Peeling Onions Sept 21, 2011
Doug Wakefield
Have
you ever peeled some onions for a dish you were making? Did you have a burning
sensation, which brought tears from your eyes? Like peeling onions, we are
watching events today that have, and will set up millions for that “burning
sensation” with their financial capital, and why there is a desire to avoid
peeling back any more layers of the onion.
This
article is the first in a series on peeling back layers of false concepts in
our minds that millions of investors have been indoctrinated to believe since
the 1980s. Since these ideas allow us to explain our world in a much more
controlled fashion, they allow us to live in our own bubble world that has
developed throughout our lives, rather than asking the question, “Are we facing
something that is drastically different from the events of the last 30 years?”
If this question is answered in the affirmative, then taking time off the trend
mill is a must for all of us right now, not a year from now, or two years from
now, but right now. If the answers is a flat out “no”, then read no further,
since it will appear as though I the writer, am living in a scary world that
does not exist.
The Question
The first question I would like to poise may appear
trite and ridiculous to ask. However, when we remember that less than 2 months
ago the entire global group of investors read, “S&P
Downgrades Debt Rating of U.S. for the First Time” and today read articles
like “Lenders
press Greek to shrink State and Avoid Default”, one has to be extremely
naïve to dismiss these events as nothing more than the random events of
history, and as such, of no importance when considering one’s own personal or
business financial goals and desires.
So here is the question. If an individual looks at
the events of the last few years, has the record revealed a forum where “all
are treated equal” and the gatekeepers of the game have sought to “place the
client first”, or more of a Darwinian survival of the fittest? In looking back
at other periods in financial market history, what can be learned?
The Response
In
Dr. Jared Diamond’s work, Collapse:
How Societies Choose to Fail or Succeed, Diamond reveals a side of the
markets that is rarely discussed with retail investors, and yet in my opinion,
should be a foundational principle of placing one’s funds in any investment
strategy.
“Many of the reasons for such a [societal] failure fall under the
heading of what economists and other social scientists term, ‘rational
behavior’; arising from clashes of interest between people. That is, some
people may reason correctly that they can advance their own interests by
behaviors harmful to other people. Scientists term such behavior ‘rational’
precisely because it employs correct reasoning, even though it may be morally
reprehensible.” [pg 427]
Today,
Mr. Bernanke, certainly one of the most prominent financial figures in the
world, will release his royal edict to tell the public what Ponzi scheme of
debt he and his cohorts at the most lucrative private bank in the world, the
Federal Reserve, has in store for our latest “rescue” from a crisis. If one
were to look at the financial markets, we can easily see that the crowd has
certainly been lead to believe that whatever he says today, will be extremely
beneficial for market participants based on how markets have rallied
since the August FOMC meeting, which took place on August 9th, the
day US equity markets bottomed. Have financial markets rallied purely on the
expectation of yet another “rescue”? Have traders and managers grown so
addictive to the Federal Reserve’s “unlimited debt to the rescue” policies that
many are ignoring these warning signs, or are they staying in their current hot
potato trade as long as possible before FOMC comments are released at 2:15 EST?
Is it possible that we could be watching yet one more episode of a Darwinian
game of survival of the fittest?
We
only need examine the history of one of the most famous banking empires of the
last 200 years, to find that market timing, while dismissed in much of the
financial advisory world over the last generation, was seen as tremendously
valuable by the Rothschild financial dynasty. The following account of a market
high in the 1820s is told in The
House of Rothschild by Niall Ferguson, Professor of History at Harvard:
“It was at
this point [July 1817] that Nathan began to sell, realizing profits of more
than ₤250,000. Interestingly, this was five months ahead of the market’s
final peak at 84.25 in December 1917, and this may explain why he delayed
slightly before relaying the advice to sell to others. Even his brothers-in-law
and his oldest client in the market, the Elector of Hesse-Kassel, were not
tipped off until after Nathan had sold. As it became apparent that the market
had indeed peaked – by 1820 prices were back below 70 – Moses Montefiore hailed
his brother-in-law’s coup.
‘I am very happy to learn you make as good a Bear
as you formerly did a Bull….You have beaten your antagonists so frequently that
I am surprised there are any so hardy to be found in the Stock Exchange to
oppose you in any considerable operation.’” [pg 118]
If
we leap forward almost 100 years, we learn that this same behavior was also
seen in the American banking giants. The following account was taken from Dr.
Carroll Quigley’s 1300 page work, published in 1966, Tragedy
and Hope: A History of the World in Our Time. Quigley was a professor of history at Georgetown, and had taught
at Princeton and Harvard.
“The influence of these business leaders was so
great that the Morgan and Rockefeller groups acting together, or even Morgan
acting alone could have wrecked the economic system of the country merely by
throwing securities on the stock market for sale, and having precipitated a
stock market panic, could then have bought back the securities they had sold at
a lower price. Naturally, they were not so foolish as to do this, although
Morgan came very close to it in precipitating the ‘panic of 1907’, but they did
not hesitate to wreck individual corporations, at the expense of the holders of
common stocks, by driving them to bankruptcy.” [pg 72]
He then gives the following cases from
history to make his point:
“In this way, to take only two examples, Morgan wrecked the New York,
New Haven, and Hartford Railroad before 1914 by selling to it, at high prices,
the largely valueless securities of myriad New England steamship and trolley
lines; and William Rockefeller and his friends wrecked the Chicago, Milwaukee,
St. Paul, and Pacific Railroad before 1925 by selling to it, at excessive
prices, plans to electrify to the Pacific, copper, electricity, and a worthless
branch railroad (the Gary Line).” [pg 72-73]
Now
I asked you, when one examines headlines from the last few years, has anything
really changed in the rules of the game? How long will the myth that central
bankers are somehow like financial gods, always trying their best to “rescue”
us from the latest crisis, continue to be the leading idea in the public’s eye?
How many more bailouts from central banks to their global banking stockholders
will it take before the public wakes up and peels back this layer of blindness
over their eyes, and understands that morality in financial markets is defined
as whatever it takes to win?
How
Goldman Profited from Subprime Meltdown, MSN, Dec 17, 2007
Goldman Sachs Has First Perfect Quarter with Zero
Trading Loss, Bloomberg, May 10,
2010
JP
Morgan Joins Bank of America in Perfect Record for First-Quarter Trading,
Bloomberg, May 6, 2011
My Hope for Less
of a Tragedy
As
financial destruction brings millions of investors and advisors to the point
that they can no longer live on myths and ideals that they have taken for
granted, always comforted that “more liquidity” (i.e. the euphemism for more
debt) would always be there to make there investments rise, need only consider
these words spoken by Chairman Bernanke in a speech
in Rhode Island during October 2010,
a time when everyone was focused on QEII, or “more debt is coming”:
“To be sure, projections are to some degree only
hypothetical exercises. Almost by definition, unsustainable trajectories of
deficits and debts will never actually transpire, because creditors would
never be willing to lend to a country in which the fiscal debt relative to the
national income is rising without limit. Herbert Stein, a wise economist,
once said, "If something cannot go on forever, it will stop."
One way or the other, fiscal adjustments sufficient to stabilize the federal
budget will certainly occur at some point. The only real question is whether
these adjustments will take place through a careful and deliberative process
that weighs priorities and gives people plenty of time to adjust to changes in
government programs or tax policies, or whether the needed fiscal adjustments
will be a rapid and painful response to a looming or actual fiscal crisis.”
(italics mine)
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Doug Wakefield
President
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