Sunday, April 5, 2009

The House Wins

Breathless commentators on the major “news” media outlets over the past week have dared to dream that we may have seen the bottom of the greatest economic downturn since the 1930’s. Could it be that we’ve tested the bottom? Can anyone afford to sit on the sidelines as we see the market so deeply discounted?

A tiny note that is worth considering: finally the Financial Times has put into the public awareness in an April 5, 2009 article (see article here) data that I discussed at the last Arlington Institute SpringSide Chat – namely, the only winners right now are the “house”. What I mean by that is that the only real wealth extraction that was taking place during the last quarter (and if we’re serious, for the past several years) was the money being taken off the table by banks and brokers that charge fees for “managing” investments and trades. It turns out that over 50% of the profitable revenue for many of the world’s leading banks came from transaction and trade fees. This was not creating value for investors. Rather it was charging them for moving investments between equally ephemeral classes.

And here we go again. Just before earnings season when we’ll see the devastating consequence of on-going unemployment and when record numbers of workers around the world will be seeing their unemployment benefits expire – two pending market shocks which will add to the pension collapse that I’ve written about earlier – you’re being asked to put money back into the market. For the record, this advice is for two beneficiaries only. First, it is for the benefit of your broker/banker/fund manager. And second, it’s for the same hedge funds that shorted the market into oblivion before. As investors are lured back into the rock of the sirens, the very professionals who are pumping the market’s value are positioning themselves for the next drop when, you guessed it, they’ll be more than happy to take your cash again.

It feels like Las Vegas because it is. The fundamentals that soured the IBM / Sun Microsystems deal over the weekend are as termite-infested as ever. The massive pending debt refinancings that are necessary on corporate balance sheets – a phenomenon which will emerge in April and May – are as problematic as they were and no amount of accounting wizardry nor accounting obfuscation (just approved this past week by an unconsidered U.S. government reality deferral) can save us from the fact that until the market constituents generate value, investors will keep losing. The winners are those who are trading on quantitative models which profile investor behavior – your behavior – and the bankers and brokers who collect the fees for rearranging the deck chairs on the Titanic. If the Obama Administration really wanted to help the average investor, it would provide an asset balancing tax amnesty where pensions, 401(k) and other tax deferred retirement plans could be really moved and managed by the individual rather than keeping them trapped in the nepotistic cabal where the House is the Winner.



  1. David, thought you'd enjoy Bill Moyers' interview with William Black on the April 3.

  2. Given the recent reports of falling state and federal tax revenues, it seems that the chances of the Obama Administration allowing us to "cash out our chips" in some form of tax amnesty is zero (which will be the value of my pension when this is all over).

  3. is it not somewhat incongruous that the identical entities receiving emergency bailout BILIIONS just a handful of months ago are (1) reporting Q1 profitability, e.g. the major banks and (2) Goldman Sachs is even ALLOWED to float a major equity offer in the same context? If one has any sense of relativity, logic, ethical awareness, repect for governmetal regulation or common sense, don't these 'facts' strike a bizarre chord? ....not if one understands the game being played by the symphony and maestro(s). It is a sad state for our great country.

  4. @ anonymous: what's even more disturbing, is that there's nothing we can do about it. sure, we can romanticize about ethical finance and the merits of good governance; but with a populous so physiologically damaged from the crisis and vehemently polarized politically, progress will not happen in our lifetimes. we're a nation so utterly dependent on credit, our DNA simply won't work without it. it's "the deal" that keep us glued, and without the contact high that only expansionary debt policies can effect, a rude awakening is upon us...we're just not sure of it yet.

  5. The house surely wins when their interests align with those who hold our government hostage. (Think, China)

    David, any thoughts regarding this recent IRA article on Citigroup?


    "One of the evil side effects of the BHC structure that has been illustrated by the failures of WaMu and Lehman Brothers is the reality that the customers and counterparties of the bank subsidiary are actually senior to the debt holders of the parent BHC. This tension has caused a great deal of delay and confusion in moving forward with a solution to the solvency problems facing the large zombie banks. Foreign bond holders, like the government of China, have reportedly told the Obama Administration that further losses to debt holders of US banks will result in a boycott of US Treasury auctions."


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave