The Dow of Poo

Of all the opiate-like recovery indicators, it’s the Dow Jones Industrial Average that offers the greatest high when injected into the American psyche and, in this case, keeps the bubble inflated.

 

Tao of PoohPart III of The Season of Our Disconnect

Benjamin Graham and David Dodd published a book titled Security Analysis in 1934 that would become a staple financial resource for the investment industry. In the foreword of the sixth edition the great Warren Buffet himself described their book as a “roadmap for investing that I have now been following for 57 years.” With the stock market crash of 1929—a result of the excesses during the preceding decade—fully in the authors’ rearview mirror, they described the collapse in stark, honest light:

“The relaxation of investment bankers’ standards in the late 1920s, and their use of ingenious means to enlarge their compensation, had unwholesome repercussions in the field of corporate management. But it may not be denied that devious and questionable means were frequently employed to secure these large bonuses to the management without full disclosure of their extent to the stockholders.”

The sound investment philosophy behind Security Analysis followed assiduously by the old Oracle of Omaha and tens of thousands of investors who came before him was established as a reaction to the corrupt practices of the Roaring Twenties. Here we are again, lo these many decades later, none the wiser. Taxpayers have been picked up by the ankles and shaken furiously for any remaining change, having been duped by the same Wall Street con artists who employed “devious and questionable means” as described above. Only this time, less than a century later, the bankers weren’t doing swan dives out their windows because they did learn one invaluable lesson from the past: If you’re going to bilk the system, make sure when it all goes bad that you control the release valve on the money flow by installing bankers inside the tank.

While most of America didn’t know what was going on behind the scenes of the recent financial crisis, people like Buffet sure did. Though no longer the wealthiest person in the world (he’s the third), Buffet has maintained his reputation as the preeminent investor on the planet for quite some time in a folksy and unassuming way. He’s the Wilford Brimley of investing, giving us a wink and telling us to eat our oatmeal and buy IBM. But his $5 billion bailout (what else can you call it?) of Goldman Sucks in 2008 shows that the old codger knows a good bet when he sees one, even if the company is rolling with loaded dice. (He got his money back, with a handsome interest payment, and retained warrants on $5 billion more of Goldman stock at what looks to be a favorable strike price.) From a bird’s-eye view, here was the con in a nutshell: Goldman CEO Lloyd Blankfein and company fleece the government for gobs of free money during the bailout—with people like Buffet backstopping their liquidity—to buy up the shitty investment packages they created, sold to their investors, and then bet against themselves.

That part is history. The ensuing game of smoke and mirrors—to restore sanity and transparency into the shit show they created—was to get the government to pony up billions more for their coffers at no cost (and no risk) so they could “invest” this money back into the economy.

Only it never went back into the real economy, instead weaving its way through the banking backchannels where free money flowed to investment banks, who gave it to hedge funds, who invested in government-backed securities, mega-corporations and, yes, even the same kooky “off-balance sheet” investments like swaps and derivatives being traded on offshore exchanges none of us can track. If you failed to spot the point where it actually came back to the taxpayers or funneled through the economy, you’re not crazy because it never happened.

Buffet may have built the most successful investment enterprise in history with Berkshire Hathaway by following the sound advice of people like Graham and Dodd, but it probably didn’t hurt to know that out of all the players in the multiple-bailout fiascos beginning in 2008, Goldman Sucks would wind up on top since nearly everyone involved in engineering the bailouts were former Goldman Suckers or beholden to them. Now we’re stuck in a bizarre carnival mirror economy with high unemployment, low consumer confidence, dwindling savings, and a global debt crisis while we’re being told at the same time the country is in a recovery, Wall Street firms and major corporations are posting incredible profits and the Dow Jones Industrial Average is trading above 12,000. Quite the disconnect, indeed.

It’s called a bubble, and it’s the last one left.

When I asked my friend Peter Klein, a financial advisor on Long Island, how he would characterize our current situation, he referred to it as “the stimulus bubble.” Now the question isn’t whether the bubble will pop, but when. And it’s people like Lloyd Blankfein that are holding the pin. But like every bubble, the average person never fully realizes when he or she is floating inside of it, particularly when receiving mixed messages like the ones above. But of all the opiate-like recovery indicators, it’s the Dow Jones Industrial Average that offers the greatest high when injected into the American psyche and, in this case, keeps the bubble inflated. As average citizens we tend to look at the Dow as the answer to the eternal Ed Koch question: “How am I doing?” Every top-of-the-hour market report on radio and television begins with a Wall Street update tethered to the performance of this antiquated measure of economic health.

For his part, Peter takes little comfort in the Dow’s astounding recovery from its low of around 6,600 in 2009, preferring to monitor indices such as the S&P 500 or the Russell 2000, which have a wider breadth and reach. The Dow, after all, is only comprised of 30 companies with familiar names like Coca-Cola, WalMart and General Electric, which give the illusion that these are somehow the type of corporations our economy is based on. It’s not that these are bad companies or even that the Dow is a lousy index, it’s just that they’re no longer relevant in today’s economy as an indicator of performance. Furthermore, it doesn’t claim to be. The problem is that the Dow is financial pabulum being fed to us by the media and Wall Street alike.

Because the Dow has traditionally been the criterion by which the average person gauges America’s overall economic health, there is a tendency to believe in its healing power. And to an extent it does make a little sense. After all, stocks don’t invest in themselves, right? The money has to come from somewhere. So, if the trading volume is still high, and our major corporations are swimming in investment cash, the logical question is: “Where is the money coming from?” When I asked Peter about this, he didn’t hesitate to respond: “Hedge funds are more or less controlling daily market flows.”

This is an astounding revelation, considering hedge funds didn’t even exist 20 years ago. But today, they are the henchmen that front the investment bank cartel because unlike mutual funds that dominated institutional trading before the rise of the hedge fund, these funds can be leveraged. So not only have the investment banks like Goldman seeded these funds with investment money, they provided them with tremendous loans comprised of…you guessed it… taxpayer money. All it takes is a little reverse engineering and logic to figure out why the Dow is still riding the wave while most Americans are out to sea believing a life raft is coming at any moment. Essentially, we’ve been had, because the only safe harbor is what writer Matt Taibbi sublimely refers to as the Grifter Archipelago—islands of entities teeming with corporate raiders accountable to no one and in control of everyone. It’s a beautiful thing, really, if you’re one of them.

 

Capitalism and Regulation Are Not Mutually Exclusive

Deregulation became the mantra of free market capitalists who view all government intervention into the markets as a complete affront to our democratic principles, as though the two are somehow connected. It sounded sexy and even seemed to be working for a while until our speculative chickens came home to roost and laid rotten eggs in all of our coops.

John Boehner NY Economic Club
House Speaker John Boehner speaking in New York

Osama bin Laden’s body has barely come to rest on the ocean floor and the Republicans are back in attack mode against the Obama administration. Speaker of the House John Boehner is taking his spending-cut crusade on parade again in the run-up to the vote to raise the nation’s debt ceiling. In doing so the Ohio Republican is not only acquiescing to the clamorous Tea Party faction of the GOP but to the special interests that define their politics.

The debt ceiling debate is the ultimate diversion from the more genuine debate that should be taking place in Congress. This is not to say it is without merit. But like so many political disputes, our politicians are intent on examining the symptoms of a crisis instead of deconstructing the root causes. The fact is our enormous national debt is a result of fighting two costly, protracted wars abroad and bailing out hooligans on Wall Street who engineered the greatest heist in American history. The problem is the GOP wants to fix everything else they deem to be wrong with the system without addressing these two key components of our indebtedness. 

Boehner and company are continuing the charade begun when Ronald Reagan was king and Alan Greenspan was God. Deregulation became the mantra of free market capitalists who view all government intervention into the markets as a complete affront to our democratic principles, as though the two are somehow connected. It sounded sexy and even seemed to be working for a while until our speculative chickens came home to roost and laid rotten eggs in all of our coops.

In a speech earlier this week to the Economic Club of New York, Boehner returned to the key conservative talking points, excoriating Washington for pandering to banks that are too big to fail without addressing the deregulatory fever in the Beltway that created this situation. He criticizes instead the government’s bailout response, saying that our “debt mostly borrowed from foreign investors caused a further erosion in the economic confidence of America and increased uncertainty for millions of private sector job creators.” If you asked these so-called job creators why they aren’t adding more people to the payroll or taking on more capital projects, I highly doubt the resounding answer would be America’s debt. Under President Reagan our debt skyrocketed but these same job creators doubled-down and invested in America, making the logical question: Why not now? Boehner went on to claim that the “massive borrowing and spending by the Treasury Department crowded out private investment by American business of all sizes.” That’s funny. I could have sworn that by keeping interest rates at practically zero, business owners would have been encouraged to borrow and invest in their companies with alacrity. 

This is where the GOP message gets into funky territory. You would be hard-pressed to find an economist who would deny that pumping bailout funds through the financial sector prevented a total collapse of our economic system. Everyone won in the short run. But because Congress was too cowardly to fix the structural regulatory issues in the banking industry, the big winner overall was Wall Street. The bailout allowed the banks to partake in riskless arbitrage (borrowing money at no cost and investing it in guaranteed government bonds for example) and bypass the private sector and individuals in desperate need of lending support. It’s one of the primary reasons the Dow Jones Industrial Average continues to rise despite a still-flagging economy; the dollars are flowing at the top with very little pulsing through the rest of the economy. But the concept of arbitrage is largely lost on Americans and our politicians are reluctant to talk about it in a meaningful way, instead choosing to focus on the national debt.

What’s worse is that the banks have presumably used a good portion of this money to invest in opaque investments that have artificially created crises in the agriculture and energy sectors. I say “presumably” because no one can really be sure where some of this money is being invested because the regulatory environment is still so broken and corrupt that the funds are impossible to track directly. It’s the pricing and behavior of these markets that gives them away. Energy supply is at an all-time high, demand is still perilously low yet the markets are soaring because unknown companies are pouring billions of dollars through small commodities exchanges and wildly impacting the prices of these investments. This phenomenon translates directly into high gasoline prices and rising food costs, thereby suppressing the recovery and obliterating household savings. Here again Boehner changes the subject, suggesting that the Obama administration is somehow keeping “energy resources under lock and key.” Further, he accuses Democrats in Congress of “creating more uncertainty for those who create American jobs” by raising “the specter of higher taxes.” Another direct attempt to divert the conversation from reality. After all, didn’t we just extend the Bush-era tax cuts? And weren’t these the same tax cuts that were in place prior to and during the economic meltdown?

This year Forbes added 214 new billionaires to its list of the world’s richest people. That’s up from 97 new billionaires last year. In perusing the list of the richest Americans, it’s interesting to note where the wealth of those whom Boehner touts as “job creators” is derived. Hedge funds, investing, oil, pipelines, retail, chemicals and pharmaceuticals are the industries that dominate the roster. Most of these companies employ relatively few people compared to the billionaire industrialists of old. No infrastructure companies, few manufacturing companies, and a handful of high-tech companies appear on this list. And of the ones that do appear, most of them manufacture overseas. I guess in Boehner’s world a job created in Bangalore is equal to one created in Scranton. What many of these industries do have in common is that they represent the vast majority of campaign contributors to people like John Boehner.

So it begs the question: Who is Boehner trying to protect? In his New York address he repeatedly refers to the “arrogance of Washington” even though that’s where he’s been working since 1990. Arrogance is not trying to pay for past transgressions by taxing those who devastated the economy. Arrogance is cutting the government’s primary funding source via an extension of the Bush-era tax cuts and attacking entitlement programs instead of the regulatory issues that brought down America’s entire economic system.

Where the White House fails is by indulging in debates over the debt ceiling and releasing oil reserves while bickering over entitlements. Our economy cannot, will not, improve until our elected officials have the courage to restore sanity to the marketplace by re-implementing the regulations that properly governed debt, equity and commodities trading for decades.

In recent testimony to the Congressional Oversight Panel on the impact of the TARP, Columbia University professor and former Clinton advisor and chief economist of the World Bank Joseph Stiglitz argued that “we have not repaired our banking system, and indeed, with the enhanced moral hazard and concentration in the financial sector, the economy remains very much at risk.”

Joseph Stiglitz

These arguments are nothing new to the Nobel Prize-winning economist, who in 2008 warned of the enduring negative consequences of deregulation. At a hearing held back then by the House Committee on Financial Services, Stiglitz invoked Adam Smith, saying that “even he recognized that unregulated markets will try to restrict competition, and without strong competition markets will not be efficient.” One of Stiglitz’s solutions to this is to restore transparency to investments and the markets themselves by restricting “banks’ dealing with criminals, unregulated and non-transparent hedge funds, and off-shore banks that do not conform to regulatory and accounting standard of our highly regulation financial entities.” For emphasis, he notes that “we have shown that we can do this when we want, when terrorism is the issue.”

He’s right in every aspect. This is economic terrorism that Americans are unwittingly enabling by allowing politicians in Washington to skirt the issue of financial reform and to skip tighter regulations in favor of continuing tax breaks, cutting spending on infrastructure and demonizing programs that provide security for the sick, the aged and the unemployed.

Yet no matter how often people of Stiglitz’s ilk provide testimony, no one on these committees either understands or cares what is being offered. I suppose that just because we call them “hearings” doesn’t mean anyone is necessarily listening.

Lying Is Big Business

The world has transitioned from the era of “too big to fail” to “to big to tell the truth.” The bigger the entity, the larger the lie and the more we believe it

Pinocchio
"I told you I was a 'grow-er' not a 'show-er'"

The world has transitioned from the era of “too big to fail” to “to big to tell the truth.” The bigger the entity, the larger the lie and the more we believe it. The lies that big companies and governments tell are typically shrouded in logic so bent the lie actually sounds plausible. The past couple of weeks have been rife with logic-bending lies espoused by corporate spinsters and government spokespeople.

In the government category, the title of World’s Biggest Prevaricator goes to China for reporting to the International Monetary Fund that its GDP grew 11.9 percent in the first quarter. Things are going swimmingly for the world’s third-largest economy despite rising oil prices, slumping consumer demand, high global unemployment figures and rising concerns over European and American debt levels. Out here on the limb it sure looks like they’re just making it up.

Here at home, the commercial and investment banking sector has been “surprising analysts” by beating quarterly earnings estimates lately as well. The Dow is up over 11,000 on all of the positive news coming out of Wall Street and bankers are breaking their arms slapping each other on the back. But listen closely to the reports of the banking sector rebound. Most of the reports talk about how the big banks are recording huge profits on their investments, which is covering for the continuing losses on their loan portfolios. Therein lies the lie.

Banks are supposed to make money from their loan portfolios. Investment banks are supposed to make money from underwriting mergers and acquisitions. Neither is happening right now, yet the stock market is soaring once again and banks are posting sizable earnings. So even though business credit is still tight, individuals are defaulting on credit cards and mortgage payments, and there are no significant deals to be underwritten on the horizon, the banks are “surprising analysts.”

So how did we get here? When the government allowed the banks and investment banks to merge, the newly formed financial behemoths poured money indiscriminately into the markets and created investments even they couldn’t understand. (Deep breath, and…) The banks got in deep shit, so the government borrowed money from the taxpayers, gave it to the banks who then invested it in the stock market instead of loaning it to real people, which is artificially pumping up the Dow and allowing banks to reap enormous profits on their investments. On top of the bailout money, the banks are even taking out low-interest loans from the government, then reinvesting the money into government treasuries at a higher rate. Neat trick, but not sustainable.

Now it seems as though the untouchable investment firm Goldman Sachs may have known more about the time bomb that was the derivatives market and made deliberate moves to profit from the scheme while duping investors. Don’t worry, they’re getting ahead of this quite nicely. Despite the SEC’s investigation into the matter, Goldman is blaming their seemingly duplicitous behavior on the actions of one person: Fabrice Tourre, the former wunderkind specialist at Goldman is the current fall guy being spoon-fed to the media and the SEC. What I find interesting about this tactic is Goldman has forever flaunted their philosophy of constant communications at all levels of the firm as the reason they are able to foresee fluctuations in the market. During the financial meltdown they credited their stability (relative to the likes of Lehman and Bear Stearns) to their remarkable communication and management skills. Apparently Tourre wasn’t invited into the daily huddle.

Lastly, filed under “ridiculous” comes the Food and Drug Administration (FDA). The FDA would like to regulate the American salt intake. Pesticides, unregistered chemicals, preservatives, food dyes made from petroleum, bovine growth hormones, steroids and antibiotics are all still OK. But we really must get a hold of this whole salt issue. This may not be as intriguing as watching China lie about its GDP or American banks play three-card-monte with government bailout money, but it’s a wonderful example of spin from one of the finest huckster agencies in the biz.