Movie Review: Inside Job

I finally was able to see the critically acclaimed documentary, Inside Job. The documentary was written, directed and produced by Charles Ferguson and recently won an Academy Award.

I had heard good reviews, but also heard that is was heavily slanted toward a view that Republicans were essentially the main cause of the crisis. I don't believe this too be accurate, the Democrats share just as much blame. In fact, the two parties worked very hard to be non-partisan in one area - Wall Street.

Inside Job does a great job of boiling down many of the root causes of the financial crisis (though not all of them). It was entertaining, educational and rightfully outrageous. Anger is the primary emotion I felt while watching. The one thing Inside Job does NOT leave you with is Hope. As I've stated many times over the past few years, Wall Street has become even more concentrated and powerful than ever, the exact opposite effect the crisis should have had.

We have a crisis in America, and it is only growing larger. That crisis is the control Wall Street has over our nation and its people. This is not a left wing or right wing observation, it's the reality. Until the banking industry is brought to heel, our nation will continue to be held hostage by Too Big Too Fail banksters.

Inside Job demonstrates the rise of the powerful financial industry and how deregulation fueled the fire. But it wasn't just Wall Street, Government failed the people and continues to do so. Both parties share responsibility, yet neither are willing to accept.

Few have been prosecuted, there is no Pecora Commission and financial reform was essentially defeated by the big banks.

I give Inside Job top ratings, its a great documentary that everyone should watch. You don't have to agree with Ferguson's politics to be outraged by what you will see.

While the movie offers little hope of change (how's that for irony), the fact that a movie like this was made at all and has gained so much fame is a positive sign.

Inside Job is available to rent now, I encourage you to watch.

Scott Dauenhauer, CFP, MSFP, AIF

Chart Store: Market Cap as a % of Nominal GDP

Prior to 1995 this measure of Stock Market Valuation had never been above 88% (this was right before the Crash of 1929). Since 1995 it has been over 100% the entire time with two brief movements below. The average is 62% - today it sits at about 125%, not an all time high (hit 180% in March of 2000), but still a number that should strike caution. Future returns from these levels do not look high.

Naked Capitalism: Regulatory Capture Is Alive & Well (

So yesterday I skewered Republicans for their lack of support of a Fiduciary Standard among all financial advice providers. Today I give equal time to their friends across the aisle, the Democrats.

Yves Smith over at Naked Capitalism Blog has a great article on Regulatory Capture:

Sleaze Watch: NY Fed Official Responsible for AIG Loans Joins AIG As AIG Pushes Sweetheart Repurchase to NY Fed


You can read the post, but the two doozies are:

Masaccio at FireDogLake was suitably outraged at this spectacle of a regulator getting a job with the biggest lobbying group in the industry he regulates…..and staying in his current oversight role:

The Washington Post reports that David H. Stevens will be taking over as head of the Mortgage Bankers Association. Stevens currently serves as Assistant Secretary for Housing in the Department of Housing and Urban Development, and as the Commissioner of the Federal Housing Administration. He has a conflict of interest so deep that he should be fired at once…

Allowing Stevens to stay on the job, and saying that it comports with ethics rules, is proof that the term “ethics” has lost all meaning. He is working on a settlement that in some news stories calls for a penalty of $20 billion, which only banksters think bears any relationship to the horrifying damage caused by these sharks, through jacked-up fees, fraudulent court filings, dual-track loan modifications and other sleazy tricks played on suffering homeowners. He comes from the industry, and is heading to the group that put out slimy reports condemning any steps that might aid homeowners, including judicial modification of mortgages in bankruptcy.

Why is he not immediately fired for cause? President Obama can’t even use his standard excuse, that we should look forward, not at the past. I’m looking forward, and I see a totally compromised person negotiating the future of millions of Americans.

So, a current official charged with heading the FHA (the main provider of all mortgages in the US right now) is leaving to head the Mortgage Bankers Association (an organization that has worked against consumers and modifications). This is a clear case of Regulatory Capture and a major ethics violation (or at least it should be).

As if that wasn't bad enough...more NY FED/AIG Corruption:

Aside from the hidden bailout, is that the NY Fed official who was responsible for overseeing Fed loans to TARP recipients, including the AIG loan, Brian Peters, joined AIG in late January. See this letter to the Committee on Oversight and Government Reform, based on subpoenaed information from the Fed, p. 8, the e-mail cited in footnote 31, for a sighting of Peters in action. Given the extensive interactions between the Fed and Treasury on the fight with Ken Lewis over his threat to walk from the Merrill purchase (the two were working in tandem here, and pretty much on all the major TARP recipients who got Fed loans), and the continued close cooperation between the Treasury and the NY Fed, it isn’t hard to imagine that Peters has good knowledge of and relationships with the key actors at the Treasury as well as at the NY Fed.

There is more to this Peters story, click the link to read it, but it is directly related to the current bid by AIG to buy assets from Maiden Lane II (owned by the Federal Reserve....The Taxpayers).

Obama promised change - so far all we've gotten is a further deepening of the financial services industry into government. This cannot end well. I guess I'd be more encouraged if there were an alternative, but the financial services industry owns the Republican party as well.

If this post seems to political - take out all references to Dem and Repubs and focus on the issue at hand - Regulatory Capture, the process where the industry being regulated hires those who have power over them and then uses those people to push their own agenda.

If you don't believe this is relevant I suggest you watch the documentary Inside Job, by Charles Ferguson.

Scott Dauenhauer CFP, MSFP, AIF

Does The Fed Even Understand Monetary Policy? Evidently Not

The United States is on a fiscal path towards insolvency and policymakers are at a "tipping point," a Federal Reserve official said on Tuesday.

"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when," Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.

Setting aside the massive budget deficits and whether or not fiscal austerity is a good/bad idea - its frightening that someone so powerful doesn't appear to understand our monetary system.

The United States is the sovereign monopoly issuer of its own non-convertible currency, it can not become "insolvent". The US has the ability to spend by crediting accounts (unlike states or european nations on the Euro) and thus is never fiscally restrained. This doesn't mean the US can spend at will with no consequences.

Is it possible Fisher does not know this?

Scott Dauenhauer CFP, MSFP, AIF

Hussman: Stock Not Always A Good Inflation Hedge

Hussman:

A paragraph from one of his recent missives:

Indeed, outside of the bubble period since the late 1990's, the only historical instance of Shiller P/Es materially above 24 was between August and early-October of 1929. The closest we got to 24 in post-war data was in mid-1965. While prices went on to achieve moderately higher levels (lagging earnings growth, so that the Shiller multiple fell), the mid-1965 valuation peak is widely viewed as the starting point for a 17-year "secular" bear market during which the S&P 500 achieved total returns of less than 5% annually through 1982, despite severe inflation. That's a good reminder that stocks are not a very good inflation hedge during periods when inflation is rising, particularly when stock valuations are already elevated and are priced to achieve poor returns. Stocks only "benefit" from inflation during hyperinflations and during sustained and anticipated inflations. In other cases, the eventual adjustments in economic activity and valuations overwhelm the "beneficial" effect of inflation on earnings.

This paragraph is saying two things - Stocks are valued quite high relative to the past and stocks don't always provide a hedge against inflation.

This is contrary to conventional wisdom.

Scott Dauenhauer CFP, MSFP, AIF

House Republicans to SEC: Halt fiduciary duty rulemaking - Investment News

House Republicans to SEC: Halt fiduciary duty rulemaking - Investment News

At least the Republican party is consistent. They have consistently sided with the financial services industry over the protection of consumers. During the Bush years when they had full control of Congress they catered to the whims of the financial and insurance industry and worked to allow conflicted advice to consumers. The Democrats haven't been much better in terms of catering to the financial services industry, but at least they are right on the issue of a universal fiduciary standard. House Republicans are not working to undermine the movement to ensure that ALL consumers have their interests put first.

I believe that all advisors should be held to the same standard, one that places the interests of their clients above their own (a fiduciary standard) - this doesn't actually sound controversial. Would you want your mother to work with someone who will work in her best interest or someone who is not required to work in her best interest? Evidently, the Republican party wants the latter. Very disappointing.

Scott Dauenhauer CFP. MSFP, AIF

TARP is NOT Profitable

Barry Ritholz on his Big Picture Blog (www.ritzholz.com) has some great stuff on TARP and the GSE's and how far in the red the programs are. This is despite news reports that these programs are successful.

If you don't read his blog, its a good one.

Scott Dauenhauer CFP, MSFP, AIF


Sources:

Behind Administration Spin: Bailout Still $123 Billion in the Red
Paul Kiel
ProPublica, March 17, 2011, 10:27 a.m
http://www.propublica.org/article/behind-administration-spin-bailout-still-123-billion-in-the-red

The State of the Bailout
http://projects.propublica.org/bailout/main/summary

Fed Allows Increased Dividends - Continues War on Main Street

The Fed has decided to allow troubled banks to loot the taxpayers by allowing some to pay dividends and/or share buybacks.

This might sound like a boon and an encouraging sign of economic revitalization, but in reality it is a decision built upon a flawed capital model that ignores massive losses and potential losses sitting on the banks books.

Taxpayers are still on the hook for any bank failures in the future, not share or bondholders of these institutions. So while the banks pay out their large bonuses, big dividends and continue to burn cash that should be used to fix the problems they created, the nation remains mired in an economic drought with no end in sight.

Scott Dauenhauer, CFP, MSFP, AIF

Strategist Price Targets for S &P 500 - Year End

Groupthink is alive and well on Wall Street:




GMO believes fair value to be around 900.



Scott Dauenhauer CFP, MSFP, AIF

Alt. Energy Update: Green Crude

OK, So these little Algae won't power the world, but they are more efficient than ethanol and switchgrass!

So far, the 30 or 40 mostly small companies now developing algae fuels in the U.S. have produced thousands of barrels of green crude, a far cry from the 7 billion barrels of oil consumed each year in America. Producers also face the daunting task of scaling from demonstration projects to what amounts to a vast new infrastructure for growing and maintaining algae in either fermentation tanks or in open ponds, and in providing feedstock for the plants, which grow best when fed sugars and other carbons in the form of plant waste or CO-2.

Green crude from algae is not a new idea. The federal government first started researching algae and other plants as alternative fuels at the National Renewable Energy Laboratory (NREL) in Golden, Colorado, after the first oil shocks in the 1970s. The program, however, was shut down in 1996 when oil dropped down below $40 a barrel.

Scott Dauenhauer CFP, MSFP, AIF

More MERS Trouble...Now in Oregon

Graphic Removed.

The linked to article above is a compilation of a few different articles, but explains in a very succinct fashion what MERS is and why this issue is so important - literally the solvency of our nations banking system is based on the legality of MERS.

I apologize if the above graphic doesn't fit within the window.

Scott Dauenhauer, CFP, MSFP, AIF