Madoff Justice

Longtime readers know my belief that our society is over-regulated and under-punished. Convicted swindler, Bernie Madoff, got off easy at 150 years. Assuming this 71-year-old man actually lives another 150 years, it means he will have to spend only a few seconds in jail for each dollar stolen and only 40 days for each victim swindled. He has lived 70 years in extremely fine style, funded by his victims. Now, he will live out his remaining years with no worries about food, clothing, housing, and even have better medical care than many Americans, all funded by the taxpayers. At some point, a person indeed becomes “above the law”.

Financial journals are now discussing the “lost generation” of investors, people so traumatized by Madoff that they have become paralyzed with fear and confusion. That would be the greatest damage that Madoff has accomplished. The $65 billion that may have already been lost by his victims is nothing compared to the profits that this “lost generation” will miss.

By the way, kudos to Sen. Jim Webb, who is crusading for a new perspective on our prisons. With 5% of the world’s population, we have 25% of the world’s prisoners. And, at what cost? How many hospitals could we build with the money we spend feeding, clothing, housing and caring for prisoners? Or, how many more aircraft carriers could we afford? Now, we must pay for a pampered swindler!

Change is coming.......

It was obvious last September when the markets crashed, following the Lehman failure. It became certain last December with the arrest of Madoff. There will be a re-regulation of the securities markets, which is desperately needed. Of course, “the devil is always in the details”!

Last week, the Obama Administration introduced their plan for re-regulation. It is large, complex, and far-reaching but certainly unlikely to be implemented as presented. The most interesting part to me is whether financial advisors should be held to a suitability standard or to a fiduciary standard. It is an important difference and could re-shape the industry. A stockbroker is currently held to a suitability standard, which only requires the advisor to present investment choices that are “suitable” for the client. On the other hand, financial advisors who are Registered Investment Advisors are required to act in the client’s best interest, not the advisor’s best interest, nor the firm’s best interest. Currently, neither the stockbroker nor the firm must act in the client’s best interest. The new chairman of the SEC recently advocated that all advisors be held to a fiduciary standard, which means every stockbroker of every firm will be incurring fiduciary liability for the firm. That is an enormous unseen and unknowable contingent liability to every firm. They may well sell pieces of their retail business to brokers and spin them off into separate legal entities.

Regardless, I don’t plan to own any shares in brokerage firms until this is made more clear. It is a BIG change!

The Wisdom of Crowds?

All year, I’ve been advising clients that the economy would “bottom-out” in the fourth quarter. Last week, the latest survey of the National Association of Business Economics (NABE) showed that 90% of economists believe the bottom will be late this year. (As a member, I naturally participated in that survey.) Maybe, I should feel comforted that so many economists agree with me, but there is an old joke among economists that the purpose of forecasters is to make astrologists look respectable.

At this point, my forecast for the U.S. economy remains the same, but something very different is happening to the financial markets. While there has never been a sharp V-shaped recovery from a credit-driven recession, this appears to be happening in the market now, and the only explanation I can believe is that the reversal is coming from the emerging markets, which are not as dependent on credit or capital. Stay tuned . . . we certainly do live in interesting times!

The Problem with Averages

I was reading a marketing piece from one of the mass market financial advisors. His argument was that since the average recession since the Great Depression has been 21 months and since the stock market has been up an average of 45% twelve months later and since this recession is now officially 19 months old, then it must be time to get fully invested in stocks. Averages can be so misleading!

Over the same period, recessions have ranged from 3 months (twice) to 62 months. Credit-driven recessions, like this one, tend to be longer than inventory-driven or trauma-driven recessions. Also, the average bounce-back of 45% twelve months later has been declining markedly. The first 3 recessions bounced-back an average of 72% while the last 3 only bounced back 25% on average.

Averages can be so misleading! Like every investor, every recession is unique and should be evaluated individually!

A Sainted Businessman

In the early 1990s, I was appointed by the Governor of Texas to the State Depository Board, where I served with the State Treasurer, State Banking Commissioner, and State Controller. We wrestled with the collapsing Texas Savings & Loan Associations, which had wrecked the Texas economy so badly. I was there when the legendary Bill Seidman arrived with the federal Resolution Trust Corporation. It was like Moses parting the sea. It was an experience I’ll never forget. Bill Seidman was a man I’ll never forget. America has lost one of those great businessmen, who made the life of every American even better, even though they’ll never know.

R.I.P. Bill Seidman

The Un-Stressful Stress Test

After all the stressful suspense, the "Stress Test" results were released last Thursday, and it wasn't as bad as I feared. Still, there are two lingering issues. First, the assumptions were 10.3% unemployment, GDP dropping 3.3% in 2009 and rising 0.5% next year, and home prices falling another 27%. I'll be surprised if unemployment doesn't exceed 10.3% by the first quarter of next year. I suspect GDP growth will not be as good this year nor as bad next year. And, with record low home mortgage rates, it is hard to forecast another 27% drop in home prices. Overall, the government did a good job.

The second lingering issue is that the Stress Test only looked at nineteen banks, but what about the thousands of other banks, many of which are heavily exposed to local commercial real estate loans? Many analysts believe that is the next big shoe to fall.

As always, the things we know that we don't know worry us the most!

Maybe Bernanke Is Right?

Today, I watched a speech by Ben Bernanke discussing the cause of the current Great Recession. For several years, he has been warning about the “savings glut”, i.e., those nations like China who run huge cash surpluses and lend the cash back to the consuming nations, effectively pushing up debt levels in our national economy. I’ve always felt like that was blaming somebody else for the mess we created. Bernanke gently hammered that point again today, and I’m starting to believe him. Regardless, it is one more reason we should become an exporting-oriented economy, which benefits from a weaker dollar.