The Financial Frontier of Ignorance – Kiss Your ASS-et Classes Goodbye

September 16, 2009

Kiss Your ASS-et Classes Goodbye

Kiss Your ASS-et Classes Goodbye

 

In 1987 when I started as a “retail stock broker” there were hundreds of high quality “investment ideas” to show customers on a daily basis – literally hundreds. There were dozens of AAA rated fixed income products, many quality high yielding stocks, and pages of conservative, safe, AAA rated insured municipal bonds. Oh how things have changed. 

Today the list of “investment vehicles” or asset classes on which “investors” are being taken for a ride, either knowingly or unknowingly, by brokers and financial advisors peddling “products” and ideas to their clients is akin to a sheep herder leading his unsuspecting sheep to slaughter. Even more egregious is that the products being sold from munis to stocks (in addition to the other toxic stuff nobody understood to begin with, as in Collateralized Debt Obligations, Mortgage Backed Securities, Leveraged ETF’s etc.) are for all intents and purposes dead. These same brokers and advisors should be telling their clients to run for the hills. Investing doesn’t and hasn’t worked since 1999 when the “Glass-Steagall Act” was repealed. That game ended when congress let the wolves in the hen house by allowing Wall Street (you know, those guys that use HUGE leverage) and banks (people that use 10-1 leverage) to merge, which allowed MASSIVE conflicts of interest and over-leveraging the consequence being the “death of investing”. 

It takes hard cold conviction to keep your eye on the truth and to be willing to stick with what is obvious in face of all the hype. In my case, as early as 2003 it was perfectly clear that the so-called fundamentals were no more accurate than a blind man shooting at a hummingbird. I did my best to warn whoever would listen – see my 2003 Thesis – that the whole thing was a house of cards that would collapse with the already extreme debt-bubble (which only got MUCH worse along with nearly everything on the list of negatives) I wrote about then. Even the SEC was warned by whistleblowers about scams like Madoff, warnings of which fell on deaf ears. As the insanity that fuels economic bubbles clouded the judgements of the supposed best and brightest there were those of us (I felt quite alone frankly) ringing the alarm bell. In any case, it is sad to have seen this crisis unfold as it has, but it’s crazy for anyone to say it was all some great big surprise. 

Deficit3So now the dollar has tanked and struggles to keep its footing. Wall Street, the FED, and the inherently unstable fractional reserve banking system are suffering under the weight of their own ignorance, stupidity, and greed. Simultaneously, the “shadow accounting” the banks utilize to skirt the rules will come back to haunt them and the entire global economy causing a NEW disaster. 

We now find ourselves in a Financial Frontier of Ignorance – blinded by our own (NOT my) mistakes and doomed to repeat them over and over again. We are stuck in a perpetual scam – everything too big to fail and not enough money on the planet to prop up all the zombie companies with their opaque bookkeeping being the alternative fuel they survive on as opposed to real profits or sustainable growth. 

As in all good scams there can be found “the hook”, and in this case the hook is the Federal Reserve itself. As the market of late fell into the abyss and the Fed pumped more and more money into the black hole, dumping interest rates to zero, forcing investors who were told horror stories of inflation that they MUST invest in the stock market (hence the bear market rally) to protect themselves from the evil “inflation monster”. The mere fact the Fed went ZIRP was all the leverage brokers needed to force their clients to play a new game – one that will prove to be the most destructive game ever, the ultimate end game. I liken it to the Titanic (which was owned by JP Morgan) returning dockside one last time to take on more passengers. Only when the colossal ship is loaded to the brim do they shove off headed toward their ultimate fate. Let’s hope they can all swim in paralyzing frigid waters. 

BELOW is a list of the most common vehicles from safest to riskiest. None are even remotely attractive at this time: 

1. US Treasury Bills, Notes, and Bonds -

30 day Treasury Bills are paying around 0%. This is typically referred to as the ‘riskless rate of return’. The moment you extend the duration of the Treasuries the risk to achieve a slightly higher yield increases exponentially due to the risk of inflation. In other words if you buy a 30 year bond yielding around 4.0% and interest rates were to increase due to inflationary pressures then you could lose many years worth of income overnight – God forbid you needed the money before maturity then you would be forced to take a huge loss, i.e. the 30 year bonds lost around 30% in short order from end of last year to June of this year when the rate was in the 2.0′s – so you have lost a decade and a half of income by looking for yield. With the amount of new money being pumped into the monetary system all bets are off on the inflation risk, either modest or hyper. Short term Treasuries are ok for now, but pay nothing. Long term Treasuries are out of the question. ASS-et class dead. 

2. Municipal Bonds -

These usually safe, tax-exempt investments have become unlikely victims of the subprime mortgage fallout. The problem started early in 2008, when the bond insurer’s sideline of insuring mortgage-backed securities blew up. This lowered their AAA ratings and subsequently those of the muni bonds they insured. In addition, most cities, counties, and states are bankrupt or near bankrupt anyway. General Obligation bonds, typically the safest bonds, have no “taxing power” and couple these facts with the fact that the rating agencies have been proven liars, the insurers themselves are all bankrupt, even the new kid on the block to MUNI insurance Warren Buffet lost his AAA rating as an insurer. Also a sidenote: Buffet’s Berkshire Hathaway has HUGE derivative exposure that could easily bankrupt him if the market takes another hit. Consensus – ASS-et class dead. 

3. Corporate Bonds and Preferred Stocks -

The GM bankruptcy proved that “senior debt holders” were not above being railroaded by their own government. Our lawmakers had zero qualms about breaking their own “rule of law” and changing the rules in the middle of the game. So corparate bonds are NO LONGER an option worthy of consideration. The games also played with the prefered stock shareholders at Citibank that were NOT good for the holders as the games changes – ASS-et class dead. 

4. Equities/Common Stocks -

The stock market has proven to produce horrible long term results in spite of the lies that Wall Street and TV represent and studies suggest. Again think of “surviorship bias” and the fact that no one anywhere has a positive 10 year track record. Now add extremely high valuations coupled with the bad books and corporate liars putting shareholders interests dead last. Also, in regards to the employee stock options that were supposed to be accounted for (as of June 2005) yet remain unresolved thereby further increasing the P/E ratios, all of it due to the fact that the FASB turned a blind eye on PURE bookkeeping fraud pretty much eliminated equities from the roster of ideas to “invest” your money. Also keep in mind that JP Morgan alone has 90 trillion in derivative exposure and Citi and Bank of America have around 40 trillion each, so who knows what you are really getting when you buy a stock anymore? ASS-et class dead. 

5. Mutual funds -

Just pull out your 401k or Self-Directed IRA statement and you know what I’m about to say. Mutual Funds have about zero chance of beating the underlying index (or exchanges) on which the funds are traded. They are managed by half-wits and sold by over-charging liars and thieves who’ve proven nothing more than they know how to lose investor money and that they couldn’t get out of the way of a runaway train if their life depended on it. Look at Fidelity Magellan, Pimco, or Sanford Bernstein, or insert any name of previous “star” funds, they are ALL decade long losers!!! along with the Oracle of Omaha Warren Buffet. They keep talking long term BUT since 1999 there hasn’t been any money made! Also notice that on 9/11, 2009, the market closed EXACTLY at the same price on the anniversary of 9/11 (eight years ago). Keep in mind we have had a HUGE six month rally just to get back to where we were eight years ago!!! – ASS-et class dead.  

6. ETF’s -

Ah, the Exchange Traded Funds – the latest fraud being playing out on the backs of unsuspecting investors. ETF’s are NOT regulated nearly enough. I mean, think about it – if no one was paying attention to the books of AIG and GM, who do you think is watching the ETF’s? No one, that’s who. Does the SPDR Gold Shares – Symbol: GLD (NYSE) – ETF really have $40 billion worth of gold hanging around their offices? Give me a break. Fort Knox has HUGE security and we’re supposed to believe these ETF guys are lounging around their Manhattan offices with $40 billion of gold floating around? What? As paper weights? Just wait, the GLD ETF will prove to be another Wall Street scam! And the leveraged ETFs are doomed because it’s an IMPOSSIBLE model, hence the HUGE losses in “busted ETF’s” so far. The fact is that ETF’s have been doomed from the get-go and the leveraged ones will all end up at zero sooner than ANYONE can imagine. Even Wall Street is starting to ban them. ASS-et class dead. 

7. Derivatives in general -

Options and futures are great for experienced traders. This is where all the lost money ends up. However, it’s a shallow pool of winners in this game – 90% are losers, 5% break even, and the final 5% keep all the money. For these few winners the good news is the inherent liquidity of derivatives and their favorable tax treatment. However, many of these “products” are NOT legitimate futures and options. As Warren Buffet said for about twenty years they are in fact weapons of mass financial destruction. Ironically, derivatives will most likely be the cause of his own destruction. It’s common knowledge that he never posted the margin requirement for his HUGE market risks and exposure so IF we would have gone down when at the lows he would have HAD to sell at those lows – and since he was down 50% in 44 days the rest was just a few points away with that much leverage!  

These are the best and worst of vehicles. Even the Bank for International Settlements recently warned that derivatives still pose a huge systemic risk. Too much risk in an unstable world. ASS-et class dead. 

8. Real Estate -

Anyone who thinks real estate is going to come roaring back anytime soon should have their head examined.
The aging demographics coupled with the perfect systemic credit failure storm DON’T bid well for a traditional real estate bounce. The baby-boomers are NOT there this time to start a new leg up. Credit has vanished. We have now entered a real estate no-man’s land Japanese style – a long slow bleed where prices will most likely continue to slide as shadow inventory skyrockets. The half-baked stimulus packages aimed at the housing market coupled with foreclosure moratoriums and loan modification programs will all prove useless. Over-supply will continue to rise, home prices will most likely drop another 25% to 50% nationally.
ASS-et class dead. 

9. Metals; Gold and Silver -

With respect to holding an asset, precious metals (especially physical) will most likely fare well in the present environment – unless there is massive intervention to hold down gold prices as there has been in the past. In the case of the gold and silver ETF’s the simple fact that they are totally fake and don’t have anywhere near the reserves to cover redemptions could cause another surge in gold at the mere hint of a dollar collapse, let alone an actual collapse. That said, adding to gold holdings at $1,000 an ounce is a stretch given that gold has tripled in value over the last five to six years. However, buying dips might make sense long term. ASS-et class – not quite dead. 

10. Other Commodities -

The balance of other tangible commodities also require skill and expertise. Looking at the global demographics we definitely need corn, wheat, rice, and cattle, along with the energy commodities oil, coal, and natural gas. These are all real, essential goods that we can touch, feel, and use to sustain life, so they are probably the safest harbor for your money given the instability of the global economy. However, investing in commodities requires the most work. There are always extraneous factors at play in this arena making the variables very difficult to master. ASS-et class – not quite dead, but difficult to trade. 

11. Currencies -

No drawn out explanation required here. The dollar is at risk of losing its reserve currency status and foreign currencies are all suspect at this point. Talk of a global currecy makes this area attractive (volatility can mean profit) BUT it’s a very risky proposition and requires a long learning curve to understand and trade effectively even under manageable circumstances. ASS-et class – on life support. 

12. Art and Collectibles -

Be my guest. This has to be one of the riskiest and dumbest places to park your money right now. Who’s going to buy a Derek Jeter rookie card when they’re trying to get money to feed their family. ASS-et class – dead, dead, dead. 

13. Guns and Ammunition -

Probably the one investment I’d tell anyone to make. The value of protection will climb and guns and ammunition will trade at a huge premium. It might be difficult to store massive quantities of ammunition or to deal with gun regulation, however, these seemingly conspiratorial commodities are probably a great place to have your money “invested”. ASS-et class – Alive and kicking. 

It used to be that an average person could take any amount of money down to the corner bank, place it in a CD, and go home to sleep that night feeling their money was secure. You can’t even do that these days. The FDIC is broke. Fort Knox is empty. Wall Street’s a scam. And the whole train wreck was run into a brick wall by our own government. Make a REAL plan while you have the chance – - You owe it to the money you have left… 

-G 

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{ 11 comments… read them below or add one }

Darren Story September 17, 2009 at 8:58 am

Well, I’ve got a front row seat to watch this thing blow up on them! And I’m glad that there’s people like you, Greg, to take advantage of their largess and twist the knife. Good job.

Marvin Rothenberg September 17, 2009 at 11:04 am

Right on Greg, What to do next and what to buy?

Best,

Marvin

Financial Jonesen September 17, 2009 at 4:02 pm

Trust and Advice is all well and good, but generally it comes at a steep price. There are plenty of websites on trading, so what will make you stand out besides a populist rant.

Jeffrey Harris September 17, 2009 at 5:14 pm

Great article. thanks !

geilheid September 17, 2009 at 10:36 pm
LargoWinch September 20, 2009 at 5:34 am

Great “lay of the land” Greg!

My personal view is that when all asset classes are unattractive and there is nowhere to go, gold is the only remaining option (and yes… guns, ammo and canned food if you are a doomer).

The next big theme/opportunity in my view is crude oil.

But how to play it?
[Shameless ask: Greg can you provide your opinion some later time about oil and how to invest in it?].

Thanks again for the article; truth wrapped in wittiness.

LW

Mr fix it September 23, 2009 at 2:15 pm

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Keith Rathjen July 2, 2012 at 7:09 am

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Greg Simmons July 9, 2012 at 10:37 pm

thanks! sorry 4 delay -G

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