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Tag Archive: Madoff

  1. 9 Predictions for 2009

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    Set forth below are my pre­dic­tions for 2009. Let’s hope that at least some of them come true.

    1. Early in 2009, the banks start lend­ing again

      In Jan­u­ary, the banks will real­ize that they can­not avoid lend­ing for­ever. The Fed­eral Reserve will finan­cially pun­ish any bank that refuses to lend by manip­u­lat­ing inter­est rates so that banks that hoard cash lose money. From the indus­try ashes a bank­ing prophet will emerge who will preach the gospel of pos­i­tive net inter­est spread through respon­si­ble lending.

    2. The Obama Admin­is­tra­tion passes the largest fis­cal stim­u­lus pro­gram in the his­tory of the United States

      The fis­cal stim­u­lus plan will be big­ger, bet­ter and more socially respon­si­ble than any­thing the Fed­eral Gov­ern­ment has ever done before. When the pro­gram starts to kick in James Carville will declare Obama has earned his place in his­tory as “one of the greats” and will sug­gest he should be imme­di­ately added to Mt. Rush­more. Oth­ers will declare that the fis­cal stim­u­lus plan proves that Obama is a Marxist.

    3. GDP falls in Q1, sta­bi­lizes in Q2, begins to rise in Q3 and is in full recov­ery by Q4

      Despite most econ­o­mists pre­dict­ing Depres­sion 2.0 and the “end of the world as we know it”, the econ­omy will begin to recover in 2009. How­ever, the day after inau­gu­ra­tion, right wing talk show hosts will declare the begin­ning of the “Obama Depres­sion”. When the econ­omy starts to do bet­ter, the same right wing talk show hosts will pro­claim that Bush was right when he said the econ­omy was “basi­cally sound” and will give Paul­son credit for engi­neer­ing the recovery.

    4. Defla­tion fears give way to infla­tion fears

      It turns out that the Fed­eral Reserve wasn’t able to un-print money any­more than Eve could un-eat the apple. Econ­o­mists will be relieved that they can pre­dict Hyper­in­fla­tion 1.0 and the “end of the world as we know it”.

    5. Europe and Asia do worse than the U.S.

      If you think it is bad here, just go over there. Jean-Claude Trichet will be exiled to the Island of Elba for start­ing his 2007 pre­emp­tive eco­nomic war on infla­tion. Tichet won the war but lost the econ­omy. Lib­eral EU politi­cians will real­ize that exile is very “19th Cen­tury” and Elba is really kind of nice (good wind­surf­ing, scuba and cute female Elbans). Trichet will escape but will be recap­tured and made to work in the ECB audit depart­ment (after all reg­u­la­tory audit work is worse than exile).

    6. Hedge funds, funds of funds and other money man­age­ment prod­ucts are reg­u­lated and taxed.

      Dis­traught for­mer fund man­agers still won’t be able to accept that Mad­off killed the golden goose. Soon, no one will be able to find an investor that actu­ally admits to ever hav­ing put money in hedge funds; it will be as if the indus­try never existed. A rumor will spread that before the end of the Cold War hedge funds were invented by the Soviet Union to destroy Amer­ica. Ann Coul­ter will say that Democ­rats invented the hedge fund indus­try to destroy the Bush legacy.

    7. Obama makes enforce­ment of secu­ri­ties, bank­ing and con­sumer pro­tec­tion laws a priority.

      Wall Street bankers will burn Sarah Palin in effigy. After all, if she hadn’t blown the Katie Couric inter­view things could have been dif­fer­ent. Aspir­ing white col­lar crim­i­nals will have to deal with pros­e­cu­tors and reg­u­la­tors who actu­ally try to do their job. 20 and 30 year old for­mer invest­ment bankers will be found in bars all around Tribeca try­ing to fig­ure out what to do next. Grad­u­ate school will be out because they will all already have MBA’s and their par­ents will refuse to pay for more school. Some will get “real jobs” and hate it.

    8. Stocks go up then down then up then down then up then down. But, major stock indexes end the year up.

      Investors real­ize that mar­ket ana­lysts don’t have a clue whether indi­vid­ual stocks will go up or down. But, liq­uid­ity cre­ated by the Fed­eral Reserve, a slowly recov­er­ing econ­omy and mas­sive fis­cal stim­u­lus all con­spire to push the Dow, S&P and NASDAQ up by year end.

    9. Regional ten­sions rise and coun­tries face inter­nal strife because of the poor global econ­omy. Most of the U.S. is an island of sta­bil­ity.

      Sarah Palin does the ulti­mate mav­er­ick thing and declares that Alaska has seceded from the U.S. and will be its own inde­pen­dent nation. Palin becomes Vice Pres­i­dent (even if it is only Vice Pres­i­dent of Alaska) and Ted Stevens becomes Pres­i­dent. Stevens hopes that by being Pres­i­dent of Alaska he will be able to avoid going to jail. After watch­ing Palin and Stevens, Illi­nois Gov. Rod Blago­je­vich imme­di­ately declares Illi­nois’ inde­pen­dence. Around the same time, dis­senters in China chal­lenge the sta­tus quo (inde­pen­dence isn’t openly dis­cussed because in China exe­cu­tion is the penalty for sedi­tion). Eco­nom­i­cally moti­vated riots break out in Viet­nam and other parts of South­east Asia. See­ing weak­ness in the EU, Rus­sia con­tin­ues to expand its influ­ence. The Mid­dle East remains a prob­lem. But, in a moment of his­toric unity and at a con­fer­ence spon­sored by CNN and Ander­son Cooper, Arabs and Israelis agree that noth­ing has changed and the “world will con­tinue as we know it”.

  2. Money Supply And Economic Data Weekly Watch – Living in the Twilight Zone

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    We’ve entered the twi­light zone. This week’s money sup­ply and eco­nomic data is surreal.

    Money sup­ply is grow­ing at an unbe­liev­able pace. As mea­sured by sea­son­ally adjusted M1 and M2, the Fed announced that money sup­ply set new all time records. The quick rate of growth for money sup­ply is actu­ally accel­er­at­ing. Over the last 13 weeks, sea­son­ally adjusted M1 has grown at a 25.3% annual rate, while sea­son­ally adjusted M2 has grown at a 10.5% annual rate. If the econ­omy wasn’t already suf­fer­ing from defla­tion, a liq­uid­ity trap and a poten­tial depres­sion, money sup­ply growth would have already caused rag­ing infla­tion. Instead, money sup­ply growth is dis­tort­ing invest­ment deci­sions as demon­strated by Trea­sury secu­ri­ties trad­ing at bizarre neg­a­tive inter­est rates.

    Qui­etly, the Fed­eral Reserve enlarged its bal­ance sheet by more than $123 bil­lion last week. A few months ago, this news would have made the head­lines and could have trig­gered Con­gres­sional Hear­ings and rit­ual sui­cide by infla­tion hawks. Instead, no one seems to have noticed or cared.

    Fed­eral Funds traded as low as 0.1% despite a tar­get rate of 1.00%. While no one knows what the tar­get Fed­eral Funds Rate means any­more, every­one expects the Fed to lower its tar­get again at its meet­ing this week.

    Almost all of last week’s data was bad except for retail sales, which tem­porar­ily halted its down­ward spi­ral. This indi­cates that sooner or later peo­ple will buy things when the Fed pushes money at them.

    While the auto­mo­bile bailout deal died in the Sen­ate and the entire world is on Big 3 death watch, that news was pushed off the front page by the hor­rific losses cre­ated by Marc Dreier and Bernie Mad­off. I am hop­ing that as long as I live noth­ing will top these frauds. With global ram­i­fi­ca­tions, Mad­off announced that he evap­o­rated more than $50 bil­lion of value. As the Mad­off losses rip­ple through the global econ­omy, what lit­tle con­fi­dence remains in the finan­cial sys­tem will dissolve.

    The once in a cen­tury grand prize for incom­pe­tence goes to Chris Cox and the SEC. It is the pri­mary reg­u­la­tor of Mad­off Secu­ri­ties and some­how didn’t notice that $50 bil­lion of secu­ri­ties were miss­ing. If the SEC can miss the Mad­off fraud in an entity that they closely reg­u­late, what sort of fraud will they catch? What do they do with their time and budget?

    I wish I could over­state how bad I think last week’s news was, but I can’t. The defla­tion can­cer con­tin­ues to grow and the side effect of the cure appears to be hyper inflation.

    I remain skep­ti­cal of Fed and Trea­sury state­ments that this econ­omy is dif­fer­ent from the Depres­sion. These are the same pub­lic offi­cials that told us just before Bear Stearns folded that all was well. They have been behind the curve for the last 18 months and I don’t see any sign of them catch­ing up. Pres­i­dent Elect Obama takes office soon and hope­fully his admin­is­tra­tion will pro­vide the lead­er­ship, plan­ning and com­mon sense that have been miss­ing in recent years.

    Vice Pres­i­dent Cheney summed it up best when he said to Con­gres­sional Repub­li­cans that it’s “Her­bert Hoover time”.

    Yes, we’re liv­ing in the twi­light zone.

  3. 10 Simple Uber-rich Investment Rules

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    I didn’t think that the uber-rich needed my advice until the last few days. After all, they are the uber-rich and I am one of the “lit­tle peo­ple”. I fig­ured they knew more than me and it was from their spe­cial knowl­edge that they got their uber-status. But after the last few days I believe that the uber-crowd is just like the rest of us, clue­less, scared and in trouble.

    As if the last 18 months of bank­ing and bro­ker­age melt­down weren’t enough to prove that the world is bro­ken, the Pet­ters and Mad­off col­lapses are beyond ratio­nal com­pre­hen­sion. Both frauds were pre­dictable, stu­pid and mas­sive. The Tom Pet­ters fraud was based upon a ridicu­lous “invest­ment” strat­egy that barely had the trap­pings of san­ity. And, Bernie Madoff’s invest­ment magic was based upon being a nice guy who belonged to cool clubs. Of course, no one had a clue what he did with their money but lots of peo­ple liked to play golf with him.

    If the uber-rich fol­low my 10 sim­ple invest­ment rules they should be able to avoid the next Pet­ters and Madoff.

    Rule #1 – Don’t Invest In Stuff You Don’t Understand

    Over the years, uber-investors have tried to explain to me how a “split strike con­ver­sion strat­egy” works. But since I was a lit­tle per­son, I was never smart enough to under­stand what they were talk­ing about. Even using his­tor­i­cal data to reverse engi­neer Madoff’s strat­egy, I couldn’t fig­ure it out. As it turns out, no one else under­stood either.

    Many struc­tured bonds sold since 2001 fall into the cat­e­gory of “too hard to fig­ure out”. For exam­ple, I can’t fig­ure out most col­lat­er­al­ized debt oblig­a­tions (“CDOs”). And, there are uber-rich who right now are putting their money into funds that were formed to invest in cheap CDO’s but have no idea of what a CDO is or why it is cheap. These investors are invest­ing in stuff they don’t under­stand and will sooner or later get burned.

    Rule #2 – Try To Use Com­mon Sense

    Pet­ters claimed that his busi­ness made tons of money buy­ing and sell­ing more than $15 bil­lion per year of name brand TV’s, refrig­er­a­tors and other con­sumer goods because top line man­u­fac­tur­ers wanted to keep it “secret” from retail­ers that they had inven­tory to sell. As an exam­ple, Pet­ters claimed that every year Sony wanted him to sell stag­ger­ing num­bers of TV’s to retail­ers at big markups because Sony needed to keep it a secret that they were in the TV busi­ness. Appar­ently investors for­got that that it isn’t a secret that Sony is in the busi­ness of sell­ing TV’s to retail­ers. And, Pet­ters wasn’t keep­ing any­thing secret. He quickly told all his impor­tant secrets to any­body with cash that he could steal. His busi­ness plan made no com­mon sense. The uber-rich need to remem­ber that com­mon sense is impor­tant when decid­ing where to invest their money. If it doesn’t make com­mon sense, don’t invest.

    Rule #3 – Risk and Return Are Cor­re­lated – The Higher The Return The Higher The Risk

    Uber-rich don’t bor­row money at really high inter­est rates and nei­ther do lit­tle peo­ple; that is unless lit­tle peo­ple are a bad credit risk or des­per­ate. In 2005 and 2006, the uber-rich and their uber-investment banks thought that lit­tle peo­ple and their busi­nesses would pay really high inter­est rates even thought they had lots of col­lat­eral and good credit. For some rea­son it never occurred to the uber-crowd that there were thou­sands of old style com­mer­cial banks and thrifts who were qui­etly lend­ing to good bor­row­ers at low inter­est rates and that high rates of inter­est were being paid by high risk bor­row­ers who prob­a­bly weren’t going to pay back their debts. The sim­ple idea that high returns are cor­re­lated with high risk was for­got­ten. The uber-rich need to real­ize that when lenders claim to have low risk port­fo­lios but lend at really high inter­est rates they aren’t telling the truth. If some­one says that they can get really high yields with­out tak­ing risk, don’t invest.

    Rule #4 – Lever­age Increases Risk, A Lot

    The uber-rich need to learn that they shouldn’t buy into invest­ments or com­pa­nies with bad bal­ance sheets. These are crummy invest­ment oppor­tu­ni­ties. Too much lever­age makes good oper­at­ing busi­nesses bad invest­ments. Before doing any­thing else, investors must ana­lyze bal­ance sheets to deter­mine if the busi­ness has a good finan­cial foun­da­tion. If the bal­ance sheet stinks, don’t bother look­ing at the income state­ment and don’t invest.

    Rule #5 – Cheap Isn’t The Same As Valuable

    Many uber-investors think a strat­egy of buy­ing well known stocks because they have gone down in price is the same as being a value investor. Unfor­tu­nately, often stocks are cheap because the under­ly­ing com­pany is ter­ri­ble and doesn’t have a future. As an exam­ple, early investors in bank and bro­ker­age stocks thought that because some of the stocks had gone down in price they were a value. But, those investors didn’t do fun­da­men­tal bal­ance sheet, income state­ment or busi­ness analy­sis. They didn’t know that that when it comes to stocks, cheap isn’t the same as valu­able. Don’t’ buy stocks because they are cheap unless fun­da­men­tal finan­cial analy­sis also says that they are valuable.

    Rule #6 – If Man­age­ment Acts Like Thugs Don’t Invest, Even If They Are Really Well Dressed Ivy League Edu­cated Thugs

    The uber-rich are often fooled when man­age­ment teams are well dressed, well edu­cated and use big words. What the uber-crowd doesn’t under­stand is a good edu­ca­tion doesn’t teach good morals. Some of the smartest peo­ple are some of the rotten­est. Thugs never let peo­ple really know what they are doing because what they are doing is wrong. Really good thugs pick the pocket of the uber-rich by hid­ing behind com­pli­cated words and sen­tences that prove their edu­ca­tional pedi­gree but mean noth­ing when torn apart. If man­age­ment doesn’t tell investors what they are doing so that a lit­tle per­son can under­stand, don’t invest.

    Rule #7 – Uber-Country Clubs Aren’t A Great Place To Make Invest­ment Decisions

    The uber-rich believe that their cash has mag­i­cal pow­ers to grow when they make invest­ment deci­sions in the rar­efied air of an exclu­sive coun­try club. How­ever, scam­sters love exclu­sive coun­try clubs because they can quickly and effi­ciently fig­ure out where to find large con­cen­tra­tions of uber-victims. Also, coun­try club deals pro­vide scam­sters the added ben­e­fit of gath­er­ing together investors who believe it is socially unac­cept­able to go “postal” if they lose their money. The Mad­off scan­dal will test the social bonds that under­lie the postal the­ory. Until the uber-rich stop mak­ing invest­ments because of the magic of their coun­try club they are des­tined to con­tinue to blow their wealth.

    Rule #8 – Ronald Regan Was Right; Trust But Ver­ify

    Trust but ver­ify. It works for finan­cial nukes just like real nukes. The one com­mon thread con­nect­ing all of the major finan­cial scams of the last 20 year is the inabil­ity to ver­ify what was going on. Investor shouldn’t invest if they can’t ver­ify what they are being told.

    Rule #9 – Don’t Invest In Stuff You Don’t Have Time To Fig­ure Out; Buy Trea­sury Bonds Instead

    A whole cot­tage indus­try grew up around the idea that uber-investors were too busy to tend to their invest­ments. After all, uber-rich were too busy to raise their kids, clean their houses or mow their lawn. It only stands to rea­son that they were too busy to worry about their investments.

    So “fund of funds” sprang up so that the uber-rich could hire some­one else to do the pesky work of decid­ing which exclu­sive invest­ments they should put their money into. The idea of hir­ing some­one to hire some­one to invest in com­pa­nies that hire peo­ple to do actual work is dumb. After fees are paid to the mul­ti­ple lay­ers of advi­sors, there is lit­tle left for investors with­out unrea­son­able risk. And, it is no coin­ci­dence that most of the money lost in both the Pet­ters and Mad­off frauds was fun­neled into these scams through funds of funds. Don’t invest in any fund of funds. Trea­suries are better.

    Rule #10 – When In Doubt Re-Read The First Nine Rules And Then Don’t Invest

    If you aren’t sure, don’t invest. There will always be another opportunity.