiders and they allowed investors to keep on buying overvalued stock and securities until the very end.
The real culprit here was not under-regulation. It was politicians (so, what’s new?) who refused to heed the warning cries and allow regulators to do their jobs. It was politicians that created a law in 1993 that eliminated the tax deduction for corporate salaries in excess of $1 million. This forced companies to pay executives through such means as stock options, thereby changing business focus from long-term to short-term. It was also greedy financiers who cooked their books as long as they could, despite the risks, knowing that that the Fed would bail them out if they failed. Fannie Mae was ordered, by Congress, to buy mortgages from low-credit areas, where few mortgage bankers feared to tread.
This problem will continue until Congress acts vigorously to prevent it. This does not mean more regulations (except for hedge funds, who should have oversight with the rest of the financial system). It means consequences. There should be consequences for fraud.
Recently, Franklin Raines, former head of Fannie Mae, was ordered to pay more than $20 million in penalties and fines. This resulted from an investigation by the Office of Federal Housing Enterprise Oversight, known as OFHEO. OFHEO found that Raines and Fannie Mae had overstated company earnings by more than $9 billion from 2001-2004. (About 40%). This overstatement allowed Raines and others to earn more than $100 million in bonus money.
These fines are a start, but they will do little to discourage future financial atrocities. A fine of just 20% of illegal and immoral bonus money is nothing. It will take jail time to drive the point home.
It appears that Fannie Mae and Freddie Mac relaxed their lending standards far more than the public was led to believe. This “public” includes the financial institutions that hold this (now worthless) paper, the hedge funds, the money market funds, the pension managers and the mutual fund managers. All of these groups were led to believe that these mortgages were solid, adhering to long-held safety standards. Financial institutions were gorging on a feast of tainted food. Now they are all kneeling by the toilet.
In their haste to point fingers and punish culprits, I do hope that Congress looks to the root of the problem before issuing a new spate of government regulations that will do little to solve the problem.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
This weekend the Fed took a final step in bringing this crisis off the cliff. The Fed allowed the two remaining investment banks (Morgan Stanley and Goldman Sachs) to become holding companies, effectively eliminating this separation, and returning us to the pre-1929 banking rules. This is being allowed so Morgan and Goldman will have better access to Fed bailout money. This will help keep them afloat, so that the crisis in the confidence continues its abatement.
The U.S. Congress passed the Glass-Steagall Act to create separation between commercial and investment banks. The 1929 Stock Market Crash, and the ensuing Great Depression, were largely attributed to banks that created stock pools, used excessive leverage, participated in “insider trading” and drove investor savings into their own shaky banking institution.
I find it curious that the issues that created our current financial crisis are virtually the same ones that this law was designed to guard against. Investment Banks moved in lock-step (along with commercial banks) to create a demand for certain financial products, they used leverage of 30-1 (the 1920s leverage was capped at 10-1), they traded algorithms like insiders and they allowed investors to keep on buying overvalued stock and securities until the very end.
The real culprit here was not under-regulation. It was politicians (so, what’s new?) who refused to heed the warning cries and allow regulators to do their jobs. It was politicians that created a law in 1993 that eliminated the tax deduction for corporate salaries in excess of $1 million. This forced companies to pay executives through such means as stock options, thereby changing business focus from long-term to short-term. It was also greedy financiers who cooked their books as long as they could, despite the risks, knowing that that the Fed would bail them out if they failed. Fannie Mae was ordered, by Congress, to buy mortgages from low-credit areas, where few mortgage bankers feared to tread.
This problem will continue until Congress acts vigorously to prevent it. This does not mean more regulations (except for hedge funds, who should have oversight with the rest of the financial system). It means consequences. There should be consequences for fraud.
Recently, Franklin Raines, former head of Fannie Mae, was ordered to pay more than $20 million in penalties and fines. This resulted from an investigation by the Office of Federal Housing Enterprise Oversight, known as OFHEO. OFHEO found that Raines and Fannie Mae had overstated company earnings by more than $9 billion from 2001-2004. (About 40%). This overstatement allowed Raines and others to earn more than $100 million in bonus money.
These fines are a start, but they will do little to discourage future financial atrocities. A fine of just 20% of illegal and immoral bonus money is nothing. It will take jail time to drive the point home.
It appears that Fannie Mae and Freddie Mac relaxed their lending standards far more than the public was led to believe. This “public” includes the financial institutions that hold this (now worthless) paper, the hedge funds, the money market funds, the pension managers and the mutual fund managers. All of these groups were led to believe that these mortgages were solid, adhering to long-held safety standards. Financial institutions were gorging on a feast of tainted food. Now they are all kneeling by the toilet.
In their haste to point fingers and punish culprits, I do hope that Congress looks to the root of the problem before issuing a new spate of government regulations that will do little to solve the problem.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Wednesday, September 17, 2008
Politics - A Deceptive Beast
As I watch the political ads that are pasting my television, I have noticed a very curious thing. Candidates are being blamed for voting against (or for) something that is entirely against their character.
Upon closer inspection, I have found this: Every bill has a laundry list of other bills that are attached to it. Politicians do this for several reasons. Fist, it is a way to add unpopular pork to a popular bill. Since politicians tend to get re-elected when they get more pork for their own district, members will trade off their pork in a “you scratch my back and I’ll scratch yours” manner.
Let’s say that there is a new bill proposed to raise taxes. Attached to that bill is a bill to provide more soup to soup kitchens in Detroit. If I vote against higher taxes, I am also voting against sending more soup to the soup kitchens. Come election time, my opponent will say in his ads that I voted against sending more soup to the soup kitchens.
Let’s say that there is a bill to lower taxes. Attached to that bill is a bill to provide more soup to soup kitchens in Detroit. If I vote against lower taxes, I am also voting against sending more soup to the soup kitchens. Come election time, my opponent will say in his ads that I voted against sending more soup to the soup kitchens.
I really haven’t voted against more soup, I have voted on taxes. But, come election time, my opponent will drag out a host of things I didn’t know that I had even voted on.
Congress plays this big game of “Gotcha” all the time. This leads to a real distortion of a candidate’s views and it causes a lot of confusion and wrong choices to be made.
Upon closer inspection, I have found this: Every bill has a laundry list of other bills that are attached to it. Politicians do this for several reasons. Fist, it is a way to add unpopular pork to a popular bill. Since politicians tend to get re-elected when they get more pork for their own district, members will trade off their pork in a “you scratch my back and I’ll scratch yours” manner.
Let’s say that there is a new bill proposed to raise taxes. Attached to that bill is a bill to provide more soup to soup kitchens in Detroit. If I vote against higher taxes, I am also voting against sending more soup to the soup kitchens. Come election time, my opponent will say in his ads that I voted against sending more soup to the soup kitchens.
Let’s say that there is a bill to lower taxes. Attached to that bill is a bill to provide more soup to soup kitchens in Detroit. If I vote against lower taxes, I am also voting against sending more soup to the soup kitchens. Come election time, my opponent will say in his ads that I voted against sending more soup to the soup kitchens.
I really haven’t voted against more soup, I have voted on taxes. But, come election time, my opponent will drag out a host of things I didn’t know that I had even voted on.
Congress plays this big game of “Gotcha” all the time. This leads to a real distortion of a candidate’s views and it causes a lot of confusion and wrong choices to be made.
AIG Saved - Now What?
The Fed got smart and saved AIG. At one point this company was one of the ten largest in the world, with assets over $1 trillion, worth more than $200 billion, with more than 100,000 employees. Now it is 80% owned by the U.S. government. Ouch.
AIG, however, insures millions of people, and has made billions in guarantees to other financial institutions. It is not that they were too big to fail,; they were too critical to fail. Where do we go from here?
I am not a huge fan of stifling government regulations. Having toiled in the securities industry for many years, I can’t tell you how onerous these regulations can be. However, using a loophole called Regulation D, hedge funds have been able to conduct their business virtually uncontrolled by any government regulations at all. This free-for-all fueled much of what we are enduring today.
Reg D allows organizations who are comprised of “sophisticated investors” to conduct their affairs outside of the traditional regulations that were put in place to protect the “little guy.” Unfortunately, this exception allowed the unregulated, hedge fund industry to grow so large that it could not help but whipsaw the entire economy. Oil prices were artificially raised, commodities and currencies were manipulated, and the stock market’s risks were exacerbated beyond reason. New industries were spawned that were more like the Robber Baron days than today’s traditional financial markets.
As we emerge from this turmoil, you can expect to see the hedge fund industry fall under much greater scrutiny than ever before. Because, like it or not, it is often the little guy that pays for their mistakes, not just their investors.
AIG, however, insures millions of people, and has made billions in guarantees to other financial institutions. It is not that they were too big to fail,; they were too critical to fail. Where do we go from here?
I am not a huge fan of stifling government regulations. Having toiled in the securities industry for many years, I can’t tell you how onerous these regulations can be. However, using a loophole called Regulation D, hedge funds have been able to conduct their business virtually uncontrolled by any government regulations at all. This free-for-all fueled much of what we are enduring today.
Reg D allows organizations who are comprised of “sophisticated investors” to conduct their affairs outside of the traditional regulations that were put in place to protect the “little guy.” Unfortunately, this exception allowed the unregulated, hedge fund industry to grow so large that it could not help but whipsaw the entire economy. Oil prices were artificially raised, commodities and currencies were manipulated, and the stock market’s risks were exacerbated beyond reason. New industries were spawned that were more like the Robber Baron days than today’s traditional financial markets.
As we emerge from this turmoil, you can expect to see the hedge fund industry fall under much greater scrutiny than ever before. Because, like it or not, it is often the little guy that pays for their mistakes, not just their investors.
Tuesday, September 16, 2008
Why AIG Scares Me
The demise of Lehman Brothers and Bear Stearns hurts, but the demise of AIG could be devastating to the world’s financial structure.
While AIG provides traditional insurance products, such as life insurance through American General Life, it is active in many non-traditional areas that have far-reaching effects throughout the economy.
AIG has been active in creating profitable niche areas of insurance that would befuddle the normal human brain. It has taken insurance practices that were only undertaken by private insurers like Lloyds of London, and brought them mainstream. One of these areas is what is known as Credit Default Swaps (on mortgage backed securities). In a credit swap, a company would pay AIG to guarantee the income stream of their mortgage portfolio. There are other things to guarantee, but let’s use this for our example.
AIG’s financial strength has allowed them to provide income guarantees effectively and profitably. AIG had the resources to make these guarantees, as well as the credit ratings to make their guarantees matter. This all works well until there are radical changes in the nature of the investments that AIG guaranteed.
Let’s say that a mortgage pool is owned by a bank. The bank has contracted with AIG (hedged) to guarantee the income stream of the mortgage portfolio. If the mortgage pool defaults, AIG has to come up with cash to make up the shortfall. AIG has reserved liquid assets against this risk, so everyone is happy. The bank manager feels secure, because his return is “guaranteed” and his profits have skyrocketed. AIG feels good, because they have earned money insuring a risk they don’t expect to incur.
Let’s continue this hypothetical scenario:
Let’s assume that large pools of these mortgages have defaulted. AIG has been forced to make payments. As the defaults grow, AIG uses more of its reserve. It becomes apparent that the initial reserve was not enough, so AIG scrambles to come up with more liquid assets. At the same time, the financial rating organizations, such as Standard & Poor’s, Moody’s. Fitch and A.M. Best all figure out that AIG has problems. They recognize that AIG has not set aside sufficient assets to cover their shortfall. In addition, it appears that defaults will continue to occur, causing a need for even greater capital. This causes AIG’s financial stability to suffer. So, the rating agencies downgrade the financial ratings of AIG. Big problem for an insurance company.
The new downgrades do many things. They cause AIG to need even more liquid capital, as their long-term profit outlook has soured. If this capital is not available (as it may not be) it could force AIG to become insolvent, and unable to meet its contractual financial obligations. They also have to pull assets away from more profitable activities and make them safer.
The downgrade in AIG's financial rating also causes a similar downgrade for other companies. If AIG’s guarantee is meaningless, other companies must then reflect this on their own balance sheets. Let’s say that I am this bank who has borrowed lots of money to purchase mortgage securities. I feel okay about this, because I have borrowed at 3% and I am earning 6% on my mortgage portfolio. For the sake of simplicity, let’s assume that I pay AIG 1% per year to guarantee my cash flow. I still net 2% on money I have borrowed. I have borrowed a mere $1 billion, but I make $20 million in enhanced profits, on top of my normal banking profits. If my mortgage portfolio stops paying interest, and AIG cannot make up the difference, I now have a worthless security as my collateral for my bank’s loans. My creditors get nervous, so they call in their loans. Now my bank is in trouble. To raise cash, my bank must now call in its business loans or sell assets. Good companies are forced out of business. Stocks get cheaper because of selling pressure. Investors lose money. My own stock plummets. Etcetera, etcetera.
The failure of AIG could cause many strongly capitalized, “conservative” companies to face financial difficulties, even collapse. It could cause many well-run companies to have liquidity crunches, not because of business mistakes they have made, but because of a credit swap negotiated in the Isle of Man, Paris or the Cayman Islands has gone sour.
AIG has insured hundreds of billions, if not more. So, if they collapse, expect this to reverberate through the markets like a California brush fire, with no end in sight except for some Pacific cliffs. Let’s hope that our economy (or Federal Reserve) doesn’t have to jump off.
While AIG provides traditional insurance products, such as life insurance through American General Life, it is active in many non-traditional areas that have far-reaching effects throughout the economy.
AIG has been active in creating profitable niche areas of insurance that would befuddle the normal human brain. It has taken insurance practices that were only undertaken by private insurers like Lloyds of London, and brought them mainstream. One of these areas is what is known as Credit Default Swaps (on mortgage backed securities). In a credit swap, a company would pay AIG to guarantee the income stream of their mortgage portfolio. There are other things to guarantee, but let’s use this for our example.
AIG’s financial strength has allowed them to provide income guarantees effectively and profitably. AIG had the resources to make these guarantees, as well as the credit ratings to make their guarantees matter. This all works well until there are radical changes in the nature of the investments that AIG guaranteed.
Let’s say that a mortgage pool is owned by a bank. The bank has contracted with AIG (hedged) to guarantee the income stream of the mortgage portfolio. If the mortgage pool defaults, AIG has to come up with cash to make up the shortfall. AIG has reserved liquid assets against this risk, so everyone is happy. The bank manager feels secure, because his return is “guaranteed” and his profits have skyrocketed. AIG feels good, because they have earned money insuring a risk they don’t expect to incur.
Let’s continue this hypothetical scenario:
Let’s assume that large pools of these mortgages have defaulted. AIG has been forced to make payments. As the defaults grow, AIG uses more of its reserve. It becomes apparent that the initial reserve was not enough, so AIG scrambles to come up with more liquid assets. At the same time, the financial rating organizations, such as Standard & Poor’s, Moody’s. Fitch and A.M. Best all figure out that AIG has problems. They recognize that AIG has not set aside sufficient assets to cover their shortfall. In addition, it appears that defaults will continue to occur, causing a need for even greater capital. This causes AIG’s financial stability to suffer. So, the rating agencies downgrade the financial ratings of AIG. Big problem for an insurance company.
The new downgrades do many things. They cause AIG to need even more liquid capital, as their long-term profit outlook has soured. If this capital is not available (as it may not be) it could force AIG to become insolvent, and unable to meet its contractual financial obligations. They also have to pull assets away from more profitable activities and make them safer.
The downgrade in AIG's financial rating also causes a similar downgrade for other companies. If AIG’s guarantee is meaningless, other companies must then reflect this on their own balance sheets. Let’s say that I am this bank who has borrowed lots of money to purchase mortgage securities. I feel okay about this, because I have borrowed at 3% and I am earning 6% on my mortgage portfolio. For the sake of simplicity, let’s assume that I pay AIG 1% per year to guarantee my cash flow. I still net 2% on money I have borrowed. I have borrowed a mere $1 billion, but I make $20 million in enhanced profits, on top of my normal banking profits. If my mortgage portfolio stops paying interest, and AIG cannot make up the difference, I now have a worthless security as my collateral for my bank’s loans. My creditors get nervous, so they call in their loans. Now my bank is in trouble. To raise cash, my bank must now call in its business loans or sell assets. Good companies are forced out of business. Stocks get cheaper because of selling pressure. Investors lose money. My own stock plummets. Etcetera, etcetera.
The failure of AIG could cause many strongly capitalized, “conservative” companies to face financial difficulties, even collapse. It could cause many well-run companies to have liquidity crunches, not because of business mistakes they have made, but because of a credit swap negotiated in the Isle of Man, Paris or the Cayman Islands has gone sour.
AIG has insured hundreds of billions, if not more. So, if they collapse, expect this to reverberate through the markets like a California brush fire, with no end in sight except for some Pacific cliffs. Let’s hope that our economy (or Federal Reserve) doesn’t have to jump off.
Is This What A Stock Market Bottom Feels Like?
The world’s largest insurance company is on the ropes. Blue chip investment firms are closing shop. Banks are lying in financial ruin. The world is on the brink of a global depression.
There is bad news everywhere, and not a lot of light in this tunnel. This is beginning to look like a stock market bottom to me.
The stock market is a reflection of the human condition. Humans have lots of great qualities and many flaws. We are a noble and complex creature.
So, too, is the market. The stock market reacts in the same erratic, irrational and nonsensical way that we all do. It goes up when things seem bleak. It falls when all the news is rosy.
I am not saying that the stock market is at its bottom. No one can know for sure until it has already occurred. I do know this. Global market capitalization has fallen by about $15 trillion dollars. Yes. Trillion. Global wealth has fallen by much more, as real estate values have plummeted around the globe.
From what I can discern, there was something like $30 trillion borrowed against $1 trillion in mortgage assets. I have always suspected that the stated values of the mortgage pieces sold into the market, when aggregated, overstated values by about 100%. So, a $15 trillion loss, just about brings us to ground zero. I know, the value of GE stock has little to do with a CDO held by AIG or the Chinese government. But, in a way, it does.
Stock market values became overinflated because earnings became overinflated. Wall street firms, banks and hedge funds were showing paper profits based on theoretical value increases in “now-worthless” securities. They were also showing up on company balance sheets as appreciating assets. We are no longer seeing these earnings. Companies are writing down the value of these securities on their balance sheets. Things are getting back to normal.
A 30% decline in global market capitalization has historically proven to be a good time to buy, rather than a good time to sell. Investors who have been able to hold their breath, close their eyes and jump, have historically been rewarded for such intrepidness.
I do not know if the stock market has hit bottom. Maybe we are heading toward a global depression that will take a decade to fix. All I can say is, in my 30+ years of following the stock market, this feels a heck of a lot more like a buying opportunity than a selling one.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
There is bad news everywhere, and not a lot of light in this tunnel. This is beginning to look like a stock market bottom to me.
The stock market is a reflection of the human condition. Humans have lots of great qualities and many flaws. We are a noble and complex creature.
So, too, is the market. The stock market reacts in the same erratic, irrational and nonsensical way that we all do. It goes up when things seem bleak. It falls when all the news is rosy.
I am not saying that the stock market is at its bottom. No one can know for sure until it has already occurred. I do know this. Global market capitalization has fallen by about $15 trillion dollars. Yes. Trillion. Global wealth has fallen by much more, as real estate values have plummeted around the globe.
From what I can discern, there was something like $30 trillion borrowed against $1 trillion in mortgage assets. I have always suspected that the stated values of the mortgage pieces sold into the market, when aggregated, overstated values by about 100%. So, a $15 trillion loss, just about brings us to ground zero. I know, the value of GE stock has little to do with a CDO held by AIG or the Chinese government. But, in a way, it does.
Stock market values became overinflated because earnings became overinflated. Wall street firms, banks and hedge funds were showing paper profits based on theoretical value increases in “now-worthless” securities. They were also showing up on company balance sheets as appreciating assets. We are no longer seeing these earnings. Companies are writing down the value of these securities on their balance sheets. Things are getting back to normal.
A 30% decline in global market capitalization has historically proven to be a good time to buy, rather than a good time to sell. Investors who have been able to hold their breath, close their eyes and jump, have historically been rewarded for such intrepidness.
I do not know if the stock market has hit bottom. Maybe we are heading toward a global depression that will take a decade to fix. All I can say is, in my 30+ years of following the stock market, this feels a heck of a lot more like a buying opportunity than a selling one.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Monday, September 15, 2008
The Good Wall Street
I know that I have been going a little hard on Wall Street lately. With trillions of dollars of wealth being lost, it is easy to lose sight of the important function that Wall Street, and the investment community provide. Without our investment community, we would not be a strong and prosperous nation. It is not Wall Street’s essential function that I criticize; it is the abuse of trust that has occurred in some parts of “The Street,” by a relatively small (but powerful) number of people.
I have been a member of the investment and brokerage community for more than two decades. I have started two broker/dealer (brokerage) firms. I have sat at the feet of some of the masters. I have raised capital and I have worked with investors. So, when I criticize, I am not criticizing everyone, because there are many good advisors out there. I criticize those who put their own good ahead of their clients’ good.
There are many of us who were trained to “serve first,” putting the needs of our clients ahead those of ourselves. There is a great body of very good people who adhere to this philosophy. What bothers me is when a few tarnish the reputation of our entire profession.
Without the investment/financial community, there would be no ready access by business to essential capital. There would be no liquidity. Whether it is a firm on Wall Street, your insurance company, or you local bank, each of them plays an integral role in keeping America strong.
Investment banks often put their own capital on the line. They do this to help others, as well as earn profits. It often takes enormous risk to bring about innovation and financial growth. Someone had to put up the cash to build the garage businesses of Apple and Google. Someone had to look beyond the “kids” to see their ideas. They had to risk their capital and reputation on complex ideas that had every opportunity to fail. And for every Google, there are many companies you will never hear of.
I do not begrudge enormous profits to Wall Street. They deserved them for themselves and their clients, because it is their risk capital that fuels our nation’s financial engine. I just want them to do it honestly and ethically.
What bothers me is when smart people do dumb things, in the name of short-term profits. When people stop producing in favor of churning for profit, I get angry. This makes life difficult for all of us. It also stops future capital from being invested, which lowers the standard of living for everyone.
As a result of the current financial mess, there are (literally) trillions of dollars that are no longer available to invest. This will slow future economic growth. Our country has increased its national debt by more than 50%. This will drive up long-term interest rates. Finally, there will be a spate of new government regulations that will make it harder for honest, hard-working investment advisors and brokers to do business. We all lose.
The people who do things right, will have to pay for the sins of those who don’t. Yet, many of the people that brought us this ugly mess, will walk away with fat wallets and reputations intact.
Do not lose faith in the system. It is the best one we have. And be kind to your investment advisor, because the vast majority of them had no way of knowing that this was coming. Most of them do really want to see you prosper.
Be careful how you invest your money. Analyze carefully. Remember that long-term return is earned by taking calculated risks and staying the course through the ups and downs over time. Even well-conceived long-term investments can show substantial losses in the short run. You should take great care in understanding this, and do not panic when volatility occurs. Higher returns can only come with greater risk. Uneducated or inappropriate risks can lead to the erosion of capital. That is what happened to many people, even the most sophisticated, during this latest “crisis.” A long line of people decided to put their own benefits ahead of others. Unfortunately, we all must pay the price.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
I have been a member of the investment and brokerage community for more than two decades. I have started two broker/dealer (brokerage) firms. I have sat at the feet of some of the masters. I have raised capital and I have worked with investors. So, when I criticize, I am not criticizing everyone, because there are many good advisors out there. I criticize those who put their own good ahead of their clients’ good.
There are many of us who were trained to “serve first,” putting the needs of our clients ahead those of ourselves. There is a great body of very good people who adhere to this philosophy. What bothers me is when a few tarnish the reputation of our entire profession.
Without the investment/financial community, there would be no ready access by business to essential capital. There would be no liquidity. Whether it is a firm on Wall Street, your insurance company, or you local bank, each of them plays an integral role in keeping America strong.
Investment banks often put their own capital on the line. They do this to help others, as well as earn profits. It often takes enormous risk to bring about innovation and financial growth. Someone had to put up the cash to build the garage businesses of Apple and Google. Someone had to look beyond the “kids” to see their ideas. They had to risk their capital and reputation on complex ideas that had every opportunity to fail. And for every Google, there are many companies you will never hear of.
I do not begrudge enormous profits to Wall Street. They deserved them for themselves and their clients, because it is their risk capital that fuels our nation’s financial engine. I just want them to do it honestly and ethically.
What bothers me is when smart people do dumb things, in the name of short-term profits. When people stop producing in favor of churning for profit, I get angry. This makes life difficult for all of us. It also stops future capital from being invested, which lowers the standard of living for everyone.
As a result of the current financial mess, there are (literally) trillions of dollars that are no longer available to invest. This will slow future economic growth. Our country has increased its national debt by more than 50%. This will drive up long-term interest rates. Finally, there will be a spate of new government regulations that will make it harder for honest, hard-working investment advisors and brokers to do business. We all lose.
The people who do things right, will have to pay for the sins of those who don’t. Yet, many of the people that brought us this ugly mess, will walk away with fat wallets and reputations intact.
Do not lose faith in the system. It is the best one we have. And be kind to your investment advisor, because the vast majority of them had no way of knowing that this was coming. Most of them do really want to see you prosper.
Be careful how you invest your money. Analyze carefully. Remember that long-term return is earned by taking calculated risks and staying the course through the ups and downs over time. Even well-conceived long-term investments can show substantial losses in the short run. You should take great care in understanding this, and do not panic when volatility occurs. Higher returns can only come with greater risk. Uneducated or inappropriate risks can lead to the erosion of capital. That is what happened to many people, even the most sophisticated, during this latest “crisis.” A long line of people decided to put their own benefits ahead of others. Unfortunately, we all must pay the price.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Financial Roulette
Yesterday, Lehman Brothers declared bankruptcy. If you haven’t been in the securities business, it will be hard for you to understand the significance of this action.
Lehman, along with just a few other investment banking firms, has ruled Wall Street for decades. Lehman has always been seen as a blue blood, filled with more intellectual capital and refinement than many of its “boorish” counterparts. They have been able to snub their nose at lesser firms, and walk along Wall Street with its head held high. No more.
The Federal Reserve refused to bail out Lehman, as it has Bear Stearns, Fannie Mae and Freddie Mac. I am sure this sent shivers through the investment community. AIG and Merrill Lynch stood next in line with their hands out. Sorry fellas. This is bleak.
When Merrill realized that the Federal pockets were empty, they quickly sought a new partner, Bank of America, selling for a total price that would have been laughable just one year ago. I’m not sure what will happen to AIG. I was trying to ferret out their financials during the past couple of weeks, and I came to the conclusion that they have so much hidden that it is impossible to predict what will happen. But it would not surprise me if the world’s largest insurance company is the next to fall.
Bank of America has become the quintessential “value investor,” picking up gems like Countrywide and Merrill Lynch at the bargain table. It may well emerge as a global financial behemoth before this all shakes out, provided they have not bitten off more than even they can chew.
Getting your hands around the “dark matter” of mortgage backed securities is like trying to catch fog. You know it is there, but, damn, it is hard to hold. For the country’s sake, I hope BOA thrives. If they don’t, we are in for some very rough sledding.
As of this date, I see a world sitting on the brink of global collapse. No one really knows how close the financial dominoes lie. Will the $150 billion that Lehman owes cause other institutions to collapse? Will the $1 trillion in treasuries that they own be dumped upon a market that no longer wants them?
The U.S. government has emptied the bank of all of its cash. It has taken on trillions of dollars in new liabilities, and it can’t produce more without seriously undermining world faith in our nation’s financial strength. We are perilously close to that point.
So, who is going to pay for all this? You are. Look at your shrinking 401(k) balance and give thanks to Wall Street greed. Big homes were built in Westport and Greenwich on your dime. Lavish parties were thrown at your expense.
Don’t get me wrong. We need a strong Wall Street. But there has always been a sense of entitlement in the financial district, the feeling that the spoils of success were due, even if earned by slight of hand. You will never convince me that no one knew what was really going on for the past half decade or so. Why shoot the golden goose? Just sock away a personal nest full of golden eggs and let the peons pay the bill. The days of living like the 1920s have got to stop. Wall Street should not be the home of Robber Barons. Hopefully, this weekend’s Fed actions will bring this toga party to a close for good.
Greed on Wall Street is not necessarily a bad thing. Greed begets motivation, which gets things done. Without big financial incentives, no one will take the big financial risks that are to create wealth for us all.
But the days of taking unconscionable risks with the little guy’s money do have to stop. Maybe today is the day.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Lehman, along with just a few other investment banking firms, has ruled Wall Street for decades. Lehman has always been seen as a blue blood, filled with more intellectual capital and refinement than many of its “boorish” counterparts. They have been able to snub their nose at lesser firms, and walk along Wall Street with its head held high. No more.
The Federal Reserve refused to bail out Lehman, as it has Bear Stearns, Fannie Mae and Freddie Mac. I am sure this sent shivers through the investment community. AIG and Merrill Lynch stood next in line with their hands out. Sorry fellas. This is bleak.
When Merrill realized that the Federal pockets were empty, they quickly sought a new partner, Bank of America, selling for a total price that would have been laughable just one year ago. I’m not sure what will happen to AIG. I was trying to ferret out their financials during the past couple of weeks, and I came to the conclusion that they have so much hidden that it is impossible to predict what will happen. But it would not surprise me if the world’s largest insurance company is the next to fall.
Bank of America has become the quintessential “value investor,” picking up gems like Countrywide and Merrill Lynch at the bargain table. It may well emerge as a global financial behemoth before this all shakes out, provided they have not bitten off more than even they can chew.
Getting your hands around the “dark matter” of mortgage backed securities is like trying to catch fog. You know it is there, but, damn, it is hard to hold. For the country’s sake, I hope BOA thrives. If they don’t, we are in for some very rough sledding.
As of this date, I see a world sitting on the brink of global collapse. No one really knows how close the financial dominoes lie. Will the $150 billion that Lehman owes cause other institutions to collapse? Will the $1 trillion in treasuries that they own be dumped upon a market that no longer wants them?
The U.S. government has emptied the bank of all of its cash. It has taken on trillions of dollars in new liabilities, and it can’t produce more without seriously undermining world faith in our nation’s financial strength. We are perilously close to that point.
So, who is going to pay for all this? You are. Look at your shrinking 401(k) balance and give thanks to Wall Street greed. Big homes were built in Westport and Greenwich on your dime. Lavish parties were thrown at your expense.
Don’t get me wrong. We need a strong Wall Street. But there has always been a sense of entitlement in the financial district, the feeling that the spoils of success were due, even if earned by slight of hand. You will never convince me that no one knew what was really going on for the past half decade or so. Why shoot the golden goose? Just sock away a personal nest full of golden eggs and let the peons pay the bill. The days of living like the 1920s have got to stop. Wall Street should not be the home of Robber Barons. Hopefully, this weekend’s Fed actions will bring this toga party to a close for good.
Greed on Wall Street is not necessarily a bad thing. Greed begets motivation, which gets things done. Without big financial incentives, no one will take the big financial risks that are to create wealth for us all.
But the days of taking unconscionable risks with the little guy’s money do have to stop. Maybe today is the day.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Our Morality Is Shaped By Politics
Every four years we get to witness, first hand, how politics shapes personal morality. Americans from both political parties take each candidate’s words and actions and shape them into the proper mold as friend or foe, good or bad, right or wrong. As this year’s political wind rages stronger than hurricane Ike, I feel compelled to comment.
I receive comments, from normally sane and reasonable readers, that are so emotionally charged in one direction as to defy sensibility This reflects our society as a whole. We tend to choose one political side and deify that candidate, while we demonize the other.
I have played devil’s advocate with some of you, trying to see how deep your feelings sit, whether they ride close to the surface, or whether they are so deeply rooted as to be virtually unchangeable. What I find is this, no matter how great the evidence, it usually takes something akin to the Second Coming to change our deeply held political and social beliefs. My research leads me to believe that one third of us lean to the left, one third to the right, while the other third sits in the middle, blowing with the wind. This has been pretty much true throughout political history. One third rules. One of these days I will elaborate on this.
McCain had his fingers deep into the savings and loan debacle of the 1980s. His campaign finance reform exempted Indian Casinos, his greatest source of campaign donors. His supporters brush this off like there was no moral or political failure. His detractors choose this as the only litmus test of his character.
Obama profited immensely from a shady real estate deal with Tony Rezko. His political career was turbocharged by Bill Ayers, a proud former terrorist. His minister of twenty years spouted hate-filled, anti-white rhetoric from the pulpit to raucous cheers of “Amen.” Obama’s supporters see this as politics as usual. His detractors see this as a glimpse into a sinister inner man.
Joe Biden is a plagiarist, whose son and brother have been accused of fraud. His champions shrug this off, while his challengers use this to show the hypocrisy they see in the national media, particularly with their attacks of Sarah Palin.
The alleged misdeeds of the Clintons are legendary. Accusations of fraud, murder, viciousness and self-dealing pale to those of any third world dictator. Her supporters view this as right-wing rhetoric, while her detractors see it as evidence that she should be in jail.
Many of Sarah Palin’s detractors accuse her of having a Down Syndrome child just to prove a point. They see it as child abuse. Her daughter’s pregnancy is seen as a moral failure. Her supporters point to her strong religious beliefs and her impressive (albeit short) political track record as signs of her strength as a candidate.
No amount of evidence can shake the deep seated convictions of political ideologues. It is viewed as “circumstantial,” even when it comes from court records or first hand accounts. It is viewed as meaningless, when compared to the much-more-important issues in the election.
What divides us?
God: What role should God play in politics?
· Conservatives tend to want God as part of the political equation. They want God influencing schools and the government. They want religious morality as part of the governing process. They feel that we cannot separate ourselves from the most important issues of religious morality.
· Liberals tend to want to keep God out of government. They don’t want religion taught in school, or the Ten Commandments in our courthouses.
Abortion: Should abortion be legal or not?
· Religious conservatives believe that life is sacred. An abortion to them is a choice to end a life, not far removed from murder.
· Many liberals (particularly feminists) see abortion almost like a Sacrament, or Inalienable Right. No one should be able to legislate a woman’s right to choose what to do with her body, or any childe within it.
Role of Government: Should the government be large or small. Should the government decide where to spend our money, or should it be left up to individual choice?
· Conservatives tend to want to keep their money and spend it how they see fit.
· Liberals want to tax (particularly the rich) and spend it as they see fit.
Taxes: Should we have high taxes or low taxes? (See role of government.)
· Liberals tend to want higher taxes and more government control over where the money is spent.
· Conservatives want less taxes and more personal choice.
International Policy: What role should we play in the world?
· Liberals tend to abhor war and anything to do with it. They want to spend as little as possible (without sacrificing personal safety) and spend the money here at home. Liberals would rather get along with their enemies than fight with them.
· Conservatives see the world as a dangerous place. They feel that there are enemies that we can’t be friends with, and that we should do all we can to defend against them, even if it means going to war.
These are the central issues that often frame the political beliefs of the one third on each side of the political aisle. Whichever candidate aligns most closely with our feelings on these central issues, we will back with blind faith. We will ignore any personal weaknesses or failures. We sweep away any indiscretions or abuse of the law. Our candidate can do no wrong, and we do all we can to destroy the other.
Politics is blood sport. No, politics is a battle to the death and it takes no prisoners. Something is terribly wrong here. Those that seek political office are often not the best our nation can produce. I am not sure if they simply represent America, with all its flaws, or if they represent some lesser class of human, drawn to politics like a neurotic to Hollywood. (I could have been drawn to Hollywood, to make films of my books. So, don’t take this as a knock on character, just an observation.) Are we electing the best we can produce, or are we elevating the most flawed as our leaders?
There is a German word, called schadenfreude, the guilty pleasure we feel at someone else’s misery. Is this similar to what we feel about politicians? Are we happy to elect people that are more flawed than we? And, do we lower our own moral standards to support these candidates? Sadly, this may just be the case.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
I receive comments, from normally sane and reasonable readers, that are so emotionally charged in one direction as to defy sensibility This reflects our society as a whole. We tend to choose one political side and deify that candidate, while we demonize the other.
I have played devil’s advocate with some of you, trying to see how deep your feelings sit, whether they ride close to the surface, or whether they are so deeply rooted as to be virtually unchangeable. What I find is this, no matter how great the evidence, it usually takes something akin to the Second Coming to change our deeply held political and social beliefs. My research leads me to believe that one third of us lean to the left, one third to the right, while the other third sits in the middle, blowing with the wind. This has been pretty much true throughout political history. One third rules. One of these days I will elaborate on this.
McCain had his fingers deep into the savings and loan debacle of the 1980s. His campaign finance reform exempted Indian Casinos, his greatest source of campaign donors. His supporters brush this off like there was no moral or political failure. His detractors choose this as the only litmus test of his character.
Obama profited immensely from a shady real estate deal with Tony Rezko. His political career was turbocharged by Bill Ayers, a proud former terrorist. His minister of twenty years spouted hate-filled, anti-white rhetoric from the pulpit to raucous cheers of “Amen.” Obama’s supporters see this as politics as usual. His detractors see this as a glimpse into a sinister inner man.
Joe Biden is a plagiarist, whose son and brother have been accused of fraud. His champions shrug this off, while his challengers use this to show the hypocrisy they see in the national media, particularly with their attacks of Sarah Palin.
The alleged misdeeds of the Clintons are legendary. Accusations of fraud, murder, viciousness and self-dealing pale to those of any third world dictator. Her supporters view this as right-wing rhetoric, while her detractors see it as evidence that she should be in jail.
Many of Sarah Palin’s detractors accuse her of having a Down Syndrome child just to prove a point. They see it as child abuse. Her daughter’s pregnancy is seen as a moral failure. Her supporters point to her strong religious beliefs and her impressive (albeit short) political track record as signs of her strength as a candidate.
No amount of evidence can shake the deep seated convictions of political ideologues. It is viewed as “circumstantial,” even when it comes from court records or first hand accounts. It is viewed as meaningless, when compared to the much-more-important issues in the election.
What divides us?
God: What role should God play in politics?
· Conservatives tend to want God as part of the political equation. They want God influencing schools and the government. They want religious morality as part of the governing process. They feel that we cannot separate ourselves from the most important issues of religious morality.
· Liberals tend to want to keep God out of government. They don’t want religion taught in school, or the Ten Commandments in our courthouses.
Abortion: Should abortion be legal or not?
· Religious conservatives believe that life is sacred. An abortion to them is a choice to end a life, not far removed from murder.
· Many liberals (particularly feminists) see abortion almost like a Sacrament, or Inalienable Right. No one should be able to legislate a woman’s right to choose what to do with her body, or any childe within it.
Role of Government: Should the government be large or small. Should the government decide where to spend our money, or should it be left up to individual choice?
· Conservatives tend to want to keep their money and spend it how they see fit.
· Liberals want to tax (particularly the rich) and spend it as they see fit.
Taxes: Should we have high taxes or low taxes? (See role of government.)
· Liberals tend to want higher taxes and more government control over where the money is spent.
· Conservatives want less taxes and more personal choice.
International Policy: What role should we play in the world?
· Liberals tend to abhor war and anything to do with it. They want to spend as little as possible (without sacrificing personal safety) and spend the money here at home. Liberals would rather get along with their enemies than fight with them.
· Conservatives see the world as a dangerous place. They feel that there are enemies that we can’t be friends with, and that we should do all we can to defend against them, even if it means going to war.
These are the central issues that often frame the political beliefs of the one third on each side of the political aisle. Whichever candidate aligns most closely with our feelings on these central issues, we will back with blind faith. We will ignore any personal weaknesses or failures. We sweep away any indiscretions or abuse of the law. Our candidate can do no wrong, and we do all we can to destroy the other.
Politics is blood sport. No, politics is a battle to the death and it takes no prisoners. Something is terribly wrong here. Those that seek political office are often not the best our nation can produce. I am not sure if they simply represent America, with all its flaws, or if they represent some lesser class of human, drawn to politics like a neurotic to Hollywood. (I could have been drawn to Hollywood, to make films of my books. So, don’t take this as a knock on character, just an observation.) Are we electing the best we can produce, or are we elevating the most flawed as our leaders?
There is a German word, called schadenfreude, the guilty pleasure we feel at someone else’s misery. Is this similar to what we feel about politicians? Are we happy to elect people that are more flawed than we? And, do we lower our own moral standards to support these candidates? Sadly, this may just be the case.
www.lumbert.com
www.shaksperbooks.com
www.jaylumbert.com
Friday, September 12, 2008
Financial Misfortune - Your Call To Opportunity?
Last year at this time I voiced my grave concern for the U.S. economy. At the time, the stock market was climbing to all time highs. Optimism ruled Wall Street and “experts” everywhere touted the great global economy. Financial crooks and buffoons were making off with hundreds of billions, while our most sophisticated financial institutions were loading up on debt to purchase shady mortgage backed securities.
I took some heat when I issued my warning, as Wall Street marched upward toward the cliff like a pack of lemmings. Today I stand at the edge of that cliff, looking down at the debris scattered at the bottom of that cliff. Man, there’s a lot of detritus down there.
What a difference a year can make. Don’t say you weren’t warned. The mortgage derivative market has been revealed for what it was—a global shell game that was based upon slight of hand. Now, the American Taxpayer must pay the price. And it is steep. I was predicting $1 trillion. Now it looks like that sum might be double that amount.
To put this into perspective, this has added more than 20% to our national debt in a single year. Granted, much of this has been financed by federal slight of hand. Although it might not show up on the books, it will rear its ugly head as inflation. The simple fact is: when you lose money, it’s gone. When you print it, things go up in price. Inflation is coming.
When I was a kid, there was a TV commercial that said, “You can’t fool mother nature.” Ain’t that the truth. Our economy is Mother Nature. Let me explain.
The stock market is little more than the expression of the human condition. As humans, we strive to fulfill our needs. Maslow did a good job in explaining this, and I will give a quick summary here.
1. Our first and primary need is existential. We need to survive. That means we need such things as food, clothes and sleep. If these needs are not met, we die.
2. If we live, our next need is for safety. We feel the desire for protection from the risks to life. We seek to avoid war, sickness, accidents, environmental catastrophes. That sort of thing.
3. Once we feel safe, we strive for something else, socialization. We want to be with like-minded others. We want to be loved and accepted by others.
4. When we are part of a culture and family, we begin to search for higher things, like confidence, recognition and self-esteem. We seek to be seen by others as worthy of something more than basic acceptance or familial love.
5. Finally, once we earn the trophies and have that house and the car, once we have a family to care for and love, we seek to achieve the ultimate human achievement, self-realization: We look for inner peace, happiness and harmony with others and our world.
Here is how this all affects the stock market. We always seek to make our lives better. This leads us to search for new ways to be more comfortable, to make more money, to have more respect from our peers. This leads to
PRODUCTIVITY. Traditionally, our productivity growth ranges between 1% and 4% per year. Things like fire, electricity, the internal combustion engine, the assembly line, computers, the Internet and medicines are all examples of human achievements that have increased productivity and makes our economy grow. For the sake of my example, let’s assume average productivity growth of 2%. This means that the companies that make up our national economy on average would produce about 2% more goods and services each year over and above inflation.
Next, we have
RETURN ON INVESTMENT. Traditionally, the stock market trades as a Price/Earnings ratio of something between 14 and 20. (I know, you are saying, “Jay, what the heck does that mean?) If a company is earning $1,000,000 after taxes, a stock market P/E of 20 would mean that the company “value,” as it relates to the stock market would be $20 million. If there are 1 million shares outstanding, we would have a share price of $20.
i. With an average P/E for the market of about 18, the underlying companies would be earning a 5.5 % after tax return on our investment.
Finally, we have inflation
Inflation typically ranges from zero to 8%. There have been times when inflation has been negative. There have been times when it has been much higher than 8%. For the past century, the long-term inflation rate is about 3 %. It has been slightly higher than that since World War II.
THE STOCK MARKET
If we add up productivity growth, plus current earnings and inflation, we come up with a long-term return of the stock market of 10.5%. It is not quite as simple as this, but I hope it illustrates the point, that until human nature or the human condition changes radically, the stock market will continue to act as it always has.
This is why I say that the stock market is a reflection of the human condition.
While we have many ups and downs in the stock market, over long periods of time, it has always gone up a rate in the neighborhood of 10%. There have been decades when the stock market returns have been negative. There have been decades when returns have been extraordinary. But the returns always seem to gravitate to a mean return in the neighborhood of 10%. Positive stock market returns are never guaranteed. But as our time frame lengthens, particularly when it is more than 20 years, the chances get better and better that human nature wins out over short-term blips, like war, hyper-inflation, mortgage crises and Internet busts.
The after-market for mortgages (Collateralized Debt Obligations) has grown so large and complex that it has baffled the “experts” and blown away the computer models that predicted the safety of these investments.
We are a long way before computer neural networks can fully understand the range of human emotions. We, as humans cannot, and our computer models are only as good as the programmers.
This said: There is an old investment adage that says, “Buy low and sell high.” With most global markets down well over 20%, and the U.S. market faring little better, it is beginning to look more like a time to buy than a time to sell. Does this mean that there is little risk? Heck no. There is still a lot of risk in the stock market. There is still a lot of risk in the global economy.
Studies show that a good deal of the gain after a bear market occurs in a very brief period of time. We are talking weeks to a few months. For those who have a long-term perspective to their investments, it may be a time to begin to accumulate stocks again.
Do I think the stock market has seen its low point? No, I don’t. I still think that we haven’t seen the worst of the news. It is getting bad. This week, Lehman Brothers cried “No Más.” To have a blue chip investment banking firm (the fourth largest) go under (on the heels of Bear Stearns’s even bigger collapse) is monumental.
This is “blood on the streets,” guys. When we look back to these days twenty years from now, we just might be saying “What a great time to buy that was.”
Please do not take this as an investment recommendation. Talk to your fianancial advisor before making any investment decisions, particularly those that involve the stock market.
http://www.lumbert.com/
http://www.shaksperbooks.com/
http://www.jaylumbert.com/
I took some heat when I issued my warning, as Wall Street marched upward toward the cliff like a pack of lemmings. Today I stand at the edge of that cliff, looking down at the debris scattered at the bottom of that cliff. Man, there’s a lot of detritus down there.
What a difference a year can make. Don’t say you weren’t warned. The mortgage derivative market has been revealed for what it was—a global shell game that was based upon slight of hand. Now, the American Taxpayer must pay the price. And it is steep. I was predicting $1 trillion. Now it looks like that sum might be double that amount.
To put this into perspective, this has added more than 20% to our national debt in a single year. Granted, much of this has been financed by federal slight of hand. Although it might not show up on the books, it will rear its ugly head as inflation. The simple fact is: when you lose money, it’s gone. When you print it, things go up in price. Inflation is coming.
When I was a kid, there was a TV commercial that said, “You can’t fool mother nature.” Ain’t that the truth. Our economy is Mother Nature. Let me explain.
The stock market is little more than the expression of the human condition. As humans, we strive to fulfill our needs. Maslow did a good job in explaining this, and I will give a quick summary here.
1. Our first and primary need is existential. We need to survive. That means we need such things as food, clothes and sleep. If these needs are not met, we die.
2. If we live, our next need is for safety. We feel the desire for protection from the risks to life. We seek to avoid war, sickness, accidents, environmental catastrophes. That sort of thing.
3. Once we feel safe, we strive for something else, socialization. We want to be with like-minded others. We want to be loved and accepted by others.
4. When we are part of a culture and family, we begin to search for higher things, like confidence, recognition and self-esteem. We seek to be seen by others as worthy of something more than basic acceptance or familial love.
5. Finally, once we earn the trophies and have that house and the car, once we have a family to care for and love, we seek to achieve the ultimate human achievement, self-realization: We look for inner peace, happiness and harmony with others and our world.
Here is how this all affects the stock market. We always seek to make our lives better. This leads us to search for new ways to be more comfortable, to make more money, to have more respect from our peers. This leads to
PRODUCTIVITY. Traditionally, our productivity growth ranges between 1% and 4% per year. Things like fire, electricity, the internal combustion engine, the assembly line, computers, the Internet and medicines are all examples of human achievements that have increased productivity and makes our economy grow. For the sake of my example, let’s assume average productivity growth of 2%. This means that the companies that make up our national economy on average would produce about 2% more goods and services each year over and above inflation.
Next, we have
RETURN ON INVESTMENT. Traditionally, the stock market trades as a Price/Earnings ratio of something between 14 and 20. (I know, you are saying, “Jay, what the heck does that mean?) If a company is earning $1,000,000 after taxes, a stock market P/E of 20 would mean that the company “value,” as it relates to the stock market would be $20 million. If there are 1 million shares outstanding, we would have a share price of $20.
i. With an average P/E for the market of about 18, the underlying companies would be earning a 5.5 % after tax return on our investment.
Finally, we have inflation
Inflation typically ranges from zero to 8%. There have been times when inflation has been negative. There have been times when it has been much higher than 8%. For the past century, the long-term inflation rate is about 3 %. It has been slightly higher than that since World War II.
THE STOCK MARKET
If we add up productivity growth, plus current earnings and inflation, we come up with a long-term return of the stock market of 10.5%. It is not quite as simple as this, but I hope it illustrates the point, that until human nature or the human condition changes radically, the stock market will continue to act as it always has.
This is why I say that the stock market is a reflection of the human condition.
While we have many ups and downs in the stock market, over long periods of time, it has always gone up a rate in the neighborhood of 10%. There have been decades when the stock market returns have been negative. There have been decades when returns have been extraordinary. But the returns always seem to gravitate to a mean return in the neighborhood of 10%. Positive stock market returns are never guaranteed. But as our time frame lengthens, particularly when it is more than 20 years, the chances get better and better that human nature wins out over short-term blips, like war, hyper-inflation, mortgage crises and Internet busts.
The after-market for mortgages (Collateralized Debt Obligations) has grown so large and complex that it has baffled the “experts” and blown away the computer models that predicted the safety of these investments.
We are a long way before computer neural networks can fully understand the range of human emotions. We, as humans cannot, and our computer models are only as good as the programmers.
This said: There is an old investment adage that says, “Buy low and sell high.” With most global markets down well over 20%, and the U.S. market faring little better, it is beginning to look more like a time to buy than a time to sell. Does this mean that there is little risk? Heck no. There is still a lot of risk in the stock market. There is still a lot of risk in the global economy.
Studies show that a good deal of the gain after a bear market occurs in a very brief period of time. We are talking weeks to a few months. For those who have a long-term perspective to their investments, it may be a time to begin to accumulate stocks again.
Do I think the stock market has seen its low point? No, I don’t. I still think that we haven’t seen the worst of the news. It is getting bad. This week, Lehman Brothers cried “No Más.” To have a blue chip investment banking firm (the fourth largest) go under (on the heels of Bear Stearns’s even bigger collapse) is monumental.
This is “blood on the streets,” guys. When we look back to these days twenty years from now, we just might be saying “What a great time to buy that was.”
Please do not take this as an investment recommendation. Talk to your fianancial advisor before making any investment decisions, particularly those that involve the stock market.
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