Paul Tudor Jones & Ray Dalio channel James Goldsmith

This week both Paul Tudo Jones and Ray Dalio had comments that took the twittersphere by storm. Tudor Jones presented a thought about "Just Capital" at the Ted2015 talks while Dalio warned about the Fed raising rates too early and repeating a 1937 styled correction. The latest 1937 warning from Dalio was interesting given his other rather dark worry relating to the possibility of the rise of a 2nd Hitler.

I know what you are saying, "Geez Gubb.. nice light topic for a Saturday afternoon" - but hear me out.

While I am certainly encouraged by these two recent gentlemen sounding these warnings, I will say I'm not the least bit shocked. This was something I called at the very beginning of the Great Financial Crisis when it became clear to me that the politicians weren't going to make any meaningful reforms to try and regain control of Wall Street.

To me it was clear: Wall Street was calling the shots.

Remember this from Brad Sherman?

Martial law if they didn't bailout Wall Street? Seriously?

Sherman made some excellent forecasts as to what would happen if the US carried out the bailout..

But, the person I credit the most with calling the financial crisis, the abuse by Wall Street and generation of Corporatism is Sir James Goldsmith - who laid all of this out in an interview he did with Charlie Rose back in 1994. 

If you haven't taken the time to watch this interview in its entirety,  you are doing yourself a great disservice. 

I'm not going to provide a link to all 6 sections of this interview as I figure if you find it interesting, you will seek the rest of it out on your own. 

But - even in the first portion, what does Goldsmith say?

He calls global wage deflation, increasing profit margins, a hollowing out of the middle class, a "destruction of one's society" and the rise of corporatism.

All the same things that Dalio and Tudor Jones are warning about now, 21 years later. 

It was this interview that really helped me gel all of the ideas I had buzzing around in my head and inspired me to write "The View from 30,000 feet" 

and now Tudor Jones and Dalio are warning about the growing risks of unrest and market corrections. 

As you know, Ray Dalio produced a fantastic discussion on "How the Economic Machine Works"

and I agree with everything Dalio says - but have made the contention that at the 23:10 mark, Dalio's simplified machine video misses the mark.

In the video - Dalio talks about how a government increases taxes on the rich to promote a 'redistribution of wealth from the haves to the have nots" and if this doesn't happen we start to see tension rise between the wealthy and the poor. Dalio then introduces the Central Bank as the hero and suggests by printing money, it helps drive up asset prices which in turn allows more people to become credit worthy.

Unfortunately as Amir Sufi and Atif Mian have already shown, asset price increases are NOT flowing to all components of the US economy. 

moreover, politicians and regulators seem to continuing their long standing tradition of siding with Wall street at the expense of main street. 

So, when you consider Goldsmith's commentary about the unappreciated trends in the global economy, and add in Wall Street's incredible influence and on going self interests, along with the knowledge that not ALL people are benefiting from the increase in the stock market and the US's economic "recovery".. you will get a better understanding of why I've been voicing the same dark warnings as Tudor Jones and Dalio over the last 7 years. . 

Very few people have put all of these things together - and while some (like Dalio and Tudor Jones) are doing so now, only a handful made this call back in 2008.

I am thankful for Jimmy Goldsmith's warnings - as they truly opened my eyes to the direction we were heading down. 

It's also helped me formulate my views on the sociopathology that exists on Wall street, and the various parasitic phases of Wall Street. 

I really do hope that I am wrong on these calls - but they seem to be confirmed more and more with each passing week.. which as I'm sure you can imagine is not great.

It is my sincere hope that at some point we get a present day Ferdinand Pecora to come in, regain control and reform the system.. but it seems that we are still a long way away from this critical step.

Symbiotic, Parasitic and Parasitoidal Cycles of Finance

Part of my big macro economic piece (posted here) planted blame for the 2008 Financial crisis squarely at the feet of the financial industry. The is the very same industry that I've worked in every day since I graduated from University in 1993 with a degree in Economics (hey, don't laugh..).

I started working as an investment advisor at a bank owned brokerage firm, one of the big four, and as crazy and stressful as it was, I wouldn't change the experience for anything in the world as it really helped open my eyes to how the system worked and where the REAL incentives lay.

From my perspective, seeing first hand how the bank culture took over the brokerage side was a fantastic experience and the lessons I learned there helped me refine my instincts and skills as a money manager.

Now - if you've been reading this blog at all you will know that I am absolutely NOT an economist nor an analyst. As such, most of the comments and observations I make here are usually rough, unscientific and lack the polish and eloquence provided by many of the other people who take time to share their thoughts on the markets and the economy. But I think what I lack in written eloquence, I make up for by having a keenly observant eye and an obsessive passion for figuring out what's going on.

So - with all of that stated, let me start my "point".

I have long used the analogy that the financial industry is much akin to a tape worm that is attached to the stomach of the global economy. As the economy grows, so does the tape worm and the tape worm's associated appetite. This mostly clumsy analogy suggests that there is a parasitic relationship shared between the financial industry and the global economy.

I would suggest that over history, finance and the global economy have experienced parasitic cycles that ebb and flow from one extreme to another. Those cycles could be broken down into three distinct classifications:

i) symbiotic
ii) classic parasitic
iii) parasitoidal

In a symbiotic relationship (which is not 'officially' parasitic, but bear with me) both the financial industry and the global economy benefit from the relationship. A simple but effective example from my own little retail investment world would be the creation and mass distribution (by the financial industry) of zero coupon, or "stripped" bonds. These things are fantastic for client accounts (RRSPs and RRIFs) as well as being a huge source of revenue for the financial industry.

In a classic parasitic relationship - only one party (the parasite) benefits, and at the expense of the "host".  You can take your pick here from a multitude of brutal parasitic financial plays, but to keep things simple let's just refer to the Goldman/Paulson/Abacus deal - Boo!

In this situation Goldman and Paulson did very well, while the buyers of Abacus (the hosts) got blasted.

Finally in a parasitoidal relationship - the parasite draws so much in the form of resources that it ends up either sterilizing or ultimately KILLING the host.

Again - take your pick, but for me the biggest (but as of yet 'unproven') example would be the plethora of debt instruments that have been made available to consumers. Each of these debt instruments draws a charge in the form of interest - that depletes the financial health of the host.

Sub prime mortgages, credit cards, lines of credit, 9 year car loans, car equity loans, Home equity loans, etc etc etc..

Again - if you read my larger macro piece, you know that I believe we hit 'peak debt' in 2007 and are now mired in a balance sheet recession of biblical proportions.

But, what I think the financial industry hasn't figured out is that all of these debts, all of the resources that they've drawn from their host (the consumer) has ended up KILLING them, or pushed them past the point of no return as we were motivated by profits and bonuses rather than fulfilling our fiduciary duties to provide SUITABLE financial advice to our clients.

This is why economists are always so flummoxed why the economy isn't bouncing back after 6 years of zero rates and unprecedented intervention and stimulus.

At best the host is now on life support in the ICU and is in a coma, and that's hardly a good thing.


Unfortunately for us, the financial parasite will never learn their lesson as they have sociopathic tendencies (as discussed here:  http://www.gubbmintcheese.blogspot.ca/2014/05/the-farmer-and-viper.html) and as such will never change or ease off in their thirst for more resources.

NB: Another great discussion of the status-quo parasitic/parasitoidal relationship between finance and the rest of the world can be found in Jesse Eisinger's outstanding piece here: http://mobile.nytimes.com/2015/03/05/business/dealbook/despite-changes-an-overhaul-of-wall-street-falls-short.html?referrer&_r=0

THIS is why I think the economy continues to struggle.

Now I know these points may sound a bit far off given my rambling, choppy writing style - but please, don't kill the messenger. For those who prefer glossy, professional, researched views look at what the BIS just wrote:

 

"Why does Financial Sector Growth Crowd Out Real Economic Growth?"

Call me crazy but I think this just confirmed by parasitic tie in.. (See what I mean? I can see it and write about it, but will leave it to other people to do a more thorough and eloquent job or researching and writing about it. )

So what to make of all this information?

Well first and foremost, I would take EVERYTHING that Wall Street says with a large grain of salt. Don't get me wrong, there are some very honest and amazing people who work in this industry.. not everyone is a bad guy or girl.

Unfortunately though, the incentives are hugely misaligned.. which means the little people who still believe in the fiduciary relationship with their investment people, are probably getting taken advantage of.

As Stephen King said, "Trust of the innocent is the Liar's most useful tool".

Keep that in mind when you are told that 'stocks are cheap' by people on the Street - even as the Shiller CAPE sits just below 28, a level only surpassed in 1929 and 2000...

Plainly put - we desperately need another Ferdinand Pecora, and we need him asap.

Great read here: http://en.wikipedia.org/wiki/Pecora_Commission

Unfortunately it appears as though government and regulators are still far too cozy with the financial industry to make any changes - which suggest we are (as of now) simply doomed to repeat yet another crisis.

I hope we can get this sorted out before another break comes, but it's certainly not looking great at this point.

Maybe tomorrow.

Cheers all.

Gubb

An observation from the front lines - commentary from a real estate agent in Vancouver

As I discussed on twitter - I received this email response from a client of mine after sending him a story about the Vancouver market. This was his reply.

(names removed for obvious reasons)

Hi Gubb,

Good article, I see it up close and personal every day.. I've been struggling to get a hold of business and it's becoming more difficult every month. The overall influence of the Asian buyer has become overwhelming. Home sellers almost universally believe it's necessary to hire an Asian realtor to get top dollar selling a home. Buyers are constantly having to go into multiple offer situations and are being out bid by Asian buyers willng to pay well over asking and assessed value. I've written offers on 4 properties in the last month - ALL were outbid, some by as much as 30% over asking 

70% of the for sale signs hopping up are with Asian realtors. The older, more well established realtors who dominated this market a few years ago are now fighting for listings and the back stabbing has begun. Up the street from my office the new home British Pacific Properties are selling new MODEST homes that start between $4m and $5m, and ALL of the buyers so far are from Mainland China who expect to come here once a year for a couple of weeks of holiday.

People are starting to speak out  but no one is doing anything. In Australia they have the same problem but their government's foreign investment review board has implemented new rules to stem the surge in home sales to foreigners. We need to do the same.

GUBB Comments below: 

My client then provided an example of a big recent home sale for $51,800,000

http://www.vancouversun.com/business/Priciest+Metro+Vancouver+homes+draw+buyers+from+China+with+video/10875651/story.html

Pretty amazing stuff. I do honestly think that the percentage of Vancouver sales with Mainland Chinese ties is FAR higher than 30%.. I'd be willing to suggest it's closer to 60%.. but of course no one really cares...  yet.

Cheers!

Gubb